Confronting Consolidation

by Nate Hunter

A road map for retailers and vendors in an active M&A market for facility services companies.


Vendor consolidation in the retail facility services sector has been an ongoing characteristic of our competitive environment for several years, posing continuing challenges for retailers and vendors alike.

The industry has witnessed several vendor combinations in the past 2 years, with two substantial transactions to date in 2011: (1) EMCOR Group’s acquisition of USM Services in May; and (2) the merger of Kellermeyer Building Services and Bergenson’s Property Services in July.

The key question for retailers as vendors consolidate is how to ensure continued quality and service continuity during the integration period, as vendor account managers and other key vendor personnel are either re-assigned or terminated? Another question is even more important for retailers that have maintenance spend concentrated with both acquirer and target: How to manage the increased risk from having many more eggs in a newly single basket?

mergerRetailers may not realize that they are in a strong position to enhance value in the face of vendor consolidation, with sound alternatives for both minimizing risk and saving costs. In a combination where a retailer has significant spend with both the acquirer and target vendors, it’s important to weigh the increased risk of concentration with the risk of making a replacement. If both vendors have strong service delivery, the increased vendor concentration risk is often lower than the risk of making a switch, particularly if volume pricing concessions can be obtained to offset the concentration risk. Retailers typically have strong leverage in this situation, as many acquisitions are debt financed and the potential loss of business from a large customer may have materially adverse consequences to the newly combined vendor. This leverage can be used to obtain price concessions in exchange for living with the increased concentration.

On the other hand, if one of the vendors’ service quality is low, retailers may elect to switch vendors. Here the risk of erosion in service quality is markedly higher than the risk of replacement. This risk is particularly elevated when the acquiring company provides lower quality service. In any situation, however, retailers are in a position to insist that the newly combined vendor takes certain steps to ensure service continuity, such as retaining key account managers and transitioning junior account and field personnel properly. To effectively use their leverage, retailers need to reach out internally among different constituencies, e.g. facilities department personnel, store operations personnel and others, to identify the vendor’s key people.

On the vendor side, the combining companies also have to answer key questions in making the integration successful, and strike the right balance between the short term payback of rationalizing costs, and the long term payback from successful account retention. The critical success factors are more complex than normal, and also require greater expedience in execution. It’s not easy, but we’ve identified several key success factors to make acquisitions work.

First, vendors must be wary of acquiring companies with material customer overlap in order to avoid pressuring accounts with higher vendor concentration. In the event this is unavoidable, vendors must meet the challenge head-on, and share the value created by the combined volume with the retailer. Yes, shoot us for saying it, but it’s smarter to beat the customer to its question. Reduced pricing represents a very real, tangible benefit of the combination to the customer in question, in stark contrast to the typically intangible benefits articulated during the customer roadshow. Second, vendors must work to identify and retain key account management and service delivery personnel, with a combination of stay bonuses and transition plans for redundant personnel, to ensure there are no hiccups with customer satisfaction. These two steps are of the utmost importance in prioritizing revenue retention, and require foregoing quick cost savings in the short term. All too commonly, industry acquirers have prioritized quick cost savings at the expense of customer satisfaction — and lost material business as a result.

While customer satisfaction and retention is the highest priority, we also suggest taking a proactive approach to talent management and cultural shaping in the short term. You have to satisfy not only customers and shareholders, but also your employees — because in the long term, culture and job satisfaction are the lifeblood of a service company. From a talent management perspective, it’s important to identify not only key account managers but also key junior personnel that have the runway to ascend to more responsibility. You can’t afford to cut the wrong people in this latter group if you want to maintain your ability to grow. With these two groups identified, you can then activate individual development plans for broadening your account managers’ reach, and preparing junior personnel for increased responsibility. Decisions on personnel assignments and transition planning need to be made with input from both companies’ department heads as they are in a better position to assess job performance. Of course, department heads from the two combining companies need to understand that they will have to make compromises in group deliberations on personnel decisions. Similarly, we suggest immediate action toward cultural integration, including teambuilding retreats, senior management town hall meetings and other forums; these events go a long way toward helping employees understand the rationale for the combination and comforting them in their future career path. In a successful integration, it’s important for employees to see tangible evidence that they are going to be better off in the new environment. And if you’re behind in building your culture, or need to make adjustments of any kind, there is no better opportunity to initiate dramatic change than in a business combination. Seize the opportunity.

By taking the steps referenced above, retailers and vendors alike can make business combinations pay off.


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