The ripple effect

If the consulting "industry" is a collection of micro-markets, you'd expect any downturn to hit sectors and services at different times and with varying degrees of ferocity.  That would certainly be borne out by the experience of niche firms in recent years: 2002-04 saw some firms powering ahead while others gave up an unequal struggle.  Bigger firms see this, too, although their broader portfolio disguises the ups and downs of specific markets.

These slides attempt to show how a downturn rolls across the major sectors and services in consulting.

The first - the impact on sectors - is based on historic data (from the UK's Management Consultancies Association covering the period 2002-04).  It breaks downturns up into three distinct phases.  The first is paralysis, when clients aren't sure what's going on and are reluctant to take any precipitous action, either cancelling existing projects or starting new ones.  Paralysis is followed by a period of re-focus as clients' objectives shift: revenue generation projects turn into cost-cutting ones; talent management work shifts towards headcount reduction.  If the economic news continues to be bad, clients start to cut back their expenditure on consultants.  My guess is that we're about one year in: we're already seeing investment banks making sharp cuts in their consulting budgets and other sectors re-focusing.  The thing to watch, though, is that by the time heavy manufacturing starts to cut back its use of consultants, investment banks are starting to increase theirs.

The second slide - the impact on services - is based on a combination of historic data (again from the MCA) but this time overlaid with recent feedback from clients and consulting firms.  Again, we're about a year in and just at a point where we might expect to see a serious cutback in expenditure on strategy (most clients say they will do this, although it will be interesting to see whether the financial crisis fuels the need for more, not less, strategy consulting in that sector).  Programme management is likely to come down quite sharply, partly because there will be fewer programmes to manage but also because clients will be more likely to hire freelance programme managers rather than expensive firms.  Operational consulting, focused on cost-cutting and performance improvement, is likely to do reasonably well, at least until a point where clients simply run out of money.

However, perhaps the key difference between this downturn and that of 2002 seems to be the role of IT expenditure.  This was one of the main casualties six years ago, a backlash to the high levels of investment around the Year 2000, the dotcom boom and the initial wave of ERP implementations.  The sentiment this time appears to be different: clients see technology as critical to making efficiency savings and want to protect their investment in this rather than cut it back.