Digging Into the cc-Hubwoo / Intersources Deal

When the news of cc-Hubwoo's Intersources acquisition broke last week, I posted a quick blog entry with some initial thoughts on it. And over on the Continent JP Massin offered a number of astute observations on the deal and what it meant for the European Spend Management market as well. Following these initial posts, I had the chance to speak with a few members of the cc-hubwoo team about the deal in more detail.

One of my main concerns entering this conversation and understanding the rationale for the deal was why cc-Hubwoo would buy a services firm in an attempt to become a "more strategic advisor" as the cliché goes when Intersources itself could hardly be a strategic advisor given its financial and resource picture. What do I mean by this? Well, cc-hubwoo has 41 billable resources and roughly $5 million US in revenue in 2006. That puts its revenue per chargeable FTE at roughly $120K (let's be very generous and say $150K based on a lower number of FTEs at the end of 2006). But this higher number is still less than half of what many boutiques and Big 5 firms aim for on the strategic sourcing and supply chain process consulting side (technical Big 5 resources tend to be a bit less). And AT Kearney and McKinsey claim above $400K and $500K respectively on a revenue to consultant basis.

One of the reasons firms like this charge what they do per consultant is that strategic advisory resources are not cheap. In other words, if Intersources focused on strategic advisory work in sourcing and procurement such as category strategy and make/buy analyses they would have only had 10-20 resources to support their revenue levels -- not 41. To explain this difference, what I found in talking to the cc-hubwoo team is that there are a number of elements that contribute to lowering their revenue per FTE. For example, while Intersources does work on traditional strategic sourcing engagements and client studies, this has only been part of their focus over the years. The other -- and they would argue primary -- focus has been on providing enabling services for sourcing and procurement technology solutions and programs (not a lower margin business, but a lower revenue per FTE model). Given these different sets of activities, they have hired a combination of strategic and tactical resources.

The "strategic consultants," which I later learned comprise around 50% of the group today, act as advisors on SRM technologies and technology adoption. In my analysis, however, Intersources must be pricing these services at a large discount to the market. How do I figure this? Well, if they have roughly a dozen plus of these resources focused on process / strategy work -- versus event driven sourcing and back-office sourcing support -- I would assume a minimum of $275-325K of revenue per consultant per year for these types of employees based on the rates of other boutiques. This should translate to $3 million plus in revenue for this group (perhaps over $4 million). And since in my experience, these types of resources command at least $125-$175K US on a fully burdened FTE basis (base, bonus, healthcare, pension, etc.) per year, they don't come cheap.

What's my quick explanation given what I uncovered here? Unless Intersources was losing money -- which they were not, as they claim profitability -- it is clear to me they were undercutting boutique and strategy firm market rates to win business and perhaps hiring lower level resources on the strategy and process side to enable this pricing structure. One data point I have to support this is how they tried to hire a friend of mine a couple of years ago who was very experienced in the sourcing field (ex-FreeMarkets) and making six figures in an industry role. But when Intersources learned of his market salary, they balked at paying anywhere near $100K (even for a New York assignment).

Enough of this particular analysis! The rest of the Intersources the team delivers support to ongoing programs on a global basis (e.g., sourcing event support, supplier training, etc.). In addition, to help lower their cost structure and get closer to global customers, they have focused on building out capabilities and support centers in lower cost areas of Europe and India which might explain the lower FTE amount as well. Given how these points add up, we should view the Intersources deal as cc-Hubwoo acquiring a combination of strategic consultants (who have been priced at below market rates) and support resources -- think of them as the old FreeMarkets EU event-based sourcing group -- to deliver projects to clients.

In my view, cc-Hubwoo should go after larger numbers of experienced advisors -- priced and paid at market rates -- to complement the tactical event-based Intersources resources. I suspect they will pursue these capabilities quickly because it will be highly strategic for them in Europe and beyond as they move upstream in the Spend Management process. And since one could argue that the slow-moving SAP installed base needs this type of help more than anyone else at this stage in the market evolution, there's a potential services goldmine waiting for cc-hubwoo if they can execute on this vision.

Jason Busch

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