Crisis Hits Consulting Industry

in Strategy & Trends | by David Capece

by David Capece

With the recession in full swing, companies have buttoned down the hatches, reducing all non-essential and some essential expenses. By now, many companies are onto their 2nd and 3rd round of layoffs. We all know that consumer psychology is changing as price-conscious consumers reject high priced clothing (Saks down 90% to $2 per share), jewelry (Tiffany’s down over 60%), and art (Sotheby’s down over 80%).  That same mindshift is now taking hold in the workplace.  While many of the stocks haven’t broken yet (Accenture and IBM are each down only 25%), the risks are high.

I had two revealing conversations yesterday. The first with a highly qualified recent MBA grad who is looking for a job in strategy, consulting, or an agency.  His plight: nobody is hiring so if he says he wants a job, nobody will talk to him.  He has given up looking for jobs and instead is resorting to heavy duty networking and offering his services for free.  The most common responses from insiders at consulting firms and agencies have been, “I can’t meet with you because I need to save my job and can’t be seen wasting any time on non-core activities.”  Or, “work is completely dead. All of our high priced projects are gone.”  Working at a services firm is great for MBAs during good times because you typically get exposure to many projects while getting paid well.  But the storm clouds are strong right now, and the near-term outlook is gloomy.

My second conversation was with a digital consulting firm owner.  I have known his organization as a sharp boutique with a good client roster.  Revenues have plummeted over the last year and they are operating in the red.  To secure the future in our certain world, he is now seeking outside capital (which is a dicey proposition in the consulting world).  His investor is low-balling him, so he wants to get creative on deal structure.  The challenge is that valuations have come down across the board (in many cases falling below 1x revenue for the first time in years), and it turns out that the investor has a pretty good case.  The owner will have a difficult decision to accept unattractive terms, or to risk it and hope for another investor or an uptick in business.  He’ll have to compete with his peers in attracting capital.  There’s a host of consulting businesses for sale or seeking capital, most of which also seem to be “hoping” for 2007 valuations.

It’s not to say that all firms are shriveling in the face of crisis.  There will be strong companies that survive, as well as niche experts that deliver outstanding value at more affordable prices.  Performance will be a key driver (directly contributing to the bottom line is still valuable).  The real winner of the contraction in the consulting industry will be business executives who will have access to talent at more affordable rates either through direct hire or through negotiation of better deals with their service providers.