A nip and a tuck here, a new competitive strategy there and the consulting industry's getting a whole new look. Afflicted by the same forces impelling organizations to turn to consultants in the first place, such as the proliferation of companywide software applications, globalization and the bewildering rate of technological innovation, the industry is refashioning itself in ways that have important ramifications for client companies.
Consultants aren't going away, certainly, but they will look and behave differently. Client companies will have to reacquaint themselves with this modish version if they want to get the most out of their consulting relationships. Here are the major trends taking place in the IT consulting industry and what they mean for client organizations.
The business world is desperate for consulting help. Running leaner than ever, most organizations lack the technical, strategic and project management skills to handle the benumbing rate of technological and market change. Happy to oblige, the consulting industry is splitting at its seams to accommodate the demand. Big consulting firms are inhaling new employees, gulping up smaller firms and merging with peers. Small firms, or "boutiques," are sprouting up everywhere. While the consulting industry in general is growing fast-about 20 percent per year-the IT consulting sector, growing at 30 percent annually, is a major driver behind the increase, says Marshall Cooper, executive vice president of Fitzwilliam, N.H.-based Kennedy Information LLC, a publisher of several industry newsletters, including Consultants News and Global IT Consulting Report.
Why is the growth in the industry significant for companies? First, the good news. With so many consulting firms competing for clients, the firms will be forced to continually improve their offerings to differentiate themselves. In addition, the sheer number of IT consultants provides organizations with a wealth of choices. The bad news is that, increased competition notwithstanding, high demand will drive up prices. Rates for basic consulting skills like client/server application development will increase 10 percent annually and 20 percent for specialized skills like Java, e-commerce and enterprise resource planning, says Stan Lepeak, a vice president in Meta Group Inc.'s Advanced Information Strategies group in Stamford, Conn. List rates will approach US$400 per hour for senior project managers or business consultants and at least $150 per hour for entry-level consultants, he says.
Another negative side-effect of the growth of the consulting industry could be increased conflict between the consulting and auditing arms of the Big Five (Andersen Worldwide, comprising Andersen Consulting and Arthur Andersen, KPMG Peat Marwick LLP, Ernst & Young LLP, Deloitte & Touche LLP and PricewaterhouseCoopers). In the past, these firms were centered around their auditing practices. But as client companies shifted their focus from cost cutting and reengineering to growth, auditing became a commodity. The only way auditing practices could compete was by lowering their prices. Conversely, consulting practices at these firms became huge profit centers with unlimited growth possibilities. The auditing sector is now growing only 5 percent to 12 percent annually, compared with consulting's 30 percent or more annual growth, says Arthur W. Bowman, editor of Bowman's Accounting Report, an industry trade publication. Consultants are starting to resent sharing their enormous profits with the bean counters, and the auditors don't want to let go of the golden cow they helped create. We've already seen this trend in action with the vitriolic split between Arthur Andersen and Andersen Consulting. (The impetus for Andersen Consulting's seeking a separation was ostensibly a disagreement over whether Arthur Andersen's rival consulting practice broke its bylaws by going after Andersen Consulting's clients.) While individuals like Bowman argue the split won't impair quality because only a few of the top partners in each camp are involved, others worry the situation will distract the partners and degrade quality levels. These critics claim that consultants won't be able to provide the best strategic help and advice to their clients if they're jockeying for position and fighting for survival.
In addition to a boom in the number of consulting firms, the size of individual firms is growing in response to another industry trend: one-stop shopping.
Consulting providers are broadening their skill sets and geographic reach to try to fill their clients' every need. Since a single application can involve many different types of technologies and extend across the globe, it makes good business sense to have all major competencies in-house. The natural tendency, therefore, will be for providers to swell to gigantic proportions as they merge with or buy other firms that can expand their skills base. The recent merger between Coopers & Lybrand LLP and Price Waterhouse LLP andthe failed KPMG/E&Y merger are harbingers of what's to come. Providers that can't compete on size will still try to offer one-stop shopping by outsourcing a chunk of a client's project to another firm while maintaining responsibility for the overall project.
Besides beefing up on all major technology and strategy disciplines, firms are expanding their services beyond merely offering advice-many will gladly help clients implement technology solutions. That's exactly what clients want: 80 percent of companies that use an IT consultant would prefer that the consultant help them with implementation, says Denny Wayson, director of Dataquest's consulting and systems integration program in San Jose, California. Even strategy shops like A.T. Kearney Inc. or McKinsey & Co. Inc., which in the past portrayed themselves as lofty strategists above base technology concerns, are getting into implementation.
