Reshaped industry is ready to take off
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After partying wildly during the unreal times of the dotcom boom, the $200bn global consultancy industry is back in the real world again, recovering from its hangover and regaining its composure in today’s more sober business environment.
The febrile atmosphere of the late 1990s gave way to a chastening period of retrenchment and declining fees and revenues in the early 2000s, with cynicism in the business world over the true worth of consultants exacerbated by the global business downturn and the terrorist attacks on the US on September 11, 2001.
For consultancies, the experience was painful but life-changing. “The industry went into a tunnel in one form, and came out of it in a different shape,” says Fiona Czerniawska, a leading commentator on the consulting industry.
Figures from Management Consultant International, a newsletter produced by US-based Kennedy Information, attest to a steady improvement in the industry’s performance, which began in 2003. Last year, 52 of the 75 largest companies in the industry saw consulting revenues increase, while 15 suffered a decline and the remaining eight saw no change from 2003.
Revenue per consultant, a key indicator for an industry whose assets are predominantly its people, rose significantly last year, according to the MCI figures – although this reflects hesitation over hiring new talent as well as an increase in work.
Industry leaders seem almost visibly relieved that there is no “next big thing” on the horizon which could cause a sudden boom in revenues, yet expose consultancies either to accusations of scare-mongering – as occurred during the Year 2000 saga – or of failing to deliver value when implementing the latest hot trend in enterprise IT.
Instead, sustainability and steady growth are the watchwords. “It’s a better, more attractive market now even than when things were booming,” says David Owen, head of consulting at Deloitte. Consultancies, he says, are “helping clients to innovate around things that have been around a long time, and making things happen. Show me a CEO who is not interested in growing revenues, optimising cost structures, in risk and regulation and in strategy and execution.”
Even in a steadier marketplace, however, there are challenges. “Growth is very much back on [businesses’] agenda,” says Likhit Wagle, a partner in IBM Global Services’ business consulting services unit. “But for the first time in my experience, at least, companies now want top-line growth and cost-reduction at the same time.”
The biggest constraints on growth, he says, are internal, and revolve around people’s ability to cope with change as well as enabling technology and people to work together. Companies need help on these issues, Mr Wagle suggests, because of external factors – a very low-growth, low-inflation environment that makes it hard to achieve the organic growth rates of the 1980s; significantly higher levels of competition, with digitisation allowing new competitors to emerge all over the world; and increasing levels of risk, associated with everything from Sars to terrorism.
In the core area of management consulting, activity is picking up after two or three poor years, says Ms Czerniawska, with human resources consulting and work related to organisational design and change, and operational improvement, leading the way.
“When you ask clients what they want to use consultants for, the number one issue seems to be ‘How do you get people to do stuff?’
“It’s about putting the ‘agile company’ concept into practice. It’s fine in theory but if you are a big, monolithic organisation, how can you really be agile?”
Other areas of activity, however, highlight the unpredictability of the consultancy world even in a steadier business environment. Outsourcing work has buoyed the industry up in the past two to three years, says Ms Czerniawska, who is also think-tank director at the Management Consultancies Association in the UK. This benefits companies providing purely strategic and advisory services and those offering a “soup-to-nuts” approach – everything from the initial consultancy through to taking over and operating entire business processes.
But the rate of growth in MCA members’ income from outsourcing slowed from 46 per cent in 2003 to 18 per cent last year and Ms Czerniawska wonders whether the outsourcing market is peaking or simply pausing for breath. She favours the latter, even though a rise in business confidence tends to reduce the demand for outsourcing. A countervailing trend is for companies to outsource non-core activities so they can shrink and grow on demand: “I can’t see that going away,” she says.
IT-related services have also experienced “a bit of a bounce back” over the past 12-18 months, says Ms Czerniawska, due partly to pent-up demand and regulatory change, which pushes companies to ensure their IT systems are up to scratch.
But she is not so convinced about the underlying demand for growth: “Clients are still very suspicious about big IT systems, so [consultancy work] is more about getting value from what clients have already.”
If consultancies have been changed by their experiences of the past few years, customers have gone through a learning process, too.
They are getting cannier and more sophisticated, says Bruce Tindale, chief executive of PA Consulting Group. “A lot of clients have become upset by the amounts of money they have spent on consultants who haven’t delivered, and by the huge teams of consultants they have had on site, including people just out of university being charged out at thousands of pounds a day.”
Yet consultancies bridle at suggestions that they do not generally give clients value for money, as is shown by their reaction to two damning books this year from industry insiders: Rip-off!: The Scandalous Story of the Management Consulting Money Machine, by David Craig (a pseudonym) and Martin Kihn’s House of Lies: How Management Consultants Steal Your Watch and Then Tell you the Time.
Industry leaders will admit privately – and some even publicly – that the anecdotes of overcharging, inflated travel expenses and other tricks of the trade have some truth to them, but say these reflect a reality that has long passed. “The crux of consulting is relationships,” says Mr Owen at Deloitte. “Doing anything ‘creative’ that might harm those relationships just doesn’t compute.”
Mr Tindale says the books’ anecdotes take a very narrow view of the consultants’ role, focusing merely on the costs to clients rather than the value created for them. “Nearly everything we have done – and I think that most consultants in the industry would agree – has, by and large, delivered value to clients that far exceed costs,” he says.
Consultants suggest that clients are not blameless, either. This is particularly the case in the public sector where political interference and constant changes of mind over a project’s aims can lead to long delays and destroy any hope of creating the value that was originally intended.
The simmering debate about consultants’ worth has had a permanent impact on the way they interact with clients.
“Contracts are becoming more onerous,” says Mr Tindale, “which is not necessarily a good idea because it tends to make consultants more risk-averse in looking for more innovative solutions.”
Delivering value for money, and proving it, has become de rigueur. “There has been a sea-change in what clients are looking for,” says Mr Wagle at IBM.
“These days, if you are going to propose a change programme, it needs to have a rigorous business case, and a robust tracking mechanism to demonstrate to the board through its lifecycle that it is delivering the expected return on investment.”
Achieving this makes sense for other reasons too. Delivering value to clients influences the rate-card upwards, says Mr Owen at Deloitte. Prices for consultancy work have stabilised in recent months, but no consultancy wants to see a repeat of the estimated 15-20 per cent fall in rates that occurred over the two to three preceding years.
After their recent buffeting, consultancies will be content with modest growth over the next few years, and that is what MCI is predicting until 2007, in the light of the continuing slow rate of spending on IT consulting. But there are some bright spots, it says, notably in the public sector and healthcare markets, which are set to become increasingly important over the next two years.
There is, too, the tantalising prospect of new markets for consultancy and related services in Asia, Latin America and eastern Europe (see page 8). Consultants will be keen to ensure that, in contrast to the dotcom boom years, they preserve their reputations intact as these new opportunities emerge.
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