Professional Services: The Help Needs Help

-- Consulting work is tougher to land

-- Corporate demand for IT consulting is weak, but government demand will be up

Consultants are by nature and necessity optimistic, can-do types. But after the year they just endured, they have reason to look a little down at the heel. Although consulting managed to eke out a 2.5% increase in global revenue in 2002, there were numerous indicators that the industry was in bad shape--and the outlook for 2003 is uncertain at best.

It's easy to understand the general funk. In 2002, two of the major names in consulting, Arthur D. Little Inc. and Arthur Andersen LLP, closed their doors. Dozens of other firms went under or suffered major layoffs. The failure of companies such as Enron Corp., which had been a major consumer of consulting-firm advice, is also hurting the industry. So are rumors that partners at high-level firms are having to pony up capital to keep their companies on sound footing. Laws that limit nonaudit and consulting services by auditors could also be a damper.

At times in 2002, the response to all this bad news bordered on panic. "Business in general is down, and we see a lot of irrational pricing," says David A. Nadler, chairman of consultant firm Mercer Delta Consulting LLC. "People are giving away business, literally, to keep their customers." Consultants News editor Jess Scheer calls 2002 "the perfect storm of bad factors." The biggest problem: The average size of a consulting engagement is shrinking and the time it takes to win one is expanding. Scheer's research showed that firms last year bid on 10% more projects than they did in 2001, but actually landed 10% fewer jobs--a trend he doesn't expect to change in '03. Investors have turned on consulting stocks, too: Electronic Data Systems Corp. (EDS ) fell about 73% in 2002, and Accenture Ltd. (ACN ), the former Andersen Consulting, was down about 31%.

Smaller outfits could get a break this year as companies go shopping for new sources of advice, in order to keep consulting segregated from auditing. Resources Connection, which provides financial executives and certified public accountants for internal audits and other projects, has opened five new offices to help chief financial officers reexamine their businesses. And Tigris Consulting, which focuses only on wringing profits from a company's existing supply chain, has had major corporations call out of the blue looking for fresh blood.

As in the past year, Uncle Sam will be one of the best consumers of consulting services in 2003. Companies with strong public-sector practices, such as BearingPoint Inc., have seen continuing solid sales of technology systems to the federal government. While information-technology consulting to corporations is down 40% from its high in 1998, S. Daniel Johnson, who heads BearingPoint's public-sector business, expects government demand for that work to continue growing for at least the next five years. At the same time, Johnson, who already does business with the State Dept., Immigration & Naturalization Service, and other agencies, expects homeland security initiatives to add $4 billion plus to government spending this spring.

While 2003 won't be a banner year, there's some sense of growing opportunity. Julie Morton, associate dean for MBA career services at the University of Chicago Graduate School of Business, says that consulting firms requested 14% more interview slots in 2002 vs. the previous year--a figure that usually tracks the number of MBAs they'll hire. More students are being invited for second interviews, and a number have already been offered jobs. "It definitely looks much more positive," Morton says. That may be optimism talking. Or maybe the consultants are really onto something.

By Nanette Byrnes, with Jennifer Merritt, in New York

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