CRA International Moat Check
Continuing my review of potential wide moat companies from a screen I ran last month, today I’m going to look at CRA International Inc. (CRAI). CRA International use to go by the name of Charles River Associates until May of 2005. CRA International is an economic, financial, and business consulting firm. They are highly involved in supporting merger and acquisition activity, business strategy, and litigation support.
Justin at the Rule One Investment Community produced a nice overview of CRA International’s Big Five Numbers. The numbers look good. Return on invested capital (ROIC) exceeded 10 percent each year since 1996. However, ROIC has dropped to 8.7 percent for the past twelve months. Equity, earnings, sales, and cash flows have all been strong. The numbers seem to indicate that CRA International has been performing well consistently in their industry.
My main concern is that it is very difficult to develop a wide moat in consulting since the company’s assets walk out the door every day. CRA International’s most important asset is their people. The company’s competitive strengths come from its highly educated and experienced staff, its reputation for high-quality consulting, and access to leading academic and industry experts.
In addition, CRA International’s considers its demonstrated success with acquisitions to be a competitive advantage. The company has made 11 acquisitions since 1998. This actually raises a red flag for me. I’d rather see a company grow organically than through acquisitions.
I might be missing something here, especially considering CRA International’s past performance, but I don’t see a wide moat here. Competitors such as LECG (XPRT), Bain, or McKinsey can hire away key personnel (referred to as rain makers in the consulting sector) from CRA International and effectively acquire customers this way. Employee retention of senior firm members is critical in this business. I do not see any particular special mechanism in place at CRA International to minimize the impact of turnover. I need to see proprietary systems, databases, or other products separate from the services of the individual staff members’ expertise at a consulting firm if I’m going to consider them having a wide moat.
I feel like I’m missing something here, so I welcome your feedback below in the comments section. For now I’m going to put CRA International on my pass pile and move on to the next company.
I work in a company similar to CRA and have been in economic/litigation consulting for nearly 10 yrs. I have worked at both boutique as well as Big 4 consulting firms. You are 100% correct regarding CRA NOT having a wide moat. Only a small number of directors or partners bring in the lions share of business. They are the ‘prima donnas’ in this business and tend to walk when they are unsatisfied. I have seen many, many groups break up (or have significant slow downs in revenue) because the partner walked (for whatever reason). Having said that – economic/litigation consulting is an enormously profitable niche……if your consulting company has the ‘prima donnas’. It is even more profitable during economic downturns when the litigation between companies increases. Some of these litigation/economic consulting cases can last for years and are cash cows. The only way to invest in these companies (for the general public) is to pay attention to insider trading. Most economic/litigation cases are only $10k to $100k. But when a big cash cow case(s) comes in (read $1 mill plus a year for a few years) – look for insiders to buy.
Please add the following consulting companies your list and analysis.
LECG
FTI CONSULTING
HURON CONSULTING
NAVIGANT
Maybe you would comment about the following:
1) Differences
2) Strengths and Weakness
3) Litigation vs Advisory
Babui – Thank you for confirming my take on this company and providing a “insiders” perspective on this industry.
Expert Company Analysis – I’m not sure that I will be covering the companies you list for quite some time. The only consultant that I know of that has a decent economic moat is the Corporate Executive Board. I might write up something about that company in the near future.
The working conditions are deplorable. The turn-over rate, at least in the DC office is approx 60% Yes benefits are given, but don’t ever, ever take that time off if you want to keep your job. And don’t apply if you are a single mother.
Too much old boy stuff and it is a known fact they use up kids right out of school….