Kendall Consulting Group -Trends in Consulting Innovation Article

Trends in Consulting:
Some observations about the consulting industry and speculation about where it is headed - consulting at the cross roads

Note to Reader: This article was written in the Summer of 2002 when the American consulting markets were still reeling from the attacks of September 11, 2001. The industry suffered some major setbacks due to those events. We leave this article posted to stimulate your thinking about what the trends in coinsulting are today; some may be the same but others given below have no doubt changed. The authors.

September, 2002

The consulting industry has been under siege the last two years. Today, in the third quarter of 2002, there is a much different industry than existed in 2000. In the past two years a recession has touched most companies and shaped management thinking; terrorists wrought a devastating attack on America that has impacted global business; and revelations about some of our largest companies such as Enron and WorldCom have resulted in monumental bankruptcies as well as the demise of the world's largest auditing and consulting firm, Arthur Andersen.

What has happened to the consulting industry and where is it going? That is the subject of this article. Before we go further, we invite you to give us your comments and viewpoints about the consulting industry. Our look is brief but we have tried to be comprehensive. We have divided our look at consulting into three areas:

• Consulting industry overview
• Consulting clients and the industries consultants serve
• Consulting operations (an internal look at the consulting business)

Consulting Industry Overview

"As the economy goes, so goes consulting." Arguments about the resiliency of consulting in economic downturns appear to no longer be valid, if they ever were. The 1990s were a boom time for most consulting firms. By 2000, large and medium consulting firms had a loyal client following and a full roster of talented staff picked from MBA programs across the globe. Consulting was one of the top job picks for graduating MBAs. In addition, many experienced professionals migrated into consulting after they had been "downsized" or "reengineered" by their company. By 2000 there were thousands of small consulting firms offering consulting services. In keeping with the times, many of them were targeted at e-business.

The Y2K problems passed without notice and the attendant deployment of many large ERP systems were completed in many companies. Company projects shifted to capitalize on their investments, or to emphasize e-business or customer relationship management (CRM) as the "next big thing."

And, then a recession started. The telecom industry as well as many "dot-coms" died. Stock prices for these shares started dropping in April 2000. The rest of industries followed as the year went on. As companies reacted to preserve earnings and cash, the technology and outside consulting budgets were frozen, reduced, or projects were put on indefinite "hold." Consulting work slowed or stopped at most client companies as businesses retrenched.

By mid-2001, many consulting firms recanted on offers made to newly minted MBAs or asked that they postpone their start dates. Many firms announced layoffs, which turned out to be only the first round of a series of industry downsizing. All this was observed in large firms that had been the center of stability in the consulting industry. While this was going on, small and medium firms started to see the erosion of most if not all of their business. Marginal firms without strong financials closed their doors and disappeared, including a number of firms tied closely to the "dot-com explosion" such as Sapient or Viant. At a meeting of independent consultants in late 2001, nearly everyone was "under utilized" and looking for work. Some disillusioned consultants tried to return to traditional corporate jobs they had left only a few years (or months) before.

Larger firms continued consolidating on a global basis; a trend that had started in the 1990s. To match the globalization of client companies, consulting firms also moved to provide truly global services. For instance, the UK's Cap Gemini eagerly took over the global consulting arm of EY in a move to integrate both horizontally and vertically on a global basis. By 2001 these companies found they had more staff than business warranted and thus they began a series of large layoffs. For example, Accenture was in the news almost monthly about this time as they announced multiple layoffs.

Concurrently, the exclusive franchise some firms had on either geography or practice disappeared. For example, McKinsey found itself challenged by new and powerful local consultancies in India and Indonesia. Firms with an exclusive hold on practice areas such as project management or e-commerce were suddenly just one of many of companies with such capability. Thus, the industry has undergone and will continue to undergo a "commoditization" on a global basis. Foreign consulting firms are likely enter American markets with comparable skills that are lower priced than their traditional local counterparts. Entries from India and Pakistan have already made great inroads into the "commoditized" systems development arena over the past decade; firms such as these may suddenly appear with new skills in practice areas other than just technology.

