• Strategy
  • CFO Magazine

Have No Fear, the Consultants Are Here

Hiring outside expertise has long been a perilous exercise, but clients are gaining the upper hand.

Over the course of his finance career, Jeff Henderson, CFO of Cardinal Health Inc., has hired consulting firms to offer insight on strategy, outsourcing initiatives, expense-reduction tactics, and large IT projects. While he believes strongly that consultants are an important management resource, he, like many other finance chiefs, is wary of their downsides, from high cost to inferior advice. “I’ve learned the hard way,” he confides. “You can spend too much, not get the service you thought you were getting, and end up with the second-tier team [rather than] the ‘stars’ you were told you’d get.”

Such complaints about consulting engagements are commonplace. As David Bean, vice president of finance at Vertex Pharmaceuticals, a Cambridge, Massachusetts-based biotech company, sees it, “There is a tendency among consultants to get hired merely for the purpose of getting more work.” In CFO’s recent survey of 400 finance executives, the majority — 55% — said they were only somewhat confident that their consulting spending was producing an acceptable return on investment, while 16% said they were not confident or didn’t know: not exactly a stunning endorsement of the consulting universe.

But the situation may be about to improve. Thanks to a spate of mergers and acquisitions, along with the emergence of newly energized firms, a very different consulting industry is rising from the ashes of the recession, one in which competitive pressures are driving prices down for buyers.

In addition, new pricing structures, in which consultancies are willing to take it on the chin financially if their promises fail to materialize, are emerging. All told, prices for consulting services have dropped anywhere from 5% to 20% in the past year. “It’s a buyer’s market out there,” says Lynne Schneider, senior analyst at Kennedy Consulting Research & Advisory.

To be sure, the U.S. consulting industry, remains a financial powerhouse. Last year, it generated $397 billion in revenue ($240 billion for IT consulting alone), according to Jenny Sutton, co-author of Extract Value from Consultants (Greenleaf Book Group, 2010). That’s a mere 2% decline from 2008, suggesting that, despite client misgivings, consulting remains virtually recession-proof. Sutton projects that total consulting revenue will resume an upward trend this year.

The industry tumult has several causes. For one, the Big Four accounting firms have returned to consulting with a vengeance now that Sarbanes-Oxley-related compliance work is drying up. In addition, a wave of megamergers has created more-comprehensive “soup-to-nuts” consultancies, particularly in IT. In the past 18 months, hardware providers Dell, Xerox, and Hewlett-Packard have acquired Perot Systems, ACS, and EDS, respectively. Now, “the acquirers are looking to leverage their existing distribution channels to sell more of everything, and they are more willing to cut their rates if asked” says Susan Tan, research director of IT services at Gartner.

Be Prepared

But this metamorphosis also poses a risk: in their rush to compete, consultancies may be more prone than ever to overpromise and underdeliver. “Clients hire a multiservice consulting firm to do strategy, and then are pressured to hire the same firm to implement that strategy even though this may not be its core expertise,” says Sutton. “Too many buyers end up using consultants in areas that are not their power alleys.”

Discuss

Your email address will not be published. Required fields are marked *