Reply: Growth Constraints

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I've looked at your LinkedIn profile, so I've seen that, but beyond that, I always like to hear the story about how you ended up where you did and how you transitioned to Reply over time. I'd love to hear that story.

Before joining Reply, or the company that later became part of Reply, I worked for the German company Merck KGaA, a pharmaceutical and life sciences company. I was an in-house consultant for Merck, and in 2012, I left the company to join a smaller consultancy based in Darmstadt, near Merck. I essentially brought the Merck business with me to this new consultancy, where I began building up the life sciences business. We started with about 10 people, and it grew slowly, which was suitable for the company's size. After about a year, the life sciences business became the major focus of this consultancy, which was called Leadvise.

In 2015, Leadvise was acquired by Reply and became Leadvise Reply. The idea was to extend Reply's value chain, as Leadvise was more focused on management consulting, while Reply was oriented towards IT consulting. The rationale was to have a consultancy that could prepare IT projects, as management consulting often involves IT issues. At that time, Reply did not have a business or management consulting arm, so we were mostly left untouched after the acquisition. They simply put their logo on us, and that was it, which was part of Reply's business model back then.

After five years, Leadvise grew significantly, and we decided to split because we had two business units. One had a strict industry focus on life science and the other was more cross industry but dedicated to process automation and things like that. These two business units did not really fit together any longer because they had different business models. So, in typical Reply fashion they said let's split it and create a new company. That’s when Laife Reply was created, and I was made managing director. So I founded a sort of new company within the Reply network. There is a sister company to Laife Reply in Italy, with whom we had nothing in common but the name. We started Laife Reply with eight people and grew it to 20 over the last three years. In 2023 I left Reply to now join NTT Data and work on the life science practice.

I wanted to ask is about entering new geographies as part of Reply’s growth strategy. My sense is that in Italy, they have significant advantages because their brand is well-regarded, allowing them to attract talented people and maintain a reputation for quality work. I don't recall exactly when they entered Germany, but it was some time ago. How successful have they been in replicating those advantages in Germany?

I think they didn't manage to create a brand in Germany. I'm quite familiar with the consulting industry, and I hadn't heard of Reply before the acquisition. Even our clients, like Merck, a large company in Germany working with many consultancies, weren't aware of Reply. The individual companies, such as Cluster Reply, Data Reply, and Target Reply, might have a brand name due to the people working for them, but not because companies recognize Reply and what it stands for. There's essentially no brand reputation for Reply. It might have improved over the years as they grew, but from my perspective, it's not a strong brand in the industry.

Are there reasons why it was successful in Italy but not elsewhere? What has stopped them from replicating that success over time?

In Italy, it's likely because it's an Italian company, and the family, the owners, and founders of Reply have good connections with large Italian enterprises. That's my assumption. They're well-connected there but lack these connections in Germany. The main issue, which was also why I decided to leave, is that Reply is composed of around 180 individual companies. These companies are not distinct from each other and often compete for the same client on the same topic. This makes growth difficult because, as a company working for Merck, why would I take another Reply company on my projects and risk them taking over my customer? It doesn't make sense. You have difficulties realizing synergies. From my perspective, it's a natural barrier to growth because you're not cross-selling or using the potential these companies have. Every partner focuses on their own company and P&L, reinforced by the incentive models, which doesn't make sense.

If you were the CEO of Reply instead of Tatiana, could you come up with an incentive model that would work, or do you think it's impossible based on their structure?

I think it's impossible based on the structure. I've thought about this a lot, and my personal opinion is that the business model of having individual companies with very entrepreneurial people comes to a natural end as you grow. At some point, the organization requires a more central or even global approach, which doesn't fit with the concept of individual companies. In a sense, Reply has outgrown its business model. They would need to change it completely, perhaps to a more Accenture-like model, where there's a globalized approach. One person directs all life science people in one direction, all automotive people in another. They would need to pivot the business model completely, in my perspective.

