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by Vault Consulting Editors | March 31, 2009

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The year 2007 was a year of sharp contrasts for the global consulting industry. For the first half of the year, at least, it was Big Business as usual: Booming markets and healthy profit lines encouraged companies to strengthen their operations by investing in advisory services. Within the UK and Ireland, Europe’s largest consulting markets, the financial services, utilities and consumer goods industries propelled demand; across the continent, the solid performance of the energy, manufacturing, telecoms and utilities sectors also contributed to a proliferation of engagements. A 2007 report from the Management Consultancies Association (MCA) indicates that management consulting revenue among UK firms—which represents 27 per cent of the European market—climbed 10 per cent to £8.5 billion, a rate matched by the continent at large. Telecoms and transportation led the way in Germany, which accounts for about one-third of Europe’s consulting industry. France’s consulting market, Europe’s third largest, brought in €10.6 billion in revenue in 2007, with demand from the public sector, as well as increased M&A activity, keeping consultants bustling. Globally, consulting growth rates are predicted to rise 5 to 10 per cent annually through 2010.

Stormy weather

Though business was strong throughout most of 2007, by the third fiscal quarter, it was obvious that a storm hovered—and it soon touched down. As years of dubious lending policies came to an abrupt and disastrous head, industries across the spectrum suffered and consequently reined in their strategy spending. Engagements dropped off swiftly. Recalling the 2001 economic downturn, a slump that took the consulting industry three years to recover from, analysts theorised that consultancies should hunker down for lean times.

Despite uncertainty on the course of the economy, the European consulting industry nevertheless managed to close out 2007 in the black—though its revenue growth was a modest 6 per cent, significantly lower than in previous years. Profits accrued in the first half of 2007 went far in mitigating the dropoff in business at year’s end. The global credit crisis, along with skyrocketing fuel prices and the falling American dollar, has put banks and other businesses in a precarious position. Doubts about the economy are also causing many consulting clients to adopt a cautious stance, and experts forecast that growth will slow even more. Fiona Czerniawska, director of the MCA Think Tank, noted that in 2008, there is “more caution among clients so far as spending on consultancy is concerned.”

Similarly, consultancies report that engagements in 2008 are increasingly centred on trimming costs and improving efficiency, rather than spurring growth. And while analysts aren’t yet predicting an all-out crisis, they are expecting tighter budgets and fewer engagements. Still, when life gives you credit calamities, make lemonade: In the short term, even the debt debacle is providing work, as financial services firms look to consultants for help with crisis management and recovery strategies.

Lessons learned

In the face of recession, one thing is certain: Consulting firms are better prepared than they were in 2001. After the dot-com trauma, clients became more sophisticated buyers, demanding better value, deeper expertise and more targeted solutions. Many now insist that their projects be staffed by senior-level consultants—industry experts who really know the sector—rather than fresh-out-of-school generalists, and consultancies have shifted their approach accordingly. There has been a conceptual shift as well—consultants now see themselves as partnering with a client over time to bring about long-term business improvements, rather than proposing a quick fix for a single problem. In addition, consultancies have tweaked their services to suit the market. For example, at a time when many clients are seeking to do business across geographic borders, firms have expanded their core service offerings to include globalisation strategies and offshoring advice.

Aim small, win big

With clients demanding targeted consulting services, more niche firms (many spun off from larger consultancies after the dot-com bust and its ensuing layoffs) have entered the landscape, jousting with the larger, well-established consulting shops for projects. Competition in the consulting world has no doubt gotten tougher, since small firms are often able to undercut the fees of blue-chip houses by keeping overhead low. Smaller consultancies may also get a foot in the door by accepting projects that aren’t as “sexy”, such as implementation or data migration, before taking on actual strategy work.

