SGS‘ push into consulting: Tightrope walk

August 6, 2019

Nobody knows where SGS would stand without Sergio Marchionne’s relentless and, at times, unforgiving push for excellence. He clearly left his mark in Geneva, and many wondered whether SGS could stay on track and continue performing without him.

One year after his passing, judging inter alia by the 2019 half-year results, it seems that SGS indeed is able to do so and that the governance mechanisms introduced by him still work.

Even more important, SGS seems to have been able to finally embark on a path of subtle strategic change. We believe that this was one of main reasons for replacing Carla de Geyseleer with Dominik de Daniel – bringing in a new CFO familiar with capital-light business models. A push into that direction is exactly what can be observed right now.

SGS’ recent scorecard and the fact that Carla was appointed as new CFO of Volvo Cars indicate that her work at SGS wasn’t too bad and is being recognized. But she may not have been able, or at least was perceived not to be able, to deliver the kind of strategic reorientation that SGS’ shareholders are looking for: Abandoning the greasy, at least in TIC terms capital-intensive or margin-weak industrial inspection stuff and moving more into glitzy, super-profitable consulting businesses that only require a bit of IT infrastructure. A strategic shift that, one could add after reviewing SGS’ measures in conjunction with BV’s and Socotec’s recent portfolio adjustments, others are trying to replicate.

The acquisitions of LeanSis and Maine Pointe clearly “demonstrate [SGS’] capital allocation strategy of increasingly moving towards higher value-added services.” But, is this still TIC?

Being perceived and credible as impartial, incorruptible experts for everyone is essential for the business model of the TIC industry. However, TIC companies can stretch the model and their reputation a bit and also offer “clearly 2nd party” services, in particular in “border areas” where the limits to other Business Services such as Engineering Outsourcing Services or Technical Consulting are blurred – where it’s partly TIC and partly something else.

TIC players managed to safely operate in these areas e.g. thanks to internal organizational mechanisms such as the proverbial “Chinese Walls” or codes of conduct that interdict e.g. a sell-on of consulting services directly after an audit. So far, brand extension has not affected their image negatively, which we however rather attribute to the fact that the considerably larger part of the TIC industry’s activities still strictly follows the “neutrality” paradigm and that this shapes how the industry is perceived.

The key question is how far this can be stretched. We believe that further expansion into adjacent areas has limits and can compromise those parts of the TIC business that heavily hinge on neutrality and impartiality, if “2nd party activities” become too important in the portfolio.

In particular in Certification, accreditation rules stipulate in utmost unambiguity that “conformity assessment bodies” must act impartially, must not face any conflict of interest and must have organizational procedures in place to deal with that. A TIC player with considerable “2nd party”-business is likely to fail these requirements, in consequence risking his accreditation to be revoked.

In other words: If SGS’ “CBE” at some point of time is more “BE” than “C”, conflict with accreditation bodies will be inevitable. This means that “accreditation-compatible” growth potentials in this field are limited.

Moreover, SGS pushes into an arena with established heavyweight competition such as Accenture, Capgemini or even McKinsey. While this might be sensible to counter these players’ recent moves into and ambitions in (future) TIC businesses, it raises the question what the chances of success against these professional service behemoths really are.

Finally, we do not buy into the story that this delivers a nice margin uplift – not yet. In our view, recent profit improvements rather result from restructuring efforts, i.e. firing people. We estimate that the approx. 3,000 net layoffs have yielded CHF 50m of savings in H1/2019, with the full year-effect potentially amounting to as much as CHF 150m. Sometimes, the “classic tools” still work well.

In conclusion, do we think that this strategy is wrong? Certainly not – but it’s risky. Do we think that it is going to cut the mustard? To be frank: No, unfortunately. Do we think that SGS would agree to this view? Yes, we do.

As one of a bundle of strategic measures, each delivering a growth and profit improvement increment, this initiative certainly makes sense. But it also points to and illustrates the strategic challenges and limitations the TIC industry faces:

  • Realizing growth has become arduous and requires many “baby steps” – sometimes into unknown and potentially dangerous territories beyond the industry’s established limits.
  • Such moves beyond the TIC industry’s “splendid isolation” should be contemplated carefully, as it is unclear whether deliberately abandoning the current sweet seclusion would really pay off in the end.
  • The “splendid isolation” of the TIC industry also has a few downsides – apparently, barriers to entry for outsiders could also be barriers to expansion for insiders.

Implementing such tricky growth strategies, achieving substantial further growth and satisfying shareholder expectations is going to be challenging – a tightrope walk, even for SGS.

