What shape will the recession in consulting be?

V-shaped, U-shaped, W-shaped or L-shaped? The debate about the overall trajectory of the recession in the wider economy has been growing in recent days. But what of the consulting industry?

It’s now starting to look as though many countries, at least in Europe, managed low levels of growth in 2008, the first half of the year being strong enough to offset the rapid slowdown in the second half. But this year is likely to be different, with most firms expecting the market as a whole to contract to some degree. It’s also reasonably clear that, a stronger than expected first quarter notwithstanding, demand isn’t simply bouncing back, as some undoubtedly hoped. As our new survey of quarterly trends indicates, the speed of decline may have slowed, but the signs of an upturn are still faint.

On top of this, the biggest consulting markets in the world are influenced by two counter-cyclical factors. For the moment, the greatest cutbacks in consulting are taking place in financial services and manufacturing, but public sector demand has been stronger, as it has been in every economic downturn in the last 15 years. Taking this into account, and looking at the probable ups and downs of specific services, this would translate into a 4-5% reduction in the consulting market in 2009.

However, with most governments under enormous fiscal pressure, this picture is unlikely to continue. Cancelled projects and weaker demand for the specialist skills they typically entail will mean reduced demand for consultants. 2010 is therefore likely to see this year’s positions reversed. Contracting markets in the public sector will be offset by renewed growth in financial services. Partly but not entirely: we’d expect to see the consulting industry shrinking again by a similar amount to this year.

Of course, much hangs on the interplay between these two substantial markets: early contraction by the public sector combined with sluggish growth in financial services would produce a much more dramatic dip.

In a more positive vein, recovery, when it comes, is likely to be rapid. Those with long memories will recall that there were a lot of predictions in 2003 that the consulting industry was entering a period of long-term lower growth. What happened? It bounced back by more than a quarter. The speed of recovery then was driven by three factors: a wave of regulatory compliance (Sarbanes-Oxley and much else); pent-up demand to renew creaking IT systems (you can only run a car so long without maintenance and repairs); and simple human nature (people had just had enough of tightening their belts and keeping their heads down).

It’s difficult to imagine a scenario in which all three factors won’t apply here. The financial crisis of September 2008 will result in more regulation, and the pent-up demand for change will, if anything, be stronger because the recession will have been longer.

That all adds up, at least in my opinion, to a frying-pan shaped recession: a reasonably steep, but not cataclysmic, drop, followed by perhaps two years of negative growth; but a reasonably steep recovery. Just don’t get fried in the short-term.