Consultants as bellwethers for the economy?

There's a common perception that consultants do well in a downturn.  Because they sell services rather than products, consulting firms are - the argument goes - better able to adapt what they do to, to fit changing economic circumstances.  Thus, in the good times, their focus is on growth and new markets; in bad times, it's on cost-cutting.

But perhaps consulting tells us more about the economic situation than we think.

Certainly, clients have been saying for some time now that they intend to limit their expenditure on many forms of consulting but increase their spend on operational improvement - aka cost-cutting.  That was borne out by our recent survey which showed that 68% of clients planned to spend more in this area, roughly twice the number planning to increase their expenditure in outsourcing and substantially more than any other area of consulting.  However, intention hasn't so far translated into reality.  Firms with performance improvement practices are generally reporting steady, but unexceptional business.

The logical conclusion is that clients are cutting costs, but aren't using consultants to help them.  After decades of remorseless pressure on efficiency, most organisations probably feel well-equipped to do this kind of work themselves.  We shouldn't be surprised at this: clients have long absorbed "consulting" skills, forcing consulting firms to re-invent themselves.

However, the lower than expected levels of cost-cutting consulting may point to something more.  Organisations that are delicately picking their way through a variety of options to reduce costs may well want expert input from consultants.  They have more choices, time to think about them and sufficient cash in the bank to pay consultants to help them.  But organisations that have to take 10 percent of their costs out almost overnight don't have any of their luxuries.  They also don't need consultants to help them because slashing 10 percent of expenditure across the board is a lot easier than pruning here and there.

In other words, the lack of demand for cost-cutting consulting suggests that many organisations are in a very bad place indeed.