Raymond James Investment Services estimates that US$100bn of the test, inspection and certification market is outsourced to service providers. The other US$150bn is shared by in-house companies (quality assurance functions) and governments providing similar services. With this significant proportion of outsourcing, it’s worth looking more closely at recent mergers and acquisitions (M&A) in the test, inspection and certification sector to uncover the reasons behind its growth.
M&A in the test, inspection and certification sector
Over the past 20 years, we’ve seen some significant M&A from service providers. Europe in particular is a dominant location for M&A in the test, inspection and certification market. Over the last decade 48% of the targets acquired were situated in Europe (Capitalmind). Many of the buyers who acquired a business in North America, the second largest region at 34%, are also headquartered in Europe. However, that was not the case recently, when USA-based Goldman Sachs acquired Lloyd’s Register’s test, inspection and certification services (‘LRQA’ as it will be once again known), leaving Lloyd’s Register to focus on the maritime sector.
What is driving test, inspection and certification acquisition?
While M&A activity in the test, inspection and certification world has often been about growth in a fragmented sector, some new and interesting strategic drivers for acquisition are emerging.
Environmental, social and governance (ESG) factors are becoming more important in acquisition. The statement from Goldman Sachs highlights this: “We are excited by LRQA’s strong ESG capabilities and the important role the company plays supporting clients managing their sustainable growth path.”
This year, sustainable quality is proving to be a priority for many, with several campaigns focusing on the topic:
Indeed, Raymond James takes the view that test, inspection and certification companies surprisingly agree on the changes that need to be made regarding the shift to ESG in business. Moreover, test, inspection and certification service providers such as Bureau Veritas, DNV and SGS are keen to show links between their offerings and the people and planet agenda.
Paul Butcher, LRQA CEO, said the Goldman Sachs acquisition “will provide the additional focus we need to accelerate our ambition of becoming a leading digitally enabled assurance provider, at a time when our customers face an increasingly challenging operating landscape.”
A 2018 BCG report estimated that over the next decade, digital technologies will affect approximately 40% to 60% of the current test, inspection and certification market. The early findings from the CQI’s Quality 4.0 research show that there are opportunities but also difficulties in developing systems of digital assurance that connect across value chains. We will undoubtedly see the big test, inspection and certification players expanding their technological and digital capabilities in the near future.
Nation states are again looking at how voluntary test, inspection and certification can support both regulation and competitiveness. Examples include:
- The USA Food and Drug Administration’s 2019 strategy for the safety of imported food, which embraces mutual recognition of other regulatory regimes, sector schemes and test, inspection and certification offerings
- The UK Government’s White Paper on Regulation for the 4th Industrial Revolution, which recognises the role of voluntary standards in getting innovation to market safely and quickly.
What do these developments mean for the rest of us?
- Quality assurance functions – US$150bn of the market is still performed in-house by company quality assurance functions and regulators. The same digital assurance technologies that test, inspection and certification firms want to implement will be available directly to industry and sector schemes to manage complex value chains. The Enfit Bulkvision scheme springs to mind, as featured in the Spring 2021 edition of Quality World.
- Management systems standards writers – if performance evaluation moved away from traditional internal process and product audit, then Annex SL – the framework for all flavours of management system – may well need a rethink
- Auditors – the accreditation sector should become more important in delivering trust and confidence to support regulation. It will also be key as consumers demand more transparency from supply chains and the businesses from which they buy. However, the accreditation sector will also need to adapt to respond to digitally enabled ‘Assurance 4.0’. If we consider a time when 80% of the fieldwork currently done by third party assessors is automated, the world will need new system and data interpretation skills.
We are some way off from automated digital assurance, but, if investors are any indication, that is the direction of travel. The BCG report suggested that “Traditional TIC [test, inspection and certification] players are getting more and more competition from start-up and incumbent TIC companies with a digital focus.”
Perhaps it is time for me to get my own TIC-tech start up going…