Another advantage offered by huge, diverse firms is that clients get the brainpower of thousands of smart people. Knowledge management tools, best practices databases and the Internet make it possible for consultants to draw upon the knowledge of every consultant in the organization-as many as 27,000 people in a firm like PricewaterhouseCoopers, for example. Large firms also invest huge amounts of money in research and development. E&Y, for instance, puts 10 percent to 12 percent of its revenue back into R&D, says Roger Nelson, deputy chairman for consulting services at E&Y. Last year Andersen Consulting spent6 percent of its revenue in training, or $300 million, says Bill Ziegler, director of Andersen's Americas Technology Recruiting division. "Client problems are now so complex that in many cases it's not possible to develop all the good ideas the client needs during the time the client signs up," explains Stephen Sprinkle, Deloitte & Touche Consulting Group's managing director of service lines. Finally, the one-stop shopping model means that clients have to go through the onerous consultant selection and RFP process only once.
But there are also downsides to this Sam's Clubbing of consulting firms. No firm can do everything well, says Lepeak. Moreover, relying on a single provider makes clients vulnerable to mediocre service. If a firm feels confident it has a customer in its pocket, it may become complacent and cease to offer the best effort and price. And by not checking who else is out there, clients may not get the best experts for their problem. "The goal of the Big Five is to never have to bid a project again," Lepeak continues. "They don't want their partners doing sales calls and wasting time competing against smaller, nimble, more efficient competitors."Another foreseeable consequence is that midsize companies may be ignored or neglected by behemoth providers. As the big firms get bigger, they'll likely focus their sights on mega-customers that can pay top dollar or on companies with exciting, cutting-edge projects they want to be associated with. Midsize companies (under $1 billion in sales) could get lost in the shuffle, says Cooper.
The Small of Success
While the world watches the big firms duke it out for supremacy, countless boutiques are quietly joining the fray. They follow a different strategy-being the very best at a narrow competency. "If you own a race car, do you want to bring it in to a local shop that can fix Hondas and Fords, too? Or do you want to take it in to a specialist who can really tune a race car?" asks Ken Rudin, CEO of Emergent Corp., a San Mateo, California-based systems integration boutique.
Many companies find this argument convincing. "The ability of small firms to be taken seriously is increasing," says Lepeak. "Whereas a few years ago companies would complain about the Big Six but would never consider a small firm, today those small firms are being taken more seriously and are getting business." Indeed, while large providers are enjoying 10 percent to 25 percent growth per year, established boutiques are growing at a 50 percent to 100 percent annual clip, he says.
Boutiques have an advantage over giants in that they can ramp up on a new technology quickly, whereas big firms take a year or two, says Lepeak. But choosing a small firm requires more work on the part of clients to separate the dross from the real experts. And boutiques are a riskier choice because they could get bought up tomorrow or go out of business. Finally, unless they have established relationships with other consultancies, most smaller consulting companies aren't qualified to work on large, complex efforts or dispersed geographic initiatives. As for trying to juggle several best-of-breed boutiques for a single solution, "It's a complex process that few organizations have the skills or resources to manage," says Lepeak.
The best approach probably is to use a combination of large and best-of-breed providers. "When working on a large project like SAP or a global rollout, go with a large consultancy," says Lepeak. "But when looking at smaller projects or new technologies, put out a bid to see what else is out there. Make the provider work to get your business." Lepeak predicts that by 2002, the biggest client companies will have close, informal partnerships with one of a handful of mega-providers. But those companies will spend25 percent of their service dollars with boutiques, often for highly visible projects.
New Business Models
Part of the appeal of boutiques is their user-friendly, hands-on business model. Client organizations have grown weary of big, impersonal firms where only junior people return their calls. They're also tired of paying time and materials for projects that drag on for years. Boutiques play to this frustration. To combat this encroachment, large firms are adopting some of the elements that make boutiques so appealing. One of their focuses will be knowledge transfer. In general, smaller firms have traditionally been better at giving one-on-one attention and helping clients learn how to do things for themselves. Large firms, on the other hand, are notorious for swooping in, fixing the problem and leaving with only a cryptic white paper report in their wake. But increasingly, even large firms are making an effort to transfer their knowledge and processes to clients so they'll be able to carry on when the consultant leaves. Companies will place an increasingly high premium on what consultants can offer in terms of knowledge or skills beyond an engagement when they send out an RFP.
Companies will also start demanding alternative pricing arrangements based on fixed time and price billing. Engagements will be shorter and the scope more carefully defined. Cambridge, Massachusetts-based Cambridge Technology Partners Inc. pioneered this tactic, thus forcing the rest of the industry to follow suit. Using rapid application development (RAD) techniques, Cambridge dramatically reduces the time and price needed to complete major projects, thereby reducing the risk to its clients. Cambridge's goal is to complete projects that could take a traditional consultant two years in two to six months, says Chris Williams, vice president of marketing. The overwhelming popularity of RAD is one of the reasons why the company is growing 50 percent to 60 percent annually-almost twice the rate as the industry overall, says Williams.