Over the past two years, larger audit firms have been in the news and having their dual roles of auditor and consultant challenged and even legislated away. A few egregious situations such as Enron and WorldCom have tainted the entire consulting industry. Arthur Andersen has all but disappeared after its conviction, bringing the Big 5 down to the Big 4. As this was happening, moves by other firms to divest their consulting arms gained momentum. For instance, IBM took over the consulting arm of PriceWaterhouseCoopers making IBM the largest services company in the world. However, IBM has been hit by the recession and merger redundancy, and has had several layoffs in service areas with more planned. KPMG's consulting practice has become an independent company, but has also struggled with the level of work and staffing levels. As moves such as these were occurring, those consulting entities were also acquiring mid-level consultancies with specialized skills and/or a strong business base. Thus, the industry is undergoing further consolidation at the top as consultants separate from the audit practices. These moves will put greater pressure on these newly separated consultancies to market and sell their services in a much more competitive climate.

Consulting Clients and the Industries Consultants Serve

We mentioned the recession above. As many businesses faced uncertainty about their earnings and performance, they slowed the purchase of all unnecessary services including consulting. Only engagements tied to rapid impact on the bottom line were kept, and then with the highest level of scrutiny. This has contributed to the shrinkage in the size of the consulting market over the past two years - for both large and small firms. As the economy bottoms out, which it appears to be doing now, there will likely be some resuscitation of the consulting marketplace. If, as some speculate, we enter a war with Iraq then business will likely remain uncertain about the future, shortsighted, and continue to avoid all but the most necessary assistance from outsiders.

Some of the industries that have provided bedrock business for consultants have turned topsy-turvy. The telecommunications industry was for decades one industry that spent billions on consulting services. Now, AT&T and Lucent are shadows of their former selves. WorldCom, Qwest and others are either bankrupt or just about at this state. Others like Cisco have scaled back their business dramatically. Few consultants derive significant revenues from these businesses.

In contrast and thanks in part to government regulation, other industries are heating up as consulting hot beds. For instance, healthcare organizations and the need for compliance with HIPAA regulations represent an opportunity for major systems and information management projects for many consulting firms. Also, greater attention to customers in a much more competitive marketplace has prompted many companies to increase spending on marketing projects, particularly in the CRM area. Finally, government organizations have started using consultants more extensively in a number of different roles.

One area that has been remarkably resilient in the economic downturn is that of outsourcing. Companies that can make an economic case for taking over some of the functional capabilities of companies (e.g., information systems, human resources), still have a solid and well performing position in the consulting arena. CSC, EDS and IBM are companies than have done well in this area.

While consulting firms are struggling with their infrastructure and markets, many companies in other industries have decided to become their own consulting clients. These companies have launched an internal consulting group, often spawned from business analysts within a firm's information systems division. These staff are tasked with a broader range of projects aimed at improving company operations and impacting the bottom line. Further, they often compete with external consulting groups for such business, only they appear to have an "insider's edge." Since the company already employs these staff, there is a strong economic case for their use in such a role, especially rather than laying off such talent as, for instance, Y2K or ERP projects are completed or IT departments are outsourced. Many companies have found that the ability of internal consultants to tackle the scope of projects the company needs and to obtain bottom line results are dependent on development of the right skill sets in and practices by these newly anointed consultants. Some companies have even expanded the role of these consultants to include services for their customers, suppliers and other external entities, further competing with traditional external consulting businesses. A companion article addresses some of these points further [Click here].

Consulting Operations

Overall, consulting operations have changed by necessity due to business conditions, and these changes will continue even after the economy rebounds. Our observations about consulting operations touch on several areas:

• Marketing and sales
• Payment arrangements
• Staffing and recruitment
• Culture
• Nature of work
• Service and practice areas

Marketing and sales - Selling consulting services now takes more resources, more time, and has fewer results than just two years ago. As in the past, personal relationships are key in sales efforts, however, due to downsizing or early retirements, many long-term client contacts have left their companies. (Some of these departing staff have, of course, sought employment with their old consulting friends.) Contacts at these companies must be developed anew, requiring an increase in marketing effort.

