[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.
Adds Steve Banker, director of Supply Chain Research for ARC Advisory Group in Dedham, Mass., During a recession software companies can often maintain the same revenue levels because of their ability to incorporate services, but this typically plays out after one year. Software suppliers can't afford to hurt their relationships with consulting partners who often bring business to them because of IT recommendations by the consulting partners.
Forrester's research in this area is showing that the market currently wants small-scope supply chain technology projects that look to minimize risk and maximize on the ROI. Suggests Forrester, With most traditional supply chain projects over-promising and under-delivering, firms demand alternatives to high-risk multi-process implementations.
In some cases, the better advice coming from consultants should have been to scale back and/or postpone a mammoth project, adds Chew. She advises software suppliers to still work with major integrators in this current market, but she also says the suppliers should take the lead on product implementation and configuration. Meanwhile, system integrators like PwC Consulting, Accenture and others could serve a two-part role: coordinate a customer's cascade of small projects and provide process-oriented consulting advice by laying out strategies to lower inventory, drive down cycle times or increase service levels.
Banker has a slightly different take on it. For business process re-engineering, no one does it better than the big guys. However, I'd keep the Big Five consulting firms away from specific IT project implementations, he says. Leave that to the specialty boutiques such as eSync, for example. He agrees consulting and IT services projects have gotten smaller with quicker completions from beginning to finish, but the specialty consulting firms have always seemed a bit more nimble and adaptive based on the project needs of the customer. Other consulting boutiques considered leaders in their specialties are ADR North America (for purchasing), Crowe Chizek, DigiTerra, Sedlak Management Consultants and Tom Zosel Associates.
If consulting firms and software suppliers must operate differently in the current market, exactly what are they to do? First up: retool for smaller, quick projects and adjust pricing. Much of what you see now is general price pressure from the current market. Since we've seen demand drop consultants have had to adjust, says Chew. Additionally, software providers have become creative in maintaining revenue levels by getting in the [IT services and implementation] game.
One obvious example of this, Chew says, is i2 Technologies. The supply chain management supplier launched two guaranteed fixed-price solutions Factory Planner and Strategic Sourcing for $500,000 that include license and consulting fees. While this minimizes implementation risks for firms, customers will still have to ante up additional fees for integration to back-office applications. Although i2 says that most customers see returns of eight to 10 times their original investment, the supplier is not guaranteeing any hard ROI.
Forrester's research uncovered another interesting example of services adjustment meant to align with market conditions. For $500,000, WorldChain, a provider of logistics and fulfillment tools, includes one functional module, connectivity to 10 partners, integration to one back-end application, 10 reports, and implementation and training services for an unlimited number of users. The supplier shares implementation risk with user companies by deferring 80 percent of the fee. Dell Computer claims that this supplier's network platform was implemented in 97 days with a 44 percent reduction in cycle time and it virtually eliminated transaction discrepancies with