In addition, consultants are beginning to accept more of the risk of implementation. RLG International in Vancouver, for instance, promises a 4-to-1 return on its fees in the first year. To make this possible, a full-time RLG coach stays with the client for two years and works with employees to help them modify unproductive behavior. Similarly, Menlo Park, California-based Strategos insists that its clients do the actual work, instead of relying on "substitute brains," says CEO Linda Yates. Strategos guarantees that it will help the client achieve its stated goals, or the client is entitled to a complete refund on Strategos's fees. "Almost every product or service you buy has 100 percent guarantees," she says. "Why is it that consulting hasn't held itself up to the same standards?"People ShortageThe greatest threat to the explosive growth of consulting firms is their inability to get enough people in the door. According to Cooper, roughly 250,000 new consultants will be needed by the year 2000. The result could be more inexperienced or incompetent consultants working with clients-assuming businesses can get booked into a consulting firm's schedule at all. "All providers will suffer from staff/skills shortages," Lepeak wrote in a Meta Group report about the industry. "This will drive increased IROCs (idiots right out of college) usage, drive up rates (10 percent to 25 percent annually), negatively impact service quality and disrupt longer-term projects as key staff defect."Some firms are already devising creative solutions. PricewaterhouseCoopers, for example, launched its own accredited MBA program-geared toward the specific needs of consultants-just for its employees and recruited 300 of its own auditors to switch careers and become technical consultants, says Scott Hartz, global leader of PricewaterhouseCoopers' management consulting practice. It also built stationary hubs for such expertise areas as systems architecting and database tuning, where consultants can process a high volume of projects without having to travel to the client site. These hubs significantly lower the cost of the engagement for clients and consultants alike. More important, it reduces turnover because consultants don't have to travel to client sites all the time. "If you're with a consultant with a strong vertical focus, then chances are [the people working in hubs] have seen your situation before and know how to solve it," says Cooper.
Ultimately, the consulting firms will probably muddle through. Smart people will continue to gravitate toward the consulting profession, especially with its heightened demand and visibility, not to mention inflated salaries. True, many of these people will be freshly minted college or MBA grads, especially at the Big Five because of their prestige and commitment to training. Small firms, on the other hand, tend to lure experienced consultants with the promise of IPOs and the chance to make a greater individual impact. Yet it's important to remember that even though Big Five consultants may be younger overall, they are often exposed to more implementations than an experienced consultant at a small firm, given the sheer volume of work done at the Big Five.
Whose Side Are They On?
Vendors are also rushing to get into the consulting game. To counter declining margins in hardware and software, many vendors are launching or buying consulting practices as a way to build long-term relationships with customers and to enhance profits. The arguments for going to a vendor are the same as going to a boutique-specialty expertise. The catch, however, is that vendors have a vested interest in pushing their own products. "Vendors cannot provide objective advice," says Lepeak. "They're appropriate to use when you're already using that vendor's products, but you shouldn't go to them if you haven't already made the decision that that's what technology you want to use."Predictably, vendors beg to differ. "As any consulting firm must do to succeed, we always do what is in the best interest of the client," says Paul R. Lewis, general manager of the IBM Global Services Consulting Group in Sleepy Hollow, New York And that sometimes means pointing them toward a competitor's product, he says. Besides, no consultant is truly objective, says Jim Sherriff, general manager of Hewlett-Packard Co.'s HP Consulting in Mountain View, California.
Even independent consultants have ties with vendors. "Our biases are more obvious," says Sherriff. "With others you have to go digging to find their biases."Ultimately, though, people don't really care whether their consultants are objective or not. Every year Wayson surveys 500 buyers of IT services about what matters most to them in consultants. Objectivity used to be one of their biggest concerns, but in recent years it's fallen off the charts, says Wayson.
Instead, the top three concerns are technical expertise, industry knowledge and project management skills, all of which can be found in the vendor community.
"People care about consulting skills," he says, "not what box it's in."With all of these changes in the mix, consulting may never look the same again.
Companies that work with consultants would do well to consider how these new trends might affect their dealings with consulting firms. To summarize in consultant-speak: Before contracting with a third-party transformational service provider, consider the desired end-state of utilization, map a number of viable scenarios and use those lessons to inform your business decisions, uncover best practices and bring them to bear in your own organization. In other words, do your homework.
Jennifer Bresnahan is a former senior writer at CIO.
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