Vault Guide to the Top 50 Consulting Firms, 2004

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Read an excerpt from the Vault Guide to the Top 50 Consulting Firms, 2004 Edition Shorter engagements, tighter budgets It's been a tough few years for management and strategy consulting firms. Traditionally, engagments for huge Fortune 500 companies have been the mainstay of the consulting industry. At one point in the 1990s, for example, AT&T was estimated to employ 300 management and strategy consultants at any one time, running up bills of up to $1 billion -- yes, billion -- a year.
Those salad days are long gone. With economic times tough, former fat cat clients are taking a hard look at consulting budgets -- and slashing left and right. Some former clients, like investment banks Credit Suisse First Boston and Lehman Brothers, have imposed a moratorium on hiring management consult ants altogether. Other firms have placed their hiring under much tighter scrutiny, which tends to affect management and strategy consultants disproportionately -- it's easier to get approval for a technology installation than a big picture analysis of future markets. Other big corporations, like American Express and AOL Time Warner, have created their own internal consulting units, further decreasing the need to hire outsiders.

Engagements have been getting shorter as clients seek to cut costs. The average engagement length, according to seasoned industry analyst Tom Rodenhauser, has plummeted to 90 days from a high of six to 18 months in the mid-1990s . Strategy consultants are typically given more direction -- a specific analysis of a competitor, for example, instead of a wide-ranging exploration of strategic possibilities. In November 2002, Ken Favaro of Marakon Associates estimated to The Economist that the consulting industry was still at 30 percent overcapacity. Another estimate by The Economist holds that revenues at the top strategy firms are shrinking by 10 percent a year.

Of course, dire predictions of ill times ahead for consulting firms were rampant in the late 1980s and early 1990s -- and were followed by a rebound of great robustness. Will the same hold true for management and strategy consulting in years to come? The next few years will tell whether the consulting business model is sound.

Coping mechanisms
What are management and strategy consulting firms doing to find clients? Going after different clients, and broadening their mix of services. Booz Allen Hamilton, for example, has traditionally served both "commercial" clients (i.e., private employers and corporations) and government clients. While the commercial side of its business has suffered, its government contracts continue to enjoy strong growth as the appetite of the United States government for consulting services increases. McKinsey, traditionally the purest of strategy plays, has been beefing up its technology strategy services, creating a worldwide practice specifically for such assignments.
At the same time, larger, more technology-oriented firms like Accenture and IBM are crowding into the strategy space. In October 2002, for example, IBM completed its acquisition of PwC Consulting, allowing it greater entrée int o the strategy and management consulting space. Accenture has also capitalized on the inroads made by its technology consulting practice to gobble up in tegrated strategy and management consulting work as well. In years to come, perhaps the distinction between strategy and technology will fade as technology becomes integrated into the strategy of company operations.
Outsourcing
Perhaps one of the greatest areas of growth for management consulting firms has been in outsourcing -- an operational specialty. Outsourcing involves helping clients find cheaper ways to get essential operations done -- everything from human resources to printing brochures. Sometimes consulting firms may undertake the function themselves -- Hewitt, for example, is a human resources consulting firm that manages the pensions and payroll functions for clients. In other cases, the consulting firm acts as the intermediary, helping the client find the most cost-effective vendors and locations to outsource its business. Many companies, even management and strategy consulting firms, anticipate that outsourcing will come to represent a third, a half or more of all engagements in years to come.
Boutiques
One change reflected in this year's edition of the Top 50 Management and Strategy Consulting Firms is the increased importance of boutique consulting firms, which are usually small and focused on a few core competencies. Oftentimes, refugees from top consulting firms such as McKinsey and BCG establish these firms. Clients use boutiques because of their deep niche expertise, andbecause they are more likely to work with senior consultants at such a small firm. While boutique consulting firms do not hire new consultants in the same numbers as larger consulting firms, many of them are actively growing. Sarbanes-Oxley's fallout In 2002, Congress passed the Sarbanes-Oxley act in response to the accounting scandals rocking the United States, such as the spectacular Enron and WorldCom bankruptcies and the related collapse of Big Five stalwart Arthur Andersen. The Sarbanes-Oxley act, intended to increase the reliability of corporate reporting and accounting, requires accountants to maintain much stricter internal controls. Limitations are placed on the ability of firms to perform outside consulting services to audit clients. In response, most of the remaining Big Four firms completed or took steps to complete the spin-off or sale of their consulting arms -- PricewaterhouseCoopers, for example, after planning to spin off its consulting business under the much-derided name Monday, abruptly sold it to IBM in October 2002. The sole exception? Deloitte Consulting. Deloitte & Touche had planned to spin off Deloitte Consulting under
the Braxton name. (Braxton Associates is a smaller consulting firm previousl y acquired by Deloitte.) However, in March 2003, Deloitte abruptly shelved those plans. The firm says it will still abide by Sarbanes-Oxley.