Consolidation

Firms need to decide who they are and the strategy to follow in order to remain competitive, argues Keith Hale.

More than half of firms in corporate services, trust and fund administration expect industry consolidation to increase over the next 2 years - that’s a very significant amount when you consider how much consolidation has already taken place in recent times.

This was a finding in our recent Future Focus Report into the industry which also found that over 40% of those surveyed said they expected to see an increase in their own firms’ M&A activity. If we look back over the last year alone, players like Ocorian, IQ-EQ, Praxis, Apex and others have been active on the acquisitions trail or in striking merger deals with other firms.

What’s driving this consolidation is the opportunity to build scale in what has traditionally been a heavily fragmented industry. Many firm’s origins were as carve-outs from banks, law firms or accountants to become standalone businesses.

But as competition has increased, scale has become much more important, with private equity interest in the sector acting as a catalyst for this consolidation. The net result is the biggest upheaval the sector has seen in the last 25 years. Our prediction is that in 5 years’ time, the industry will shrink from thousands of firms to hundreds and will polarise between global players on one side and smaller specialist firms on the other.

This accelerating polarisation will have consequences. Larger global players offering a wider choice of services through a digitalised offering will put pressure on fees and precipitate an increasing move away from time and material charging models towards fixed fees. This, in turn, will pressurise other firms to increase efficiency in unit production cost by digitalising workflows.

The opportunity created by change is being recognised by those players involved in consolidation who are following a strategy of building scale across multiple customer segments and jurisdictions. A key challenge for these firms is how to successfully integrate the disparate businesses in order to drive efficiencies across different entities. Delivering smooth integrations is also critical in delivering the expectations of end clients - firms need to make sure the combined business lives up to the brand as an integrated scaled business, rather than a bad scenario consisting of multiple silos simply under common ownership.

While polarisation is driving firms on one side towards consolidation, this will create opportunities for firms on the other who focus on a specific niche or product offering. By being specialists in a niche area or regional capability which offers a high-value service to clients, they too will remain competitive in an increasingly polarised market.

The most at risk from change in our view will be the current middle tier of providers - it is this part of the market that is most vulnerable to being squeezed by consolidators and becoming increasingly less competitive moving ahead unless they pivot to a path of offering a more specialised or high-value service.

As we approach 2021, the fundamental question for firms is to decide who they are and the strategy they must now adopt in order to successfully adapt to change. More forward-thinking firms have already made this decision and have also recognised the powerful role that technology will play in adapting their business strategy and go to market approach in order to drive new revenue opportunities.

Change therefore does bring opportunity, but unfortunately not in all cases. It is now up to firms to decide their future.

About the Author

Keith Hale

Keith is Executive Chairman at TrustQuay