Wednesday, February 20, 2008

Consulting industry bounces back after talk of recession

This week I was invited to write a piece for the Consulting Special that appeared in the Evening Standard on 19th February. It's my take on the yo-yo fortunes of the consulting industry over the last few months - and the more positive landscape that now lies ahead. Would be interested to hear your thoughts on my take, so do submit your comments below...

Consulting industry bounces back after talk of recession

After several months of uncertainty, consulting firms now expect 2008 to be another vintage growth year for the consulting industry.

The last months could best be described as “nailbiting” for those at the helms of the world’s major consulting firms. The fallout from the global credit crunch had the consulting industry trembling. Week after week of gloomy headlines had produced an environment in which major corporate clients were reluctant to commit to any new initiatives. Did major corporations need to prepare for a slowdown, or embark on new growth initiatives? With the economic climate on a knife edge, CEOs of the world’s biggest businesses were undecided – and to an extent still are.

We’ve witnessed a difficult few months for consulting firms precisely because there’s nothing worse for them than a period of paralysis. In a booming market there are growth strategies and M&A opportunities to advise on. When businesses are cutting back, consultancies will be right there to help clients decide where to wield the axe. In either market there is business to be won. It’s the grey area in the middle that consultancies fear. With uncertainty about the economic outlook comes a hesitation to sign off new engagements. So after several years of double-digit revenue growth, the leaders of the world’s major consulting brands were staring at a possible consulting recession - if the world’s stock markets didn’t settle and market sentiments show signs of improving.

The problem these consulting leaders face is that their sector is more susceptible than most to periods of economic uncertainty. Within a six month period, the industry can be turned on its head. Firms that were so busy they were turning away business can find work drying up as paralysis prevents new engagements from being signed off. With engagements lasting an average of six months, consultancies face a collapse in their revenues if there are just a few months of economic uncertainty As we entered 2008, this was exactly the situation that consultancies were facing. Lots of new assignments were being discussed with clients, but few deals were actually being closed. The industry was just months away from having to implement cutbacks and redundancies – and with staff costs accounting for 66% of a typical firm’s cost base, redundancy programs tend to be far-reaching once Partners decide they are necessary.

Fortunately a corner has now been turned and the consulting industry is bouncing back. Whilst a few firms are still struggling, most are now reporting that clients are signing off on new projects – and skills shortages rather than a lack of new business look like being Partners’ major headache for the remainder of the year. A combination of interest rate cuts and improved market sentiments have ensured that business leaders cannot sit on growth initiatives indefinitely. Projects are being kicked off again and another bumper year is now being anticipated by consulting Partners. Everyone associated with the sector can breathe a collective sigh of relief.

The impact of all this uncertainty on recruitment has been pronounced. Industry website reports that 22% of consulting employers have delayed the start of their 2008 recruitment drives as a result of the global credit crunch and resulting market uncertainties. January, usually a bumper month for candidates wanting to find a new consulting job, has been somewhat subdued. “Interview cycles have been prolonged by employers and offer letters have taken longer to get out to candidates” confirms Bryan Hickson, a Director at Top-Consultant. “Everyone has been anxious to avoid a situation where new hires were being brought on board just as the market might have been turning. As a result recruitment campaigns were scaled back and those candidates already in the recruitment process found themselves being stalled as much as possible.”

Now all that is changing and the volume of recruitment advertising is finally catching up with the improved market sentiments. A staggering 75% of consulting employers report they are looking to hire staff this year at least as fast as they did in 2007 – and 2007 itself was considered to be an exceptionally buoyant recruitment year. Yet having had recruitment more or less on hold in January, many firms now have some very sizeable hiring targets to hit and only 10 months of the year left to hit them. “We can expect to see a lot of inter-firm poaching of staff and a willingness to bring in talent from outside the consulting industry as the year unfolds” predicts Hickson. Rosier times, it would seem, lie ahead. Unless that is a severe recession bites, in which case a totally different type of cost-cutting consultants can expect to be in demand.