1. Introduction to the Consulting Industry
Consulting services (management, scientific and technical) generated about $160.3 billion in revenues in the U.S. during 2007, according to Plunkett Research estimates. This is an increase of about 3% over 2006 estimates. (Accounting services generated an additional $110 billion in 2007, up about 5% over 2006 according to Plunkett Research estimates.) Kennedy Information, www.kennedyinfo.com, places the global consulting market (including management, human resources and information technology consulting) at about $310 billion in 2007.
After a decade of sizzling growth and enviable profits, the consulting business was forced to pull in its reins during 2001-2003. The stock market bust of 2000-2001, particularly in the technology and telecommunications sectors, caused this. Tech companies that were once lucrative consulting clients disappeared under crushing financial losses. Meanwhile, a general economic slowdown in most of the developed world further hampered the consulting industry.
However, consultancies posted significant growth in the 2005 through 2007 period. Major consulting firms are hiring again-stalking the ivy-covered halls of America's best business school campuses in search of the best and brightest new MBAs. The fact that new graduates will have trouble getting jobs in the financial and banking industry in 2008 will be a boost to recruiters at consulting companies. However, a question looms about consulting firms' ability to grow and hire in 2008 in light of the latest economic slowdown and shrinking corporate budgets. Government budgets are under pressure as well, particularly at the state level where large deficits loom. Big corporations and governmental agencies are prime clients for consultancies.
Outside the U.S., the consulting industry and related sectors have been booming. However, the slowdown of 2008 will temper that growth. Until recently, global business growth from Europe throughout North America to Asia/Pacific were fueling demand for consulting of all kinds, including management consulting, HR consulting, industrial consulting and technology consulting. Meanwhile, many types of consulting and accounting projects are being offshored. Initially this was due to efforts by firms in North America and Europe that wanted to take advantage of lower hourly fees. To a growing degree, however, offshoring of such tasks is becoming necessary in order to conduct consulting projects in the nations where practices must be applied. As multinational companies headquartered in the U.S. and elsewhere continue to open offices, factories and research facilities in other nations, consultants must follow in order to best practice their skills.
At the same time, China and India are investing heavily in their own upper-level education systems with the aim to turn out world-class MBAs, scientists, researchers and engineers from stellar universities. Many Asian nations have already achieved excellent success in this regard, including South Korea, Singapore, Taiwan and Japan.
The consulting industry is a multifaceted, global business sector that is facing many challenges and evolving quickly. At the highest level of the business is "management consulting," the segment that advises top executives and boards of directors at Fortune 1000 firms on strategy and organization. McKinsey & Company, Inc., Bain & Company, Inc., Boston Consulting Group, Inc. and a handful of other companies are the most elite. Such firms may charge their clients anywhere from $300,000 to $1 million in monthly fees, billing top consultants at as much as $5,000 daily plus expenses, and associates at $1,500 or so. These consultants' engagements for a multinational corporation may include analysis of multiple divisions and involve travel to several continents. Their suggestions often result in sweeping organizational changes, adding (clients hope) tens of millions of dollars to the yearly bottom line. Management consultants may take assignments involving many aspects of a client's business, including marketing, acquisitions, finance, information technology, manufacturing, distribution, human resources, divestitures, government relations, facilities, telecommunications, environmental matters and more.
The growing globalization of business and industry in general has led inevitably to the globalization of the leading consulting companies. Major consultancies operate offices in the most important business centers in Europe and Asia-Pacific as well as in North and South America. Many operate worldwide and have multiethnic, multilingual employee bases. Major consulting firms have opened significant offices in India and China.
Annual revenues at such firms runs in the billions of dollars, and top consultants may earn $200,000 to $500,000 or more yearly in return for grueling hours, high stress and many, many days spent traveling far from home. Despite these drawbacks, considering the high pay and the prestige, it's no wonder that the best students at the best business schools frequently pine for posts in consulting.
In contrast to the size and fame of the leading management consulting companies, a large portion of the consulting industry is comprised of very small companies-in many cases these are one-person shops, perhaps operating from a spare bedroom at home. This part of the business has grown rapidly since 2000, as legions of well educated, highly qualified and thoroughly experienced executives and professionals were laid-off during corporate downsizing or took early retirement in exchange for an opportunity to work for themselves. These professionals have turned to self-employment as consultants, focusing on their specialties and combing their rolodexes for leads.
During the consulting slump of the early 2000s, many consultancies resorted to mergers with partners; others instituted layoffs and otherwise slashed their expenses. Some corporate clients built their own internal consulting staffs in an effort to control costs. Up until recently, however, consulting companies in general expected healthy growth, particularly in projects with clients based in the North America, parts of Europe, South America and Asia/Pacific, where economies had been steaming ahead. It remains to be seen how well consulting revenues will hold up in 2008 and beyond, but it is safe to say that budgets will be much more restrained than they were in the recent past, and new engagements will be harder to come by.