Clients are more sophisticated and selective in how they use consultants and they are often needing to stretch out work rather than accelerate its performance. As clients apply some of their own staff to projects, consulting jobs appear to be smaller often offering the opportunity for only one or two uniquely skilled individuals to consult. In some cases, clients are simply picking a consultant's brain (rather than mounting a major consulting project) to gain their knowledge so their own internal team can continue their own work with greater certainty.

Payment arrangements - Historically, consulting work has been based on time and materials. Individual consultants have a billing rate. They multiply this times the number of hours worked for a client to determine the fee charges. Expenses are added in for the bill. Of note is that consulting fees have remained relatively constant, adjusted for inflation, over the past decade. Several years ago some major firms made front-page news by negotiating deals where their pay was contingent on performance milestones by the contracting client. The news was that they were making billions on engagements that only cost them millions to perform. EDS and the U.S. Postal Service is one such case that received much notoriety.

Notoriety notwithstanding, an increasing number of clients are attracted to the notion that they don't have to pay anything unless visible and measurable results are obtained. Mostly large firms with some economic bench depth can play this game. A job is negotiated and various business performance milestones or measurements agreed that should be met in some way as the work is completed. The consulting firm will then receive its fee, usually in installments over a period of time, based on milestone achievement or attainment of new measurement levels. One well to do consulting firm specializing in mergers and acquisitions, is purported to take 20% of the net increase in earnings for five years from newly merged client firms. Novel retainer and fee arrangements will continue to percolate deeper into the consulting industry, moving downward to even smaller firms as they seek to remain competitive.

Other unusual pay for consulting arrangements are also emerging. Online consulting services have been tried by a number of firms (e.g., EY, PWC, D&T) with mixed results. Typically, clients pay an annual fee to obtain access to the firm's network of consultants who are on stand-by to answer any question. EY says they break even on the EY Ernie service, however their goal for Ernie is not so much profits as the maintenance of client relationships. We expect other firms will enter the online consulting market with even more innovative approaches.

Staffing and Recruitment - Consulting firms are much more selective in their recruiting for talent. Many second and third tier schools have been dropped from the visitation schedules of major consulting firms, who now are focusing their efforts on only a few top schools. MBA hiring into consulting firms is down significantly from two years ago. Even graduates from top-tier schools have been "let go" by some consulting firms.

One by-product of this soft job market is a greatly increased skepticism by MBAs about the consulting industry. This may also be aggravated by the tarnished reputation all consultancies received from the Enron/Andersen case. In 2000, about half of MBA students were seriously interested in a career in consulting; today, that number is less than a quarter.

Consulting firms are still willing to entertain flexible work arrangements. Several firms use part-time employees, employing them on client work only when they can make them billable to the client.

Culture - The pendulum has swung several times during past decades between firm focused and employee focused. Right now, focused by tough economic times, consulting firms are very inward and firm focused. The focus is on billable hours and market/sales activities directly related thereto, rather than firm projects or employee perquisites. As the economy strengthens again, we expect to again see a renewed interest in the employee, their work environment, and their issues and concerns.

Nature of Work - Influenced by many of the factors mentioned above, how some consultants work has changed. Clients now appear much more interested in having consultants join a client team, perhaps in a leadership or coaching role. The old model was a consulting team doing most of the work with a client manager. Today's model appears to be a client manager and client team assisted by several specialized consultants who work as team members. These external consultants coach the team and/or client manager, or even help build internal consulting skills. New skills in teamwork, coaching, cooperation, and individual chemistry are thus more important than ever for the consulting team members. [See companion article in this area]

Another trend we see is the increased use of multiple consulting firms by a company. The firms are expected to cooperate and work harmoniously, usually along with company staff, towards the goals of the project. While issues of proprietary methodologies and knowledge can be raised, those firms that want the work will subjugate these issues and work jointly with another firm for the client. We recently saw a small firm handle the front-end strategy work for a client, integrating and handing off their work to a larger firm for the implementation phase.

Service and practice areas - consulting can be broken down into about seven major practices or work areas. This article ends with a look at each of these areas.

1. Strategy Formulation (e.g., choice of markets, products, channels) - while interest was increasing in this area two years ago, recently we see a shift to strategy implementation rather than formulation. We expect this to continue.