Further heating up competition are three of the Big Four accounting firms—PricewaterhouseCoopers, Ernst & Young and KPMG—that recently re-entered the consulting market (though KPMG’s consulting presence in Europe is less pronounced than its Big Four cohorts). Between 2000 and 2001, these firms were compelled to spin off the consulting divisions from their audit and accounting practices after the US Securities and Exchange Commission clamped down on independence regulations to prevent conflicts of interest. Out of the Big Four, Deloitte is in a class of its own, having elected not to cast off its consulting wing. In 2007, the five-year noncompete agreements between the firms and their spin-offs came to an end, and PwC, Ernst & Young and KPMG have since been busy cranking up their business advisory services and financial and risk consulting divisions.

The hiatus did not diminish their brand value in clients’ eyes: Consulting and advisory services were the fastest growing service lines for the firms, and all posted impressive financial results in 2007. European business lines proved particularly fruitful. Deloitte’s European revenue grew 13 per cent, while PwC posted 22 per cent growth in Central and Eastern Europe and 9 per cent in Western Europe. Ernst & Young exhibited revenue growth of greater than 15 per cent in each of Northern, Central and Western Europe in fiscal 2007.

IT’s coming up

Another marked change for the industry is consultancies’ gradual merging of business consulting and IT and project management services. Many companies are wising up to the fact that technology plays an essential role in meeting strategic objectives and, as such, are increasingly turning to consulting firms that can offer both nontechnical solutions and IT systems. According to the 2008 MCA report, such engagements account for more than half of companies’ consulting expenditure. Over the course of 2007, while income from strategy consulting diminished, IT consulting grew by 16 per cent. As business strategy and IT processes become increasingly interdependent, strategy and advisory firms have found it profitable to offer the kinds of tech services—such as database creation—that were previously performed by “pure tech” consultancies. For instance, Bain and McKinsey, traditionally strategy-oriented firms, are now exploring the benefits of integrating IT consulting into their service lines. And while niche firms do have their place in the technology industry, the biggest players have a leg up on winning clients, thanks to their ability to seamlessly weave customised IT solutions and software with business strategy.

The strength of financial services

The consulting industry’s growth in 2007 was largely spurred by the financial services industry. In the UK alone, the sector accounted for more than £1.4 billion in revenue for the year. Demand was driven in part by the increase in M&A activity, which surged to unprecedented levels in the first six months of the year. By the second half of the year, however, deals dwindled as mortgage woes in the US reverberated through global credit markets. The resulting revaluation of credit spreads hampered European companies’ ability to raise low-interest capital. The effect this will have on the consulting industry in the long term is yet to be seen, but there is likely to be intensified need among clients for credit risk analysis, refinancing assistance, and other credit- or finance-related services.

Despite the depressed conditions, the global M&A market reached a record $4.3 trillion in 2007, with Europe accounting for 39 per cent of that value. M&A deals typically provide a stream of work for consultants, who are called on to evaluate potential deals, find targets or conduct due diligence. Consultants are also brought in after deals to help handle postmerger issues. In response to the M&A boom of the last years, some firms have bolstered their M&A service lines. Companies focussed on M&A, including AlixPartners, LLP, Droege & Comp. and Alvarez & Marsal, are poised to cash in on the lucrative market.

Risk management and security are also driving the financial services industry’s demand for consulting services. With a global market and increasing cross-border activity, businesses are more concerned with managing security issues. Regulatory consulting has also been a boost for consultancies, as banks fall in line with 2008 Basel II requirements. Research firm Kennedy Information reports that the financial services industry alone spent $60 billion on consulting services in 2007, a figure expected to rise more than 5 per cent annually through 2011.

The Eastern front

Eastern Europe is proving a viable new market for consulting activity. In fact, industry observers expect growth in Hungary, the Czech Republic and Poland to outstrip growth in more established Western European markets. Thanks to Eastern Europe’s low-cost labour pools, outsourcing has so far driven the region’s expansion. Though talent is not nearly as inexpensive as it is in India and China, workers in these countries have the advantage of geographic proximity and facility with European languages. In the future, however, consultancies expect the region’s consulting needs to stretch far beyond outsourcing engagements. Following the deregulation of industries such as telecoms and utilities, Eastern European businesses are calling in consultants to help sharpen their profit focus. And now that Romania and Bulgaria have won inclusion to the European Union, companies in those nations are seeking out advisory services as they navigate EU compliance regulations.

