2005
Advisers harness home-grown ideas - Financial Times, 1 September 2005
By
Andrew Baxter
Financial Times,
01 September 2005
After the dotcom boom, PA Group is one of the few management consultancies continuing to run its own start-ups, reports Andrew Baxter
It started out as a "cunning idea", says Jon Moynihan, executive chairman of PA Consulting Group. If the technology inside a third-generation mobile phone was going to be so complex, why not set up a business to test other companies' equipment and then use the revenue to expand into 3G development of your own?
That was the logic behind the foundation in 1999 of UbiNetics, a venture that PA, the UK management and technology consultancy, sold in two separate deals this summer for a total of $132.5m (£74m).
For Mr Moynihan, the creation of UbiNetics and its eventual sale have a significance that goes beyond the wireless sector. The deals were among a spate of recent transactions involving PA's highly successful ventures, which have turned the spotlight again on the role of corporate venturing in making profitable, saleable businesses out of smart ideas.
Corporate venturing has struggled to restore its reputation after the excesses of the dotcom years, when, as Mr Moynihan puts it, "a lot of companies dived foolishly into this area like Gadarene swine - they were investing in silly dotcom concepts". Now he hopes other companies can emulate PA's ventures programme. As jobs flow out of western countries to China, India and elsewhere, new companies based around original technology ideas are one of the few ways in which jobs can be created, he says.
On the face of it, consultancies should be a good role model for corporate venturing: they should be brimming with ideas as part of the process of helping clients; they ought to know how to nurture, manage and develop businesses - after all, this is one of the qualities they claim to sell to clients; and one would expect them to have a pretty shrewd idea of when to sell, or to cut their losses and run.
In fact, PA is one of the few consultancies to remain in corporate venturing. The concept was more popular in the 1990s, when consultancies had a different mindset, says Paul Gronwall, a former consultant and now editor of Management Consultant International, a US-based newsletter.
"The consultancy business was lucrative [then], so they had money to invest,and since they were advising start-ups themselves, they constantly had contact with good ideas, and the start-ups were looking for capital." Now, he says, as margins have come under pressure the "pure" consultancies have had to focus all their attention on consulting.
Another problem could be consultancies' management abilities. The number of consultancies that have disappeared or been swallowed up over the past eight years supports the 'cobbler's children going barefoot' argument, says Mr Moynihan - that consultancies are good at telling others what to do but cannot look after their own.
He makes an exception for PA, however: "There are some things that other consultancies are better at, but in terms of managing ourselves, we are the best," he claims.
The same management processes that PA uses to help consultants concentrate on their work with clients are used for the ventures. A 'management surround' handles issues such as compensation, options, tax and human resources, allowing leaders of the venture - who may have moved into it from PA after coming up with the original idea - to focus on the business until the new venture is big enough to support itself.
Mr Moynihan contrasts this approach with that of venture capitalists or private equity groups, which will put hard-nosed people on to the venture's board but are unlikely to provide support functions.
Yet there is nothing excessively cosy about the way PA nurtures its ventures and, occasionally, Mr Moynihan, who has chaired each one, has had to play the ruthless venture capitalist to keep one of its offspring on course. The first chief executive of one of the biggest ventures had to be fired, he says. "We've learnt what every venture capitalist knows," he says. "It's all about the people. If people aren't perfect for the job, if they want to play games or anything, you just walk away."
Knowing when to sell a unit is another key skill in corporate venturing. "When it gets to the stage that we can't add any value to it, that is the time to go," says Mr Moynihan. "We don't want to hold on to a venture for the sake of it."
This crucial decision will inevitably stimulate a healthy debate in a company with about 180 partners, and where most long-term employees are shareholders. The partners' annual bonuses are about 5-8 per cent lower than they would otherwise be because of the money going into the ventures, says Mr Moynihan.
PA's early forays into corporate venturing led to some "fairly robust discussions" about the wisdom of the strategy - a bad call, after all, could leave partners without bonuses.