2. Systems Implementation (e.g., SAP, e-Commerce) - Large ERP implementations are increasingly rare in the marketplace. A few will remain. The focus will be on the "build out phase" for e-commerce, particularly for large companies. The Internet bubble did burst, but this next phase will be a long and consistent one as the promises of the Internet and a global, networked business community are realized. The focus of projects in this area will be more operations and service oriented, for instance, the development of sophisticated extranets or virtual private networks to support customers and prospects.

3. Change Management (e.g., organizational design, HR policy) - Work in this area weakened over the past two years, and we believe it will continue to erode. Companies do need help in this area, but for now they appear unwilling to buy external support. Internal consulting groups are being used in this area, but often with mixed results due to the lack of adequate change management skills.

4. Operations (e.g., supply chain, warehousing, distribution) - This area was the target of many quality initiatives during the 1990s. These have been drastically curtailed over the past two years. In their place are targeted initiatives based on use of the Internet, virtual private networks, and other network capabilities to improve company or supply chain operations. As projects such as these can be tied to a company's bottom line, in the short term, we believe work in this area will expand. Reengineering, not by that name, will also continue as a viable practice area so long as results are tied to company performance. Internal consulting groups will strongly compete with external consulting groups in this arena.

5. Marketing (e.g., research, branding) - The hot spot for consulting in this arena appears to be Customer Relationship Management (CRM). More than a software package, these initiatives are transforming how companies get and service their customers. While traditional marketing consulting will be hard won business, CRM initiatives will be a growth industry. Since many internal consultants do not have skills in this new area, CRM represents a significant opportunity for traditional consultants.

6. Coaching (e.g., leadership, one-on-one) - This business has softened significantly over the past two years. Executive coaching appears to still be "in," but broader initiatives aimed at large segments of a company are rare. These areas are likely to revive in direct relationship to the economy.

7. Mergers and Acquisitions (e.g., valuation, negotiation, integration) - This will continue to be a hot area, even in weak industries as they consolidate.

Consultants, be they in organizations external to or within a client company, need to develop new skills and new areas of expertise. What are needed are new ways to look at relationships with customers, operations, supply chain management, and a networked business community, and ways to rapidly turn these ideas into high impact results.

Summary

Being a consultant in 2002 is hard work. There is more competition than ever. It is now harder to market and sell jobs, and harder yet to maintain a long-term relationship with your new client. There are, however, some new "hot" areas in the marketplace that buyers of consulting services are interested in. As the economy rebounds we see the consulting industry also bouncing back, although the structure and many of the core operating principles for this business will be in the process of flux.

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Kendall Consulting Group has helped a wide variety of companies with strategy formulation, execution, and implementation tactics. The company often helps clients bridge the gap between business and technology, creating innovative and workable solutions in the process. KCG has also helped many companies start and run internal consulting groups or professional services groups. Please contact us if you would like to talk further about your business needs.

Kendall Consulting Group
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(01) 941-366-1774 or 978-474-9109

Contact us at: info@kendall-consulting.com

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Innovations Articles

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• Trends in Consulting
• Commentary on Trends in Consulting
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• Consulting Skills Development Experience
• Effective Uses of I.T. Staff as Internal Consultants
• Strategy Implementation
• Visit to an Operational Excellent Company
• Organizational Due Diligence (Mergers and Acquisitions)
• Principle Driven Operations
• Change Management
• Education's Role in Change Management
• Communications and Change Management
• Value Disciplines
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• Grow Your Own Consultants
• Trends in Consulting (You are here!)

Archive Articles (below)

• Designing Executive Information Systems
• Executive Information Systems: An Overview of Development
• Implications of Transition From an Industrial Era to One of Information
• Critical Success Factors Techniques can Apply to Team Management, Too
• Decision Scenarios Ensure Information System Meets Business Needs
• Critical Success Factors : Helping IS Managers Pinpoint Information Needs
• Combining Quality and Reengineering for Operational Superiority
• Steering IS Committees Straight
• Internal Consultants and a Consultative Approach
• EIS Plays Critical Role in Reengineering
• Rapid Software Selection

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