For FDs at blue chip corporations there has never been a better time to buy consultancy – considered purely from a price standpoint, that is. The sector is under pressure as never before, and rates are being cut at some of the best firms.
Roy Abrams, chairman and CEO of IT consultancy The Aspect Group, says: “For a lot of consultancy firms right now, the name of the game is just staying alive. Forget growth, winning means staying afloat, doing what you have to do to remain a player until the upturn finally arrives.”
For many firms this means charging out consultants at a fraction of the £1,500 or £3,000 a day that was par for the course in the boom years.
It’s a case of them doing anything they can to generate a revenue stream.
“Clients expect you to sharpen your pencil, as their margins are under attack,” says Abrams. “You have to cover your costs, but you have to get some revenue in if you’re going to survive.”
One telling sign of how dire things have become is that Aspect regularly finds itself competing with the likes of Accenture and IBM Global Services for contracts of £50,000 and less. “We’re a #4m turnover operation, down from £6m two years ago,” Abrams says. “We never ever saw these guys hunting on our patch. In the last few weeks, I’ve had Accenture, IBM and Logica going head-to-head with me for contracts they would never have looked at a year ago. They’re scrambling for the crumbs. If they tell you everything’s fine, forget it.”
However, Abrams argues its not all doom and gloom. The downturn has given rise to some fundamental changes in the market that could play very well for the small consultancies when companies finally start spending again.
“We have found that the old avenues into companies have closed and new ones have opened,” he says. “You can’t even get through on the phone to IT departments anymore. That road in is now a dead-end. They don’t want to know. Instead, the people who are spending, albeit in a limited way, are HR, finance and marketing, and they are buying direct, not going through the IT department at all.”
The top consultancies have always had a road into projects emanating from outside the IT department, via board-level contacts in client companies.
But for small players, the fact that line management in these areas are now ready to negotiate directly with potential suppliers for “must have” projects, is one of the few bits of good news to come out of the downturn.
Abrams says his firm has had to rethink its strategy. It was founded seven years ago, when the consultancy market was already on a roll. In the boom years, it didn’t need a sales and marketing function. Its technical consulting skills lie in internet security projects and the phone rang off the hook. Selling took care of itself.
Now, Abrams says, he pays premium salaries to sales people who can get the company in front of its new targets in HR, finance and marketing.
“I’m cutting techies and employing the best sales and marketing people I can find,” he says. The upside of this change is that when confidence returns, his company – and others like it – will be much better at selling their skills.
According to Abrams, the projects that are getting a budget today all share one feature – they can deliver acceptable ROI in three months or under. “You can’t get any attention at all for project propositions that aim to put the company in a market-leading position 18 months down the track, with payback in two years,” he says.
John Davies, technical director at Century 24 Solutions, a consultancy aimed at the financial services sector, agrees. “No one is thinking about projects that will bear fruit over a two-to-three-year period. It has to have a three-month ROI or it doesn’t get off the ground,” he says.
Davies points out that, in normal times, this view on the part of clients would be seen as na’ve. But he emphasises that the people he talks to are sophisticated and experienced buyers of IT in a sector that has made computing a central part of its business proposition.
“We are talking to a whole range of people in the financial services sector, and they all see STP, or straight-through processing, as the sector’s Holy Grail – but no one is spending on STP-related projects. It’s too speculative,” he says.
However, Davies does not see a lack of willingness on the part of clients to pay reasonable fees for consultants with real skills and experience.
“In the boom years, people were coming out of hairdressing and other occupations and getting themselves a few months-worth of Visual Basic or Java, and looking for £1,500 a day. They weren’t worth it then and they aren’t worth £250-a-day today. If you want quality today you are still going to have to pay for it,” he says.
In his view, the big consultancies muddied the waters during the boom years by packing projects with low-grade staff. “If you can take someone out of a £30,000-a-year job, put them through a course or two, and charge them out at £1,500 a day, and get a 60% placement rate, you’ve made a very handsome profit,” he says. “But there was a lack of quality on those projects and it is no surprise to see the big consultancies dumping staff now the going is tough.”
Jane Tweddle, national director for the finance sector at IT consultant CMG, reckons consultants have been among the hardest hit of all sectors in the downturn. CMG made 10% of its UK workforce (around 300 staff) redundant during the Q4 2001. She says there are projects to be found, but they take a lot of spade work to get off the ground. “One of the key things now is to help clients to realise benefits from IT projects they have already implemented. There are many issues pressing on this sector: new capital adequacy requirements, legislative changes, the regulatory regime – they all create challenges and opportunities,” she says. “There is no point banging on someone’s door to tell them what their problems are. They know that already – so you have to try to get them thinking about solutions.”
Tweddle is optimistic that budgets will be forthcoming for new projects. But she does not see any speedy return to boom times. “It is inevitable that organisations in this sector will have to move their focus to the front office, and they will need IT support to help them. But it is likely to be a long, slow journey,” she says.
Gerry Docherty, managing director of consultant Real Time Engineering argues that part of the pain the consultancy sector is feeling comes from the inevitable readjustment that has to follow the end of an extraordinary boom. “The IT sector has come through a remarkable up cycle that began in the mid-1990s, accelerated in 1998 with preparations for Y2K, and continued with the dotcom boom and e-commerce,” he says.
Now, many companies have moved into “care and maintenance” mode. A slackening in IT spend was inevitable, even without the collapse of the bull market and the current lack of clarity about the future of the economy. “What I see is not so much a collapse in the IT or consultancy market, but a return to pre-1998 normality,” he says. “If you compare the market figures for 1997 with those for 2002, you’d probably find they were similar. Look at all the consultancies shedding people now and compare their present figure with staffing levels five years ago. We are just returning to normal levels of business.”
David Owen, head of Deloitte Consulting (which is soon to be renamed Braxton), insists that the market is still very much there for his firm, if not for anyone else’s. “We have faired rather well in harsh conditions. Our last fiscal year finished on 31 May 2002, and we saw year-on-year growth. We have not made anyone redundant and we recruited 70 graduates in September. However, the market is very challenging and you need relevant things to say to your clients. You also have to communicate those things in a convincing way,” he says.
Part of the reason Deloittes has not felt as much pain as some of its competitors, says Owen, lies in the breadth of its client base. “We are involved in sectors, such as consumer product manufacturing, and the public sector, which are enjoying a degree of buoyancy,” he says.
Owen admits Deloittes has changed its tactics in the way it now looks to be rewarded for consultancy contracts. “There is far greater appetite in the market for performance-related service delivery, rather than contracts based on a pure rate-per-hour approach,” he says.
He also points out that consultancies which want to make headway when the market moves forward again need to take on board new developments, such as the cost-cutting opportunities stemming from moving work off-shore, to India and other low-wage economies.
Small consultancies are already looking to develop off-shore capabilities. Abrams says his firm has spent the past two years refining its management of off-shore resources in South Africa and India. However, the idea of postponing payment for six months to a year while the performance benefits from a project are quantified is a non-starter for companies of Aspect’s size. “For a consultancy with a turnover of less than £50m, that is the road to ruin,” he says.
The moral of the tale, for FDs, is that it is Autumn/Winter fire-sale time in consultancy land. As with all sales, take care, but remember that shopping now for next year’s strategic project could make financial sense.
Besides, given the current rate of attrition in the profession, if you wait until next year, there might not be any consultants left. They’ll be drowning their sorrows in the same bars as all those out-of-work corporate finance M&A specialists the City has axed.
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