T.K. Hamann and adeptic bundle their competence

July 10, 2019

Top-management consultancy and Automotive & Mobility expert T.K. Hamann as new cooperation partner for adeptic

T.K. Hamann and adeptic have agreed on a cooperation to bundle their complementary fields of competence. The focus is on the application and commercialization of innovative technologies – including those developed by start-ups – especially in the area of “Testing, Inspection & Certification” (TIC).

Another focus of the cooperation are the current challenges and opportunities in the Automotive & Mobility industry (e.g. ‘Remote Diagnostics’) as well as in the Aerospace industry (e.g. ‘Urban Air Mobility’ and commercialization and industrial use of drone technology).

T.K. Hamann is a top-management consultancy that possesses marked and deep competence in Strategic Management, Business Development, Leadership & Organization, and Operational Excellence with a clear spike in the Automotive & Mobility industry.

Its founder, Dr. Thomas K. Hamann, possesses both profound consulting experience (i.a. McKinsey & Company and Bain & Company) and abundant operational know-how (Project Manager for Group-Wide Porsche Improvement Process at Dr. Ing. h.c. F. Porsche Aktiengesellschaft)

T.K. Hamann delivers tailor-made projects in a strong cross-functional and interdisciplinary approach and involves—if required—outstanding specialists from a large network of contacts.

Cybersecurity and Digital TIC: Tales of pride and fall

July 1, 2019

Even though quite likely untrue defamation by envious rivals at the court of Catherine the Great, the story of “Potjomkin’s villages” continues to hold a prominent place in the collective set of European metaphors. Its powerful imagery still works today: Refer to them, and most people promptly see the fake houses painted on canvas along the Dnieper’s beds in their mind’s eye, and immediately understand the implication.

And because some things haven’t changed since the prince’s alleged deceit in 1787, the story continues to enjoy unbroken popularity. Still today, some people apparently feel the need to cover up failings and shortcomings by painting in glowing colors and by embellishing on a grand scale, pretending that results/achievements/progress/life are great. Just like in the story, this can work quite well and quite a while, saving faces and jobs.

Not even stoic consultants are immune to that powerful imagery. When reading certain statements by some TIC players on Cybersecurity, the gap between the bold assertions on the one hand and the rather unexciting reality on the other is too obvious – so striking that we can’t help thinking of the proverbial canvas villages:

  • Some recent remarks, made by TIC top-level executives during press conferences and in results presentations, suggest a level of Cybersecurity competence and Digital capability that in most cases simply does not exist in practice. It is okay to stretch things a bit, but neither is the TIC industry a thought leader in the field nor the natural address to turn to. Rather, the industry is not even able to protect itself against Cybercrime, as the Eurofins hack has vividly illustrated.
  • Likewise, the mellow wordiness of some exhilarating press announcements on Cybersecurity partnerships with OEMs only hardly obfuscates the very uneven arrangements behind: that TIC players felt compelled to team up with OEMs to get a foot in the door at all, and that most of the competence and business rests with the partner. That is yet another clear indication that the TIC industry is about to lose the battle against OEMs reg. asset-related OT Cybersecurity, and that it is devolving into a mere subcontractor role in this field.
  • Furthermore, some players’ praised investments into “Digital” appear less stellar when compared to others’ efforts and initiatives. Just as an example: U.S. Venture Capitalists and strategic investors are pumping triple-digit millions into the next wave of Cybersecurity start-ups, fueling nail-hard competition between these tech-savvy, promising and ambitious newcomers and pushing them to maximum performance and progress. Neither does the TIC industry match that level of spending, nor are most players able to keep up with that pace.

Some readers may feel being treated unfairly, and it would indeed be incorrect to say that all of the TIC industry is on the wrong track. Many TIC companies have realized that Cybersecurity and Digital competence will be crucial for continued success in TIC, but not all players seem to achieve actual progress or take the topic seriously. In consequence, we observe a growing disparity between those TIC players really working on Cybersecurity/Digital and making headway, and those just pretending to do so and resting on their laurels.

In our view, this growing division between the “future-proof TIC players” and the “heroes of the past”, and not hypothetical synergies, will trigger the next consolidation wave in the industry. And this will follow a very simple “predator and prey”-logic: The “future-proofs” will acquire the others, or only those parts of the obsolete players useful for them.

Pride comes before a fall, but a fault confessed is half redressed. The TIC players on the slow track reg. Digital/Cybersecurity should finally acknowledge that they are not just falling behind against new competitors from outside, but that they are unwillingly turning themselves into acquisition targets for the next wave of TIC consolidation – and that seducing oneself and fooling others with sweet little lies will take them nowhere.


Photo copyright: Gregor Sailer