Last year, there was a 'little frisson' within PA when Mr Moynihan opposed the sale of the Meridica dry-powder inhaler business to Pfizer, the US drugs company best known for Viagra, for $125m and a further contingent payment. Meridica already had a licensing deal with Pfizer, and other drug companies were keen to do similar deals.
Mr Moynihan felt PA should hold on to Meridica, believing it could be worth $1bn by around 2008, but that was not the prevailing view. "There were a lot of people here with kids in school and mortgages to pay who said 'You must be freaking joking - show us the money now!'" he admits. "It was clear that our shareholders wanted to sell."
Alec MacAndrew, a PA partner and head of its global technology group, is a member of PA's board and supported the decision to sell which ultimately prevailed. "Valuations in the pharmaceutical business can be very volatile," he says, citing one company whose value slumped from £100m to zero almost overnight after hitting product development problems.
Both Mr Moynihan and Mr MacAndrew stress the importance of not having too many ventures running simultaneously.
"We must never lose sight of having to do consultancy, and we mustn't let the tail wag the dog," says Mr MacAndrew. Some smaller consultancies, he says, have used their consulting side as a cash cow to fund venturing, and then seen talent drain from consulting into the ventures, causing the whole business model to collapse.
Ensuring enough management 'bandwidth' is available within PA for each venture is also vital, they say. With UbiNetics and Meridica sold, Mr Moynihan and his team have more time to nurture Aegate, the new drug authentication venture, and with money in shareholders' pockets from the sales, PA can afford to take a more long-sighted approach with the venture.
A classic example of an early-stage tech company that might have struggled for funding in the current venture capital climate, Aegate would have run out of money by the end of this year without PA's latest investment, says Mr Moynihan. The only alternative, ceding control cheaply to venture capitalists, would have "made my blood boil", he says.
Yet ultimately he believes Aegate, if it is successful, could be worth "large multiples" of the sums PA received for either UbiNetics or Meridica.
A cue for more 'robust discussions' at future PA board and partner meetings, perhaps.
A parsimonious approach to venture proposals sifts the best ideas from the good
Good ideas that might form the basis of a venture are coming up all the time at PA, says Jon Moynihan; the only problem is sifting through them. "We are quite parsimonious in letting ideas through to the venture stage and agree to very few that we think are top of the pops," he says.
Apart from Cubiks, a specialist human resources consultancy that was the subject of a partial management buy-out last year, only two ventures have made it through the sifting process to be sold on.
In wireless telecoms technology, UbiNetics is being sold in two parts this year. In May, US-based Aeroflex paid $84.5m (£47.1m) for UbiNetics' test and measurement division, while last month CSR of the UK agreed to buy the volume product business for $48m. PA had a 45 per cent stake in UbiNetics and venture capital group 3i, the other founding investor, also sold its significant minority stake.
Meridica, developer of the Xcelovair dry powder inhaler for pharmaceuticals, had an even shorter life within PA. It was established in May 2001, and sold in November last year to Pfizer for at least $125m.
Inevitably, some ventures do not get this far. PA invested "a couple of hundred thousand [pounds]," says Mr Moynihan, to prove a new high-speed analysis technology for use in proteomics, the study of proteins. The technology worked, but PA was unable to find a partner to develop the technology further, and abandoned the idea.
Aegate, PA's latest venture, uses tracking technology, including radio frequency identification, for authenticating pharmaceutical products at the point of dispensing. It is a typical internally generated idea that is more business concept than pure technology. "Four smart people got the idea going, and persuaded us to put a couple of years of development money into it," says Mr Moynihan.
Following a successful pilot in the UK, PA announced in April that it was investing £15m ($26.9m) in Aegate over 30 months - enough to launch a commercial service in the UK and begin developments elsewhere. One of the concept's pioneers, Ian Rhodes, has moved from PA to head the venture.
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