I'm not sure if they have this in Germany, but I know in the UK they have a UK CEO now. This doesn't necessarily solve the problem you're mentioning. I think one of the issues is having an Italian mindset in Germany, which I assume doesn't work well. Did you find that when they encountered these types of problems, they were pragmatic and found solutions? Or do you think the company's DNA is very stuck in its ways and unlikely to solve its problems over time?

Of course, I don't know what happened over the last year, but when I left, it was somewhat stuck. To answer your first question, there is a German CEO, but this CEO primarily manages the partners. He doesn't have any strategic responsibility or orchestrate the organization. He's just taking care of the partners. You have a network structure where companies are grouped into individual networks. Each network is composed of, let's say, 10 companies managed by a networking partner who is supposed to realize synergies between the companies within the network. It's a good intention, but it doesn't really work because it doesn't change the original problem of focusing on your own P&L. When I left, it was still like this. You compete against each other. We're a super entrepreneurial network of companies and we're not going to centralize anything. That was the idea back then and people were just pushed for that.

One thing on my mind is whether Mario is still somewhat involved. Tatiana seems to be groomed or having control over many things. Does she strike you as someone who follows the framework, or did you see her adapting and changing?

I had the notion that they were trying to be a bit more centralized, saying, "Okay, we're giving you more direction from Italy." But it didn't really work. What I experienced, and this comes back to the idea of whether this entrepreneurial model works in a larger organization, is that when we started with Reply, I met Tatiana in person. She traveled to Darmstadt, Germany, which is a really small city, and visited us in our two-room office, saying, "Hey, this is Reply, and happy to meet you." It was very personal; you could even give her a call. Now, this is no longer possible. Tatiana is now really the CEO of a public company, and you lose this connection that made Reply five or seven years ago a more interesting or familiar place to work. This has stopped, but it's the only change to the model I've experienced so far.

One thing I heard, which I was a bit skeptical about, and I'm not sure if you can validate this, is whether the network partner you work with each year changes. Someone said it changes every year, which didn't make sense to me. Do you have any thoughts on that?

Yes, it changes regularly.

Doesn’t it take a year just to understand your business. Why would they do that?

Honestly, I do not know. I have never understood the rationale or logic behind how these companies are grouped. They have a meeting every year, which should be happening in a few weeks, maybe in a week or so. It's like a big surprise when they tell you how the networks are organized for the next year.

Honestly, the networking partners understand the business they come from because they were typically managing directors of companies before being promoted to networking partners. They understand what they have been doing before, but they do not understand the rest of the companies they are in charge of. My networking partner was a great guy and a good mentor. I liked him a lot, but he never understood what we were doing. I think he was really interested, but he just knew it wasn't his business, so it didn't make sense from my perspective.

It seems like the business was too centralized around the family, and they can't possibly oversee every problem. But at the same time, I don't understand why there isn't a more dedicated group of people invested in understanding what you do, rather than constantly changing the network. It just seems very counterintuitive to me.

Yes, maybe that's it. It's like you always keep people on the move. As I said, it's a very entrepreneurial approach. By default, you avoid people building their own kingdoms within the organization. You're disrupting it over and over again. Maybe that's the startup mentality they had at the very beginning. I think there is an intention behind it, but it doesn't work in such a large organization any longer.

You've kind of alluded to this a couple of times. I assume there are lots of good things at Reply, but we're focusing on some drawbacks. There were quite a few opportunities where you looked at it and thought, "This doesn't make sense." Were there not avenues to voice these concerns? Did they not seek feedback? It seems obvious that certain dynamics wouldn't be effective if someone objectively looked at it as a third party.

Was it a political problem where if you did that, next year they'd say, "Oh, you have to grow 50 instead of 20?"

Yes, there are two things to that. This is my very personal opinion. I wouldn't want to mess with the Rizzantes because they decide on your bonus, and I don't want to question their strategy. That's one thing.

