Convulsions on Wall Street and elsewhere are grim news for the global consulting industry, which boasted $309 billion in revenues last year, according to Kennedy Information. Financial institutions are some of the industrys biggest customers. But revenues are also under pressure in other areas. The credit crunch has cut the number and size of deals by private-equity firms, which are also big consumers of consulting services. And a decline in mergers and acquisitions means there is less demand for the nitty-gritty work of combining computer systems, a mainstay of some consultancies.
Consultants say they have fared pretty well in the first half of 2008. But consulting revenues are not immune to a downturn (see chart). The impact may simply be delayed because firms such as Accenture and IBM (which earned 55% of its $98.8 billion of revenue in 2007 from consulting-related services) have multi-year contracts that protect them from sudden slumps. But consultants will feel the pinch next year, as clients cancel or delay projects.
Some consultancies are already sounding cautious about the rest of this year. I would expect the second half of 2008 to be slow, says Shumeet Banerji, the head of Booz & Company, a strategy consultancy. Industry observers agree. Consulting firms will be anaemic for a while, reckons Christopher McKenna of Oxford Universitys Sad Business School, who is the author of a history of consulting.
This month Monitor, based in Cambridge, Massachusetts, cut almost 20% of its staff. It laid off consultants in its main business, shut a unit that produced customised software and closed down another that provided consulting to start-ups. It also spun off e-learning and merger-advisory activities, in which it is keeping a small stake. And it closed several small offices, including one in Milan.
Joe Fuller, a co-founder of Monitor, says revenue is up on the previous year, but that it is anticipating a demanding and tough market in the short term. In response, Monitor plans to invest some savings in promising regions such as the Middle East, and in new areas such as its defence practice. Other consulting firms are coy about plans to reduce costs, but in the past the industry has dealt with slowdowns by recruiting fewer new staff and encouraging surplus consultants to seek jobs elsewhere.
Might tougher times lead to consolidation Rumours of link-ups abound. One company that considered a merger in the past year is the Trinsum Group, which is itself the product of a union in early 2007 between Marakon, a strategy consultancy, and Integrated Finance, a financial- and risk-consulting company that includes Robert Merton, a Nobel prize-winning economist, among its founders. Jim McTaggart, co-chairman of Trinsum, says neither of the firms that it talked to about a combination was an ideal fit. In the meantime, Trinsum has shelved a plan to create a private-equity-style fund because of the chaos in financial markets. Its been a challenging year, says Mr McTaggart.
One consultancy that has been on an acquisition spree is Oliver Wyman, part of Marsh & McLennan Companies, an American conglomerate that also has insurance-broking and human-resources businesses. The consulting firm, which has a huge financial-services practice, has seen revenue growth slow this year, but its advice on financial restructuring and regulation is in demand. John Drzik, Oliver Wymans chief executive, says the five purchases it has made in the past eight months have bolstered its presence in fast-growing areas. In August, for example, it snapped up ChapterHouse, a health-care consultancy.
As some consultants have tied the knot, others have divorced. In July, Booz Allen Hamilton (BAH) split into two separate companiesone focused on defence and government consulting and the other, Booz & Company, focused on corporate clients. Rivals claim that the split was inspired by BAHs government partners, who were bringing in most of the money at the combined firm, and that the split disrupted Booz & Company. But Boozs Mr Banerji argues that the commercial arm is better off now because the split freed it from legal strictures associated with BAHs government work. He says the separation was fairly smooth because the two sides were already operating independently.
All consultants agree that emerging markets such as China, India and the Middle East offer the best opportunities for the future. But they accept that most of their business will come from the developed world for a while yet. So the industry badly needs a Big New Idea that it can sell to clients there. Previous consulting booms were built on ideas such as total quality management and re-engineering. But at the moment consultants have no successor to such money-spinners.
Even so, one corner of the industry is thriving. Companies such as FTI Consulting and Huron Consulting, which advise firms and boards on litigation, forensic accounting and many other issues, have never had it so good. FTI Consulting has been busy helping firms caught up in the financial crisis; its revenues shot up 41% last year to just over $1 billion. On September 18th it was appointed by Lehman Brothers unsecured creditors to defend their interests.
Demand for FTIs crisis- and risk-management services is soaring too.
To cope with demand, the firm hired 50 new staff in August. Unlike strategy consultants, were very tactical, says Dennis Shaughnessy, the firms chairman, who jokes that firms such as FTI are bad-news bulls. Given the troubles in the banking worldand the deluge of hearings, investigations and lawsuits it has triggeredhe and his colleagues have plenty to be bullish about.
The Economist Newspaper Limited 2008