Thanks for the idea, Mavix. This looks like a well-run consultancy similar to Italian Reply.

Do you see any times of entry barriers or barriers to success in that business? Why aren't they copied easily?

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Thanks for yor words Rocko!

I don't think that a classic "moat" exists in the consulting business. There are a lot of consulting companies that offer similar services and solutions. Of course some customer relationships are important to differentiate and as you can see, B3 has some high profile customers. But i think the most important aspects for the consulting business are talented consultants. And to attract these people is something that is B3 doing really good and probably better than some competitors. They have implemented a corporate culture that allows them to attract new talent while maintaining an entrepreneurial character with their start-up strategy. Of course any competitor can copy these strategies. But having that long history of being a good employer is in my opinion an important asset in the consulting business.

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Apr 4, 2023·edited Apr 4, 2023Liked by mavix

Being an developer myself who has worked at a software consulting company, there are basically 2 main kinds of software consulting businesses.

a. One are VMS (vertical market software) businesses that are targeted by $CSU.TO Constellation Software. They do have their own products and basically just customise their products to an certain extent for customers that mainly come from the same industry, e.g. Personio ( HR software providers for small and midsize companies. Recruit, manage (vocation/absense), pay and develop the employees ).

b. One are consulting companies that basically grow by building up relationships with more and more customers and employing more consultants like Mavix decribed before. They do not have their own products and just leases their employees to work on the clients' products.

Of course there are it-consulting companies that do both kinds (I think $REY.MI Reply does both). I am not so familiar with a, so I will only describe the "moat" of b. As reference I would recommend to take a look at a private business it-economics in Munich, Germany (https://www.bundesanzeiger.de/pub/de/suchen2?4)

- it-economics improved its margin from 10-12% in the 2010s (with 2016 being a fluke year) to 20%-25% post-covid between 2020 and 2021 because of covid stimulus from government and less travel expenses that were previously covered by the company because of more working from home

- "brightest minds": every consultant gets a career advisor who is basically his/her "boss" and everyone gets to plan ahead those 10 training days every year and decide what he/she wants to learn, this could involve internal trainings or external trainings that involves cloud, software architecture or even it-conference. (Travel) Expenses for those 10 trainings days are also covered by the company. Those trainings can not only include technical trainings but also soft skill trainings like conflict management which is very important because of the next point I will be mentioning.

- senior + junior: staffing of a team is not easy in consulting projects at customers. Most consultants do not work in projects that are outsourced from e.g. big insurance giant like Allianz etc. but they work together with developers and other roles "at the customer" who could be internal and external. So in order to overcome the issue that 1 junior + 1 junior = 1 disaster, a project is normally staffed with 1 senior / architect and 1 junior with no or up to 1-3 year industrial experience. As 50% of the world-wide developers have less than 5 year experience (exponential growth since alan turing at the age of 2. world war). I worked with a lot of developers with 5+ year experience but a lot of their soft skills were pretty awful.

- experience of writing tests. Test driven development that was promoted by Uncle Bob, Kent Beck etc. is a very important concept. Even Uncle Bob has to learn it from Kent Beck. But many it-consulting companies are still overlooking this aspect. You can simply identify this by simply looking at the company job descriptions or developer skills on Linkedin.

- other aspects: clean code, certification requirements can also be identified by simply looking at the company job descriptions.

- rising to the top: as a developer/consultant gets more project experience, certification and more skills, he/she gets promoted to a senior title. And the company hence can also charge more money for every hour.

- near-shoring / offshoring: margin expansion were also driven by the growth of employee number in near-shoring location in Bulgaria, as Bulgaria is one of the convenient locations inside EU. Many people even speak German, because many German lived there before the 2. World War.


- automobile clients in this industry tends to have the lowest hourly rate

- developers can choose their own hardware (Macbook over Windows, also a perk for the employee)

So I think the moat of b is basically having a good culture. Just like the CEO of Ryanair Michael O'Leary learned from $LUV southwest and integrated the culture of cost reduction on every level of the business (low-tier airport, single airplane type, europe-only, low fees, no free beverages or meals on the plane, buying planes from Boeing during recession because of low-price) and Mark Leonard learned from Buffett, Munger and other good capital allocators. Fun fact: it-economics was founded by Torsten Klein, who worked at Anderson Consulting (another consulting firm) and Anderson Consulting layed off many people because of Enron.

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Thanks for your insights!

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Nice write-up! I would like to go deeper about the public sector customers. You said they represent c15% of total revenue. Do you expect them to keep this percentage? What is the impact of these customer in the working capital? AFAIK, they often have longer terms of payment than private companies. Is this the situation here too?

Thanks again.

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Thanks mate! I think the percentage of revenue of the public sector will stay in a similar range, but maybe a little bit lower as the other sectors show strong growth. In the last year B3 had a very good development in the health and industry sector and thats also the reason why the share for the public sector fell from 16% to 14%. I think B3 will continue to grow in these two sectors and also enter new sectors, so on a percentage wise it could fell a little bit. But on the other side a big public project could have the opposite effect, its difficult to predict.

They don't disclose the the impact of customers on WC but i think the share is similar to the revenue share. You're right, public projects often take longer (tender process and also the implementation process), the payment terms are also longer but at the same time a payment default is less probable compared to private companies.

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