Professional Services: Auditors Applaud, Consultants Cope

>>New regulations will boost both the hours put into audits and the fees paid
>>Low-cost competition and fewer new technologies will hold back consulting

For a sense of the wild ups and downs of the professional-services market, look at the gyrations of BearingPoint Inc. (BE ) Formerly KPMG Consulting, BearingPoint broke away from the auditing firm with its IPO in February, 2001, only to find itself heading into a sharp cyclical downturn in consulting. In 2001, revenue growth excluding acquisitions was 21%. The next year, it shrank 17%. Then in 2003, it ticked up 3%. Things may be looking better this year, but CEO Randolph C. Blazer remains cautious and won't offer any predictions for 2004. "We're still dealing with a lot of tough economies," he warns.

BearingPoint's vicissitudes typify the whole area of professional services -- a wide swath of the economy that includes consulting, auditing, law, and temporary-help firms. Amidst the tumult, some companies managed to enjoy banner years, while others barely made it through. And that split is bound to continue in 2004. Companies specializing in cleaning up the excesses of the bull market -- particularly audit firms and some law firms -- should do well. Temporary-help firms may experience some of the strongest growth of any element of the economy. But for those most dependent on the economic cycle, including many consultants, the outlook is less certain.

Tough Love

Auditors are in the lucky set. Despite the shellacking their reputations took in the fallout of Enron Corp. and WorldCom (MCWEQ ), business is booming again. In 2003, the Big Four -- Ernst & Young, Deloitte Touche Tohmatsu, KPMG, and PricewaterhouseCoopers -- picked up revenue by adding former partners and clients of Arthur Andersen and by increasing their auditing fees because of the tougher requirements of the Sarbanes-Oxley Act. According to Public Accounting Report, an industry trade magazine, Deloitte gained the largest number of new Securities & Exchange Commission registered audit clients in 2003. No surprise, then, that global revenue was up 21% in the year ended May 31, 2003.

For auditors, 2004 will be another good year, thanks to the second phase of Sarbanes-Oxley. It requires that auditors certify the good health of corporate systems designed to assure that internal financial data are correct. Despite the fact that every big firm has had at least one client blow up in the recent scandals, they are all expected to benefit. "Not in the past 20 years have I seen this kind of significant increase in work," says Edward Nusbaum, CEO of audit firm Grant Thornton LLP, who expects his firm's person-hours per public audit client to increase 10% to 20% in 2004.

Consulting firms can expect no such gains, though business will be better than last year. Kennedy Information, which tracks the consulting industry, expects global revenue to increase 3.4% in 2004, to $123 billion. (Revenues fell by 6% in 2002 and were flat in 2003.) Among those strengthening their positions are strategic consultants. David A. Nadler, chairman of Mercer Delta Consulting, a practice focused on CEOs, says his firm picked up half a dozen U.S. engagements in the second half of 2003. He thinks there could be an uptick in mergers in 2004 to further boost growth.

Many others are cautious in light of various dampening factors. First, there is a surprising dearth of new "must-have" technology systems for consultants to work on. Nothing on the near horizon resembles the giant business software programs many companies swallowed -- and then had to digest -- from SAP (SAP ), Oracle (ORCL ), and PeopleSoft (PSFT ) a few years back. Second, competition in information-technology consulting and outsourcing will be fiercer this year than ever before. IBM (IBM ) will lead the pack, but there will also be growing pressure from low-cost competitors such as India's Wipro Ltd. (WIT ) What's more, customers are now insistent that consulting deliver quantifiable savings or business improvements.

Chell Smith, global managing director of Cap Gemini Ernst & Young's Technology Services business, says a lot more people have recently started talking about launching new projects. "But I've learned over the last few years to believe it when you see it," she says. For consultants and their clients, a dose of skepticism may be the best advice.

By Nanette Byrnes in New York

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