Do you think that's common among the partners? They're all like you, not wanting to stir the pot because there's no real upside. They don't seem to like feedback.

You know how these company events work. Take the Reply example, but it applies to every large company. You have the head, the CEO, the chairman, and then partners mingle around like bees next to a honeypot, trying to be nice and make good friends. I never played that game, so I can't really tell.

The other thing is if I am able to make my 20% margin in the existing model by just focusing on myself, I'm satisfied. Why should I change things? I'd been able to do that. I wouldn't really care about how the group as a whole grows because I don't have any incentive to take care of the group. I realize there's a lot of potential that's left unrealized, but why should I worry? Because I'm doing well.

And also, you're taking on risk for something where you don't get any reward for fixing it anyway.

Correct, correct. This is why probably no one really speaks up because every partner has the same incentive and just focuses on their own P&L.

The reason I ask is that usually family-owned or founder-led companies actually seek out criticism and are willing to hear the negatives, unlike a typical big company with professional managers. I didn't get the sense from my conversations that these feedback loops and discussions around what could be fixed were very back and forth. It seemed very much like a top-down approach

To give you an example, when Leadvise Reply was split, I had the opportunity to create my own business within Reply, which was great. We were looking for a name for the company and had lots of ideas that would fit our business model and industry. I met Tatiana, and she told me, "This is your name." I said, "Okay, it doesn't make sense."

This was for Laife Reply or something else?

Yes, Laife Reply. People aren't even able to pronounce this. The Italians say it's "Lai-fe," the Germans say it's "Life." It just doesn't work. I mentioned, "Couldn't we go for another name?" No, this is what we came up with. This is the sort of conversation you have, and if you experience this once or twice, you'd rather say, "Okay, don't mess with them, just do your job, get your bonus, and you're good."

They're not very open to criticizing their concept. Honestly speaking, I haven't looked at the stock price now, but so far, it was at least a growth story.

They’re doing great, but I think one of the things that makes it tough for me is the track record is amazing.

I have to give Mario a lot of credit because having decentralized autonomous teams is a better way to operate. However, there are still many top-down centralized decisions that make it challenging. My main concern is that it feels like this is a business that deteriorates as it grows, rather than improves. Typically, in consulting, the bigger you get, the better you become because you gain a larger brand, attract talent, can price higher, and cross-sell. It seems like many of those elements, such as geographic expansion, don't hold in this model. I've been pondering whether this is a model that just operates differently and will continue to grow uniquely, or if it's one that becomes increasingly chaotic and eventually transitions from a growth story to stagnation. I've said a lot. What are your observations and thoughts on this?

Yes, I agree, and that's my concern—that this model is reaching its end. They won't be able to grow and leverage the brand if they continue like this. That's my assumption. However, if you shift to a more central model, you might struggle to attract the hungry and talented people who are currently driving growth because Reply grows through acquisitions. They buy companies, clients, and businesses. If you're no longer attractive to young entrepreneurs who have founded startups and are then acquired and retained for five years, how would you attract new talent? If you change Reply to a more conventional consulting model, why would people join Reply instead of Capgemini, Accenture, PwC, or others? I think they're somewhat trapped, and I wouldn't want to be in Tatiana's or Filippo's shoes right now because they have to make a difficult strategic decision.

Well, that's exactly my next question, which is if you were the CEO of the company, what would you do?

Fortunately, I'm not the CEO, but perhaps it's a matter of either going all in and centralizing while still trying to remain attractive to people, finding other ways, and completely abandoning this sell-and-grow business. Alternatively, from an investor's perspective, you could say we've reached a certain size, so why not split the company and create smaller entities, like smaller Replies, if you will. We could say, for instance, create a "Reply DACH" and maintain its fragmented model, but not as large as Reply is today, where it reaches its limits. This approach mirrors what Reply does with its individual companies—splitting them when they reach a certain size. So why not do the same for Reply as a whole and divide it into different companies? They could do this because the Reply brand, perhaps in Italy, but in Germany, isn't as significant. You could use any other brand for the companies and still be as successful. That might be a model to continue with, and then you'd have your Reply holding in Italy, which collects the money. This is just a spontaneous thought, but it might be a way forward.

