THE ANALYST: Advise and Consent

Knowledge, knowledge, who's got the knowledge?

In 2002 Australian enterprises spent $US815 million on computer consulting services and $US2.45 billion on development and integration services, about 4.5 per cent down on the previous year. In 2003 those figures remained essentially flat, but this year an increase of between 3.0 and 3.5 per cent is tipped by Gartner.

The business consulting market is much smaller - amounting to $US144 million in 2002, which represented a 9.5 per cent decline compared to 2001. 2003 saw a further drop of 3.4 per cent. But Gartner is predicting a turnaround in 2004, with 1.8 per cent growth and single digit expansion forecast for the foreseeable future. Consulting is looking up.

"While it is true that the skills of assessing what IT is needed - analysing the processes and implementing systems - is available widely and often in-house, companies are making pragmatic decisions, and over the longer term they will use more external resources," Gartner's research vice president for IT services Rolf Jester says.

The mix of those external resources may be changing, though, says Gartner's research vice president for business applications, Kristian Steenstrup. "Software vendors are doing more of the software consulting services - and part of that is a survival mechanism," he says. "Over the last 20 years there was a lot of involvement from the consultants doing bespoke development. Then there was the rise of the packaged software to a point where it was viable to have consultants install that. Now software companies are trying to grab that [consulting] revenue themselves."

Adding to the competitive mix is the rise of new players, particularly the Indian companies, which are effective operators, particularly at winning code-cutting or outsourcing business.

A further change that vendors and consultants are grappling with is the shifting skills landscape. "I have noticed customers who have brought in integration skills and have now decided that it is a core competence," says Steenstrup. "If I am a company committed to SAP then I will develop an SAP competence inside so that I am less reliant on, although I may still use, external consultants."

Jester notes, however, that companies seem willing only to develop skills in areas where they perceive they have a competitive edge. So, for example, a company would not necessarily build up its skills base in human resource or accounting IT skills. "They will, though, build competence around integrating processes as part of the value chain and that might be a competitive differentiator. It might be core so there they are more likely to, and should, bring skills in-house," he says.

In part, Steenstrup says this will be dictated by the class of software in question. So for example ERP will tend to be installed as a package in association with the vendor. CRM applications meanwhile will tend to be considered core, and often be customer-developed with a high demand for consulting services.

"It's also partly to do with the life cycle as well, as the product evolves and morphs. When it emerges there is a lot of hand fitment going on. Then as you move to deployment there are training services needed, and finally when a product/application is mature you come to services like outsourcing," Steenstrup says.

He adds that the skills shift, plus the vendors' search for more value from their products, is increasing the pressure on the consulting firms. Consulting firms were already under pressure - some arguably of their own making, at least for those organisations that re-created themselves in order to be separate from accounting firm ancestries and the taint of inadequate governance. At the same time, however, the uncertain global economy has simply reduced the pool of cash available to fund new projects.

But as Jester notes, even a drop of a couple of percentage points in the software consulting market still leaves a very sizeable market opportunity.

"You have to contrast the acceleration in the market with the velocity of the market," says Steenstrup. "Even as the acceleration tails off the velocity is still there and the sector has plateaued at a high rate of velocity."

It is analyst speak for: "There is still a lot of money to be made here."

And if Jester's forecast of as much as 3.5 per cent increase in demand in the next 12 months is correct, the market velocity will shortly be twinned with acceleration once more. He believes that his forecasts stand up, because "the economy in Australia has been consistently good. In reality it's been the standout economy for a very long time.

"People have been putting off new IT initiatives because of global uncertainty but as people realise that the economy and the opportunity is still there and their customers are still spending money, well there is a lot of pent-up demand."

Jester is particularly bullish about future demand for CRM, supply chain systems and ERP. However, he says some vertical markets - particularly telecommunications - are awash with excess technology and will continue to cut spending, for a while.

It all points to a continued consolidation for the consulting sector, according to Gartner, which sees IBM's $US3.5 billion purchase of PwC Consulting and Atos Origin's $US1.5 billion purchase of Schlumberger Sema in September as indications that scale is being perceived as a refuge for the beleaguered consultants.

The most affected, according to Jester, are the individual IT contractors and smaller firms that will see more and more market share fall to the large consulting firms.

A brighter future, however, lies ahead for the strategy or management consultants such as McKinsey & Company, Bain, Boston Consulting Group and the like. "People at the pointy end will always be there," says Jester, "but they are the most subject to the cyclical upturns and downturns in the economy."

Still, they will no doubt rejoice to hear Jester's forecast that they will "see a pick-up next year".