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DECEMBER 29, 2003
Consulting: More Players, Lower Fees Cap Gemini Ernst & Young's Chell Smith explains how hard times and upstart Indian firms have transformed the business Within an industry broadly called professional services, no sector has had a rougher ride over the past couple of years than the consulting firms. In the late 1990s, business was booming as consultants installed legions of new technology systems to combat Y2K issues, make businesses more efficient, and integrate varied legacy systems. Revenue was jumping as much as 30% a year for some, and a new consulting firms were hanging out their shingles every month. But a sharp economic downturn combined with a dearth of new "must have" technologies hurt the industry. In 2002, according to Kennedy Information, the global consulting market shrank by 6%, its first drop in 30 years. Today, says industry consultant Tom Rodenhauser, "for a consulting firm, the definition of 'doing O.K.' is you're still in business." Unsurprisingly, consultants' traditionally upbeat rhetoric has become much more subdued. Among those who've lived through the boom and bust is Chell Smith, Global Managing Director of Cap Gemini Ernst & Young's Technology Services group. The firm recently had a big win -- a 10-year, 3 billion pound outsourcing deal with Britain's Inland Revenue -- but tough competition and weak pricing continue to take a toll. Smith recently spoke with BusinessWeek Senior Writer Nanette Byrnes by telephone. Edited excerpts of their conversation follow: Q: Consulting seems to be in flux, with a technology company (IBM ), now the largest consulting firm and a lot of the old players gone. Is turmoil too strong a word? A: This is an industry that has undergone a huge amount of change over the last three years. First, there was huge overcapacity in the market in terms of skills vs. demand. Second is new competition -- the pure-play firms from India coming on and offering services like systems integration at much different price points than had traditionally been there. In some segments of the market there has been 40% price reduction -- or more -- over the last three years because of that. Q: Many have thrown in the towel. A: Sapient, Viant, Cambridge Technologies, Rompe, they're all gone. Acquired, merged, on to other things. It has become very much a bifurcated market, with lots of little individual, boutiquey kinds of players and then the big ones like Cap Gemini Ernst & Young, Accenture (ACN ), IBM, and increasingly Hewlett-Packard (HPQ ). Q: You mentioned that a lot of the talent that had been at consulting firms has now moved in-house. A: With all the oversupply, reduction in spending, and pressure on budgets, information-technology shops have quit using major systems integrators and have focused much more on increasing their skills internally. Where have they gotten those consultants? From us. Q: So your bosses have become more demanding? A: It's easy for us to say "let us take control over this project, no hassle, no worry to you." But the clients aren't willing to do that anymore because IT is strategically very important. They want to be dealt with differently than in the past. Q: Is the market starting to improve at all with the upswing in the broader economy? A: We're seeing a lot more people talking about projects, seeming to be pretty serious about it, but I've learned over last few years: Believe it when you see it. There's still this fundamental overcapacity in the market. People are doing things, but they're very sensitive about what they're willing to pay for it. Q: So fees haven't come back up? A: The excesses of the 1990s, we're not going to see that again. [Clients are] once burned, twice cautious. We've reached a juncture where at a lot of companies IT is the largest capital expenditure and one of the largest pieces of their budget. Because it has become so embedded, you still have to continue to reduce costs, and you don't just go willy-nilly spending money on it just because it's important. Q: How do you convince your clients that using consultants is worthwhile? A: We're spending a lot of time and money on training and specialization. We think what will differentiate our people is deep skills. We know clients are still willing to pay for people with big expertise that is not readily available in the market. Q: Does it make you nervous that Indian firms are now looking at buying U.S. firms? A: There's no question some organizations like Wipro (WIT ), for example, are building up on-shore capabilities. They've acquired some local firms, they're moving upstream. As they start to do that, their costs go up. Their onshore people cost the same as ours. Q: How do you deal with the new crop of low-cost offshore competitors? A: All the major system integrators have a lot of work to do to show our clients we have credible capabilities in response to the offshore players. It will stabilize this year, but margins are still going to be under a lot of pressure. The shakeout in the business isn't over. We're absolutely taking smaller contracts with more specific expectations and greater risk on our part. A lot of our clients are under cost pressure, and cost and price are not the same thing -- working to coordinate between locations comes at a cost. Because of our ability to do work better onshore, we offer them a more compelling value with a lower total delivered cost. And there's a big chunk of this work that has to be done near the users. If you're going to build a computer system, you need to know what it's going to do from the perspective of the users. You can't define the problem without finding out what the user needs. It's a complex picture. I wouldn't say "oh doom and gloom, life as we know it is over," but it's tougher for us. We have to work harder.  Edited by Patricia O'Connell
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