Global Enabled Supply Chain Series: Consulting

[From iSource Business, June/July 2002] Thanks to the severity of last year's economic slowdown, the days of frenzied spending and experimental technology deployments are long gone. Today's more disciplined e-business environment has reshaped the consulting and information technology (IT) services business at least for a little while.

While some might say it's not fair to blame everything on the slowdown, when the changes that have taken place in the last 12 to 18 months in the consulting business are examined one can only conclude: It's the economy, stupid. According to industry analysts, the typical price tag on consulting contracts has grown from thousands of dollars to an average of between $1 million and $3 million per project. But many analysts contend that current conditions allow those companies implementing these million dollar projects to prove a quicker return on investment (ROI) or, at least, more-defined results.

Over time, the consulting business has taken several transition shifts. In the 1980s and 1990s it was huge enterprise resource planning (ERP) projects that often took months or even years to complete. Cost overruns and project scope creep were almost expected. Then, a few years ago, consulting contracts involved installing an inventory management system or designing a corporate Web site. Today, a consulting contract can include handling everything from creating a business model to revamping a Fortune 500 company's supply chain, e-business strategy or marketing plan. There's almost nothing the right consultant cannot do.

What's Current with Consulting?

The most recognizable change in the consulting and IT services business is software providers that are offering to do what has, in the past, been the domain of consultants. This trend is a result of the downturn and should be short lived.

With tight IT budgets the norm software suppliers are trying to grow revenues where software license fees normally dominate. As license revenues tumble, the software supplier is forced to increase service revenue opportunities. Typically, in the peak growth period of software, suppliers generate in excess of 70 percent revenue from software licenses alone. More recently, license revenue has trended towards a 50 percent margin with the other 50 percent built by service and implementation fees for many midsize to smaller players, and less than 50 percent for more established players, according to U.S. Bancorp Piper Jaffray in its April 2002 Software Field Guide.

While software suppliers often compensate for lost revenue by adding services to their offerings, such strategies come at the expense of some of the system integrators and the Big Five services partners A.T. Kearney, Accenture, Boston Consulting Group, Cap Gemini Ernst & Young and KPMG Consulting. According to the Software Field Guide, As the overall IT spending environment has tightened up, the competition for services has also increased, placing traditional partners [software suppliers and systems integrators] at odds with one another. For software suppliers this presents a very tough balancing act between maintaining enough services business to generate revenue and retain highly trained services specialists, while not taking too much business from the hands of systems integrator partners. The clear danger for the software providers is that they end up biting the hand that feeds them by alienating the large systems integrators who have the ability to recommend suppliers in future engagements.

Jennifer Chew, research analyst for Forrester Research out of Cambridge, Mass., confirms the fact that software providers are doing more of their own software implementation. Last year 74 percent of enterprise firms planned on spending money on consulting services. This year, no more than 50 percent will spend money on consulting services. With the implementation phase of a software initiative still to come, you find the buying organizations turning to the software firms themselves. SAP, Oracle and Peoplesoft are obvious examples of software suppliers doing their own implementations. In fact, Peoplesoft and Oracle's service revenue is outpacing their license revenue right now.