Meanwhile, the days of unrestrained corporate spending are long gone. Going forward, consulting firms will be forced to compete fiercely for their engagements, and the engagements they receive may be relatively short-term or less profitable than assignments of the recent past. Corporate clients will be focused on a provable return on investment for their consulting dollars spent. Specific goals will be set early in the process, and consultants will be under intense pressure to meet those goals. Large, multifaceted consulting companies will face fierce competition from smaller, niche companies. In particular, consultancies that can help implement outsourcing and offshoring, or further their clients' desires to increase revenues in rapidly-growing foreign markets, may have the best competitive advantage over the mid-term. Corporate clients may lean toward hiring consultancies with a proven ability not only to point out a corporation's problems and strategic deficiencies, but also to implement solutions in distant lands.
U.S. governments at local, state and federal levels have been providing lucrative consulting contracts. Government at all levels has large needs for consulting in IT, security, human resources and other areas. For example, the latest Washington Technology (www.washingtontechnology.com) list of Top 100 Federal Prime Contractors, based on 2006 revenues, ranks IBM, Booz Allen Hamilton, Dell and SAIC among the top 20 firms, each with more than $1 billion in prime federal contracts.
One of the fastest-growing segments of consulting has been information technology (IT). This segment includes consultants focused on e-commerce; telecommunications; intranet and Internet strategies and functionality; hardware systems design and implementation; software design, acquisition and implementation; and web site design and operation.
During the tech boom of the 90s, IT consultancies like the now defunct marchFIRST appeared out of nowhere and quickly attained annual revenues in the hundreds of millions of dollars. The 90s, through the widespread commercialization of the Internet and fiber optics, as well as the rapid spread of networked computing, brought a dizzying tidal wave of technology opportunities to light. Managers everywhere wanted to quickly ramp up new systems, from web sites to private data networks to advanced e-commerce systems. They turned to consultants, and the IT consulting companies boomed. These consultancies created marketing partnerships with leading hardware and software manufacturers so that they could quickly recommend, purchase and install technology system packages-at high profits to both the consultancies and the system manufacturers. Enterprise-level systems, which were supposed to seamlessly deliver real-time information from subsidiaries around the globe to top managers, became the standard at Global 1000 companies. In the end, corporate clients invested massive sums but didn't always get the results they desired.
Today's largest IT consulting firms often provide outsourced IT services of many types. In fact, successful consultancies with IT roots have evolved into full-service companies. In many cases, they are integral departments within larger technology-based companies. The IBM Global Services unit of computer giant IBM best illustrates this trend. At such tech firms, a large portion of income is derived from outsourcing. That is, once these IT services firms have determined a client's needs during a consulting or analysis phase, they may deliver turnkey services that include actual day-to-day operation of the client's computer department and/or other departments. HP has also been focusing on its large consulting and services unit. Likewise, many companies outside of the computer hardware and software field have successfully blended consulting and outsourcing into their offerings, developing dependable additional revenue sources by offering a complete line of services to their clients.
biggest development in IT consulting today is the extremely rapid growth of major companies that are based in India but compete globally, such as Wipro, Infosys and Tata Consultancy Services (TCS). These companies quickly grew multi-billion dollar revenue bases as major contenders in the global IT sector.
hot competition for IT consulting budgets comes from software companies, such as Oracle, that have quickly built up large consulting units of their own. Even Dell, once a firm focused on the efficient manufacture and direct sales of PCs and servers, now offers a turnkey system design and installation service.
In an interesting development, OEMs (original equipment manufacturers) of a wide range of products and components, from laptop computers to hard drives to automobile components, now consult intensely with their clients in the product development phase, and are later involved in the actual manufacturing. This has led to the evolution of some OEMs into ODMs (original design manufacturers). These ODMs consult with, design for and then manufacture for their clients.
For example, an ODM might determine the needs for an in-dash stereo/radio system of an automaker client, design the system and finally manufacture the system. The automobile industry has become an environment in which major manufacturers, such as GM, rely heavily on a handful of component and systems manufacturers, such as Delphi, to consult in the design and engineering phase of new car planning. The newest generations of aircraft at Airbus and Boeing are designed and manufactured to a large extent by ODM partners scattered around the globe.
The consumer electronics and personal computer sectors are heading in the same direction. Contract electronics manufacturers such as Flextronics consult heavily with their clients in the design of new products, whether they are computers, stereos or telecommunications equipment. As technology has advanced rapidly and microchips have become integral components of many everyday items, consulting regarding design and implementation has become necessary to many types of manufacturers. Likewise, many types of service providers, such as those in telecommunications, must consult to a large extent with end customers regarding their systems' needs. Consulting in these types of situations may or may not result in additional fees, but can be vital pieces of the complete sales cycle. In many cases, the consulting functions at manufacturing and services firms have been developed into true profit centers with specific fee structures.