August 13th, 2009
When Consultancies Feel the Pain of Recession
Phil Fersht, an AMR analyst and blogger, wrote yesterday about the bad year that major outsourcing consultancy TPI is having. He went further and checked with other consultancies about how they are doing. In short, he found that some firms were doing more outsourcing consulting and some less. But, he also found that many management consultancies were doing this work when they weren’t during a more robust economy. He also notes that many customers are doing outsourcing evaluation work on their own.
Let me add some additional insights re: Phil’s piece.
Just before the tech crash of 2000, a colleague of mine, Vinnie Mirchandani, and I launched a dot.com business. We saw the difficulty that companies were experiencing when trying to get economically priced services proposals from systems integrators. In 1999, labor was scarce, demand was through the roof and integrators were charging obscene billing rates. We thought the market needed a better way to contract for this work. So we launched a business to do just that.
The business’ purpose was to help large companies structure, bid and select software implementation partners. We built an exceptionally rich, robust system chock full of intellectual property (IP). That IP alone, we thought, would be the real driver of business. Well, just as the dot.com came online, the tech bust occurred.
It turns out that any IT person could wrestle a great deal from system integrator in a down economy. We found that buyers in a down economy value discounts (or low price) above all else. We found that buyers had to be more self-sufficient/self-reliant as they had less operational, discretionary budget to spend on services like ours.
Now, a decade later, I see similar actions affecting the outsourcing consulting business. Businesses will try to do more by themselves and avoid the use of consultancies. When they do use consultancies, businesses will use less expensive and smaller consultancies and bypass the big, higher-priced ones. All-new competitors will come crawling out of the woodwork to hang out their ‘outsourcing consulting’ shingle. In a down market, demand is down, competition is fierce and growing.
Phil’s observations are in-line with past down economy experiences.
Readers should also note that some consulting services often lag economic conditions. Take systems integration services as an example. When an economy starts to slow down, businesses often finish these huge capital-intensive projects instead of shelving them. As a result, systems integrators often fail to see any material impact on their business at the beginning of a recession. However, when the economy is returning to a more robust state, these same consultancies will experience a continued lack of demand for their services. Why? Some big IT projects have long ramp-up or lead times. Just because management is ready to start a new initiative doesn’t mean that systems integrators will get immediately to work on it. Companies will likely send out RFIs, RFPs, ask for a couple of presentations, negotiate terms, etc. before doing a new deal with a consultancy. That elapsed time could run into several months. Bottom line: some consultancies are the last to feel the pain of a recession and the last to feel the effects of a recovering economy.
I believe Phil is seeing this situation in action with the outsourcing consulting firms.
Not all consultancies are affected equally by a recession though. Some track exactly with the recession. Often these firms sell short duration projects. Other firms experience financial results exactly opposite the direction that the economy is moving. For example, consultancies that handle bankruptcies do well in a down market.
Good service executives know exactly how their firm will fare in changing economy. Great executives anticipate the needed changes and make sure their firms are always relevant in the current economy. Is your firm relevant (or surprised)?
This blog explores the intersection set between services and technology. If it impacts either space, it will be covered here. Brian Sommer is a former Accenture partner. He did an 18-year tour of duty there and ran three small practice units (Finance Center of Excellence, HR Center of Excellence and Software Intelligence). He’s sold service projects in almost every continent and remains just as current on both services and technology today as ever before. Brian is currently CEO of TechVentive, a strategy consultancy servicing technology providers, and a research analyst with Vital Analysis. See his full profile and disclosure of his industry affiliations.
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