If Mario were 20 years younger and running the business instead of Tatiana, do you think he would have a much greater chance of finding a way forward? Or do they both have the same odds of success?

That's difficult to say because I don't know them well enough. I think they both have strong personalities. It's not that people see Mario as the ultimate decision-maker and don't view Tatiana as a fully responsible CEO. Maybe those who have been with Reply for 20 years might see it that way, but for those who joined recently, Tatiana is the CEO and fully in charge.

Have you heard any anecdotes suggesting they behave and operate significantly differently?

No, I haven't. I think there's a larger difference between Tatiana and Filippo, which is interesting.

I've heard Filippo is more mellow, low-key, nicer, or softer around the edges.

Yes, he seems to be the more innovative one. If you've seen speeches from both, Filippo is very engaging and motivational. Tatiana is more administrative, often reading from a teleprompter, which might be due to language barriers. She might be stronger in her own language, but in English, it's challenging.

I agree. She doesn't come off as very inspiring in English. Your company got acquired, and it seems they wanted your capabilities and Merck as well. That's classic. It sounds like you still grew, possibly because you would have grown anyway. Did they bring anything significant to the table, or was it just business as usual with no synergy?

For my business, there was none. I just had better conditions for leasing a company car. That was basically it. For others, it might have been different.

I've heard in Italy, it's a real advantage. Your brand gets elevated.

You might have better chances in recruiting and opening doors to companies if you utilize the technological competencies that Reply brings. But in management consulting, there are no benefits, so I wouldn't have needed it, honestly.

I've heard that they've kind of ventured into different areas. This is more of an observation, and I'm not sure if it's true. They've acquired management consulting and some creative agency acquisitions. They've been trying different service models. However, some people we've spoken to have mentioned that they've moved away from management consulting and creative agency work. What do you make of that ebb and flow? Does their model only work in certain cases, or why do you think this happened?

I think management consulting doesn't work within Reply. I'll share an anecdote from my last meeting there, which was a key reason for me to explore other options. This was in 2022, right after the pandemic, during the war in Ukraine, amidst an energy crisis, and with high inflation. These were tough business conditions, especially for my very energy-intensive and global industry. Meanwhile, the IT industry was growing, with Gartner predicting 20% annual growth. In a meeting, Mario said, "Gartner predicts 20% industry growth, so you all should grow 25%." As a management consultant with a different business model, I felt they didn't understand what I was doing. I'm not the only one who felt that way. If you need to hire people with a scientific background from the pharma industry, who might not be IT experts, you face several loops to get approval. This indicates they don't understand or aren't interested in understanding your business.

I know they have strict hiring requirements, applying IT engineering standards to management consulting. Why is that?

Don't ask me.

Hasn't an executive partner approached them to say this isn't the right requirement for the company?

Yes, we did that. In the end, you always get your exception, but you have to go through the process.

You need an exception for every hire you make?

Every hire. It's like a game you play. You know it's going to happen, you write the necessary emails, but it becomes annoying after a while.

Doesn't Mario or Tatiana have to approve each of these exceptions? Don't they have more important things to do?

That was always my concern, but apparently not. It might have changed over the last year, but back then, it was indeed Tatiana who had to approve them.

It seems like they have a successful formula and are almost afraid to change it in any way.

That's my assumption, and I assume it's the same for the creative agencies.

Yes, I heard very similar anecdotes. I think I heard the exact same quote, which was, "They don't understand my business." I spoke to someone who said they didn't understand the business they acquired, which is amusing. I wondered how they could not understand what they acquired. It seems like they never really spent the time.

I don't know how due diligence works, but I think their due diligence when they bought us could have been better.