Outsourcing excellence

Business process outsourcing activity in Europe continues to provide steady, lucrative work for consulting firms, and the EU now accounts for 51 per cent of global BPO contracts. According to a report from European import research firm CBI, the outsourcing market in Europe is set to grow from €11 billion in 2006 to €18.9 billion in 2011. The UK dominates Europe's BPO scene, though recently Belgium, the Netherlands and Luxembourg have been ramping up BPO activity.

India continues to be a prime area for growth, for both outsourcing and advisory service lines. Between 2005 and 2007, IBM doubled the number of its employees in India to over 53,000. In 2008, Deloitte announced plans to raise its India headcount from 7,500 to 12,000 by 2010. Accenture, too, considers India to be one of its largest developing markets. With a headcount of 35,000 in the country, it has more employees in India than in any other country. But as the labour market in India matures, salaries are inching upward at a rate of 15 per cent per year, making it more expensive for consultancies to hire local staff. At this rate, analysts say the country may soon price itself out of the offshoring competition. As such, companies have started looking beyond India, eyeing other emerging countries, such as Indonesia, Vietnam, the Philippines and Eastern European nations, for outsourcing opportunities.

While the BPO industry’s overall outlook is positive, Consulting Times reports that 2007 was the first year that the total number of contracts declined, by 12 per cent. Part of the drop is due to the maturation of the market; businesses are increasingly using several specialist providers, and contracting each for just a single piece of the whole BPO project, rather than using just one outsourcing provider for all. As it stands, the human resources and financial services sectors are driving most BPO work.

A few good hires

Economic uncertainty aside, recruiting remains a top priority for many consultancies. The MCA reports that member firms employed over 33,000 consultants in 2007, a 9 per cent hike over 2006 levels. But the major consulting shops have been unable to keep up with current demand for talent, and have set ambitious hiring goals for 2008. Indeed, the steady drive for recruiting talent indicates that consulting firms are confident that the flow of engagements isn’t likely to trickle off any time soon.

As clients continue to demand specialised expertise, consultancies are specifically seeking experienced candidates—lateral hires with a few years under their belt are preferable to newbie graduates. Specialist consultants also top recruiters’ most wanted list, and MBAs with a background in the telecoms, high-tech, biotech or consumer products industries will likely have their pick of offers. In 2007, recruitment was heaviest for consultancies' outsourcing service lines, up 14 per cent over 2006, compared to 10 per cent for pure strategy consultants.

Some firms are also raising target hiring numbers to keep up with the slightly higher turnover that has resulted from industrywide poaching. According to the 2007 “Retention Report” by Top-consultant.com, attrition averaged 10 to 15 per cent throughout Continental Europe, with rates in the UK averaging 15 to 20 per cent. Recruiters estimate that they will need to bump up hiring by 25 per cent over 2008 to make up for staff losses. And since salaries in the industry rose only 4 per cent over 2007, consultancies also face the prospect of losing talent to higher-paying industries such as financial services. The most self-aware firms are acting quickly to keep their workforce challenged and interested by ensuring that compensation remains competitive, increasing the transparency of the promotion track and boosting resources for official training.

The green scene

Environmental awareness was also on the rise in 2007. Concerns about global warming led multiple early-adopter consultancies to initiate programmes aimed at reducing or even eliminating their carbon footprints. Some of the methods introduced to achieve these objectives include promoting the use of recycled and recyclable office materials, upgrading the air conditioning and computing systems to curb wasted energy, and minimising air travel to client sites. As a natural outgrowth of such initiatives, many environmentally conscious consultancies will also offer environmental advisory services to assist clients in their own conservation efforts, especially in light of tightening compliance standards. Among the major consulting firms to adopt green programmes in 2007 were L.E.K. Consulting, Capgemini and IBM Global Business Services. L.E.K., in particular, intends to eliminate all CO2 emission, making it the first major management consultancy to become carbon neutral.

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