"If you don't like it, wait a minute," say New-Englanders about their weather. Over the past two years, as the specialty e-consultancies claimed leadership in the U.S. market, the Big Five integrators have said essentially the same thing: Wait for the first storm clouds. It took longer than a minute, but the old fogies were proven right. In a quasi-recessionary market, most of the arrogant, young Web consultancies are scrambling for air, while the Big Five - Accenture (formerly Andersen Consulting), Cap Gemini Ernst & Young, Deloitte Consulting, KPMG and PricewaterhouseCoopers - are back in the catbird seat.
It's no mystery why the worm has turned so quickly, says Michael Sherrick, who tracks the consulting market for Morgan Stanley. The industry, which is based on short-term projects with low long-term visibility, is inherently sensitive to economic cycles. At best, says Sherrick, concepts like "backlog" and "pipe line" have only vague meaning. A company's - or a market's - fortunes can turn on a dime.
In this case, he adds, the market has lurched back to an emphasis on delivering value that can be measured, working on larger, more complex projects, and ensuring a return on investment. "The Big Five will be more relevant [in this] round of digital initiatives," Sherrick says.
No slam dunk
Alden Cushman, VP of research at Kennedy Information Inc., agrees that the renewed emphasis on delivering quantifiable business value will benefit the Big Five, and he, too, eyes a comeback for the major consultancies. But he cautions that the comeback will be anything but stress-free.
"For them, this will be a 'show-me' year," says Cushman. "In 1998 and 1999, their Global 2000 customers were forced to go elsewhere for rapid response to their [Web-based] needs now the Big Five have to go back and reclaim the credibility they've lost. This is no slam dunk."
Other big challenges facing the Big Five as they emerge from their cocoon, says Cushman, include regaining the edge in recruiting ("market forces pulled away many of their best and brightest consultants"); differentiating themselves from one another; and coping with an overall consulting market that is projected by Kennedy Information to grow only 12.8 percent over the next four years. This compares with 20-plus percent growth in the 1990s.
In addition, the consulting game is getting bloodier. Just last week, Pricewaterhouse - Coopers (PWC) was forced to dismiss 400 employees because of the market slowdown.
Moreover, the major consulting organizations in recent months have undercut their fees by up to 40 percent in an effort to drive a final stake through the hearts of the e-consultancies, according to industry observers. If true, this price competition will put a further crimp in the Big Five's earnings.
Mike Gerentine, VP of partner marketing at Vignette Corp., a developer of e-biz applications, points to another challenge confronting the group. The Big Five need to heat up their tepid partnering efforts, he says. Specifically, they should increase their investment in marketing campaigns and joint programs with their software allies.
"I would like to see deeper campaigns and ... demand-generation programs," concludes Gerentine. "We do that with IBM on the software side."
Drilling down deeper, each of the Big Five consultancies must deal with its own set of challenges and issues that can become significant management distractions.
Deloitte Consulting, for example, is positioning itself as the only member of the group with ties to an auditing parent. That strategywhich flies in the face of the majority opinion that a large consultancy needs deep, public pocketswill not be easy to carry out. Moreover, as part of an auditing firm, Deloitte Consulting will continue to face SEC scrutiny over the separation of the consulting and auditing functions. And finally, Deloitte's approach - providing pure consulting services and reaching out to other areas of the company for related skills - brings another set of risks.
But all that aside, Stephen Sprinkle, Deloitte's global director for strategy, innovation and eminence, says the firm is clearly on the right strategic track. He acknowledges that "there's a bit of a cloud" over the issue of auditors' independence but insists the firm's reputation for integrity mitigates those concerns.
More important, Sprinkle argues that Deloitte is very well-positioned against its Big Five competitors, noting that KPMG and PWC both are attached "to audit firms that want to sell them," and that the future sale of those entities could raise doubts among their customers. As for Accenture, Sprinkle sees it evolving into a "merchant consultant" with ownership interests in a variety of businesses. While that may be a profitable strategy, says Sprinkle, it's also bound to limit the growth of Accenture's consulting activities.
Sprinkle says that if Deloitte faces one significant hurdle this year, it's a softening North American market for consulting services, which he expects to grow less than 13 percent.
Meanwhile, Accenture, Cap Gemini E&Y and PWC all are going to market with a suite of professional services under one roof, from strategy consulting, to traditional systems building, to hosting and VC capabilities. But these three powerhouses have pressing concerns of their own.
For instance, E&Y still is sorting through integration issues spawned by last year's merger with Cap Gemini of France, while PWC continues to grapple with the best way to separate from its accounting parent - either a merger or an IPO. (Mid-2000 M&A discussions with Hewlett-Packard went nowhere.) And Accenture has to brand its new name in the marketplace and then decide when - and if - to go public.
Cushman, who expects all but Deloitte to go public, says Wall Street represents a double-edged sword. While it brings access to capital to grow a business, the money can come with unrealistic growth expectations.
Over at Cap Gemini E&Y, Terry Ozan, managing director for North America, expresses no concerns about Wall Street ex pec tations and insists the integration of the two firms is ahead of schedule. Annualized attrition, which was 30-plus percent last March, has settled down to around 20 percent, he says. Worldwide leadership teams and mission-critical systems have been put in place, and the task of meshing U.S. and European cultures is progressing smoothly, Ozan says.
Moreover, given the ability of any established integrator to adjust its variable costs and maintain close client relationships and intellectual capital, Ozan is not troubled by predictions of a slowing market. "Certainly, the frantic pace of the late 1990s, where you had both Y2K and e-commerce driving enormous growth, can't be kept up," he says. "But this next generation of e-business, driven by B2B marketplaces, is a new ball game that falls right into our sweet spot."
Grady Means, the global leader for strategy consulting at PricewaterhouseCoopers, offers a similar prognosis for his firm, pointing to opportunities in helping clients "take advantage of the astounding leverage they'll get from trade exchanges."
The "huge transformation" that is occurring throughout every industry offers PWC the chance to leverage its own in vestments in customer relationship management and enterprise resource planning, as well as its knowledge of supply chains and relatively deep pockets, Means says. Going forward, he adds, these factors will raise the barriers to entry in the consulting market and push serious global contenders toward the waiting arms of Wall Street.
"In the short term, the changes might be confusing," he admits, "but long term, we're more optimistic about our growth than we've ever been."
Jerry Rosa and John Moore contributed to this story.
- Buying decisions will be more thoughtful, and consultancies will have to demonstrate an ability to generate return on investment, higher revenues and a means of benchmarking those improvements.
- Customers will gravitate toward soups-to-nuts suppliers, rather than single-focus packaged solutions.
- Customers will clamor for performance-based billing arrangements (no gain, no pay).
- The Big Five, after getting smoked by the small, speedy startups, will now show the kids how it's done.
- No consultancy will dare attempt a public offering without a track record of profitability.