It sounds like there's a lot of good, and then there's a lot of bad all at once. It's hard because, in the early days, the bad is not as pronounced, but over time, your vulnerabilities become more pronounced as you grow.

That's my assumption. I liked working at Reply a lot. There are many really good people there, and there's great technology. I also felt that the Rizzantes are taking care of the people, ensuring partners are doing fine. If you attend these events, like the ones in Florence or now in France, they are top-notch company events. You can have a good life at Reply, but it depends on your own objectives. At some point, you might decide it's no longer what you want.

The compensation structure might be less attractive for the acquired company since you were more of an entrepreneur. It sounds like you took a business and elevated it. But for someone who's been at Reply for five to 10 years, and then Tatiana asks if they want to start, say, a life sciences blockchain division, how attractive is that compared to taking entrepreneurial risks on their own? You mentioned their structures are good at attracting people, but how does it compare to the opportunity cost of doing it themselves?

It is attractive. You can earn a lot if you are a managing director of a company. I had an attractive bonus model and all the securities of working in a larger company. You have your fixed monthly pay, benefits, and a large potential to double your income. The money I could have earned at Reply is something I cannot earn now in my current position. So, that's very attractive.

That says a lot about your willingness to accept a lower compensation structure.

Honestly, there were other factors that influenced my decision to move, which didn't really pan out. This isn't related to Reply. It's just that, you know, if you have 20% growth every year and still feel that people don't understand what you do, at some point, you decide it's not worth the extra $20,000. However, founding a company within Reply is attractive.

So you're working with someone who doesn't understand how your business functions. You mentioned quoting Gartner, which seems like the blind leading the blind. Is it you? I've heard this many times. They just come to you and say, your target is X. But where does the target come from? Is it just made up?

It's just made up. You come up with a plan, and then they say, let's add another 10% on top. That's how it works. I've always joked about it.

So it's like a negotiation almost?

No, not really. I always tell them, this is how we plan. I go to Italy, they tell me our plan, I return, and then that's our plan. There's no real planning, and it's not substantiated by opportunities or your pipeline. It's just made up.

But if your bonus is based on that, isn't it demoralizing if you can't achieve it? I know it's margin first, then revenue on top.

Right, of course it is. But the objectives are typically not completely ridiculous. It's doable. You usually have a business plan that lasts a few years, and you have some say in it. It's not entirely unrealistic. However, there are years when you don't achieve it. I've had those years. But then you make it the next year and forget about the previous year because you say, okay, I made it this year, and I'm fine.

But if they say you need to do 20 and you do 10, the next year is based on the 10 growth, right? They're not compounding it and saying, oh, you didn't hit it, but let's keep going.

Yes, that's correct.

So they're using the trailing year as the baseline, even if it's unrealistic.

They're trying to put you back on track or on the path you originally defined. You commit to three or four years. If you don't make it the first year, they're not telling you to catch up completely in the next year. But over four years, you should be where you wanted to be.

That makes more sense. I think comparing one year to the next is challenging. Like you said, in 2022, it was an unpredictable landscape. You could never have predicted how difficult the year would be. So, I think it's short-sighted to set a goal like 15% for this year when nobody knows. The three to four-year vision makes sense to me, but the single-year focus doesn't.

Yes, but even in a single year, it's still 20%. It's not just the specific number that concerns you; it's the message you receive. It's more about the message you get when they say, "I don't really care what your business is about. This is what Gartner tells me, and this is what you ought to do." Even if you end up with 15% in your objectives, it shows they just didn't understand.

So, for you, the problematic part was not just the flawed goal setting, but also the unwillingness to understand what I was doing in the first place. You put that at the top of the list, right?

Yes. You can game the system if you know how.

I've heard that before too, by the way. It sounds like if you hit your number, don't go over. Save it for the next year.

Correct, correct.

But that's so foolish. How do they not understand that the incentives they create lead to suboptimal behavior? That's what I don't understand. It seems like Reply is so smart in its setup but so foolish in execution.

Yes. Yes, fully agree. Fully agree. I don't know how to put it in English, but if you're successful with what you've done for a long time, you lose the flexibility to do something different.

I agree. It’s like, would you rather have lumpy 15% growth or smooth 10%? It sounds like they prefer the smooth 10%. It seems irrational. The structure appears very rational. To create autonomous, local, decentralized teams, with great people and great technology, and compensate them well, that’s great. But when you hamper them with all these irrational things, it turns a good system into one that's really not humming.

That's the point, yes.

How did Reply find you to acquire you? How did that deal come about?

I wasn't fully involved in the search process because I was partnering with the company being acquired, but not as a managing director. I believe the managing directors were actively seeking a buyer and were probably working with a consultancy for the search. They were in touch with a senior advisor at Reply who was handling the acquisition. We, as Leadvise, were actively searching for someone to buy us.

Did they offer you a retention package or any incentives to stay, besides just liking it there?

The founders who sold Leadvise and held all the shares definitely had an incentive package. They had a five-year business plan and, unsurprisingly, left after five years and are now retired, so it must have been attractive. I did not receive such a package. Back in 2015, I decided it was fine as I could still conduct my business, so I didn't worry.

Do you have any anecdotes or stories that encapsulate the problems and opportunities you observed? Sometimes stories can better illuminate the issues. Are there any examples that speak to what you saw?

You often remember the negative things. To describe the issue of understanding your business, I once gave a small talk on CRISPR Cas9. It was the industry's hot topic in 2019. During a convention where people discussed industry trends, I gave this talk. Then Mario asked, "Why do we hire those people?" That showed me he wasn't really interested.

What do you mean by "Why do we hire those people?"

People like me who are interested in life sciences and genetics, which have nothing to do with IT. He just didn't understand.

Did you mean why did we hire them to give us a talk?

Why did we hire them at Reply? Why do we have people in life sciences?

So he didn't even understand that there was a division that handled this? So he was completely confused as to why someone was discussing life sciences in the first place.

Yes, it was really strange. That was unexpected. But on another note, for instance, the CFO of Germany, I think she might now be the CEO of the UK, Flavia Rebuffat. She's top management and a very open person. If you had any issues, you could always visit her in Munich and discuss them, and she would take care of you.

Even when we did the split between Leadvise and my company, Laife Reply, which wasn't free of conflict, there were certain issues with the Leadvise folks. Reply could have told me, "Now you've got an issue with your partners, deal with it." But they provided me the opportunity to create my own business and try to ease the situation. That was fair. As I said at the beginning, they are concerned about their people and take care of them, which is very positive about Reply.

Was there anything else we didn't discuss that you think would be useful to understand about your time there from an outsider's perspective? Anything about Reply we didn't cover? If you were the interviewer, what would you have asked yourself?

One thing to consider is the size of the companies being acquired. When I joined, acquisitions were typically in the range of 20 to 50 people, which was manageable. The year I left, they were acquiring companies with 500 people or more. This creates a completely new business in places like Germany.

It's much more difficult to integrate these companies, and it's challenging for existing companies because they suddenly have a large internal competitor five times their size. I'm not sure how they handle this now, but it was tricky.

It's really concerning when a company joins you and becomes an internal competitor, especially when they used to be an external competitor.

That's a valid point. It might be a topic worth exploring. I'm not sure if it's good or bad, but it's something I observed.

It seems uncharacteristic of them because isn't that the size at which they usually split companies up?

Exactly, that's the point.

Right, so acquiring something even bigger than what they typically build over time is quite strange.

This is why I just didn't understand it. Perhaps it was a detour in their strategy, and now they're back to their traditional acquisition path. I'm not sure, but it was very apparent that year.

It seems like they try new things to see what works, which I commend them for. However, it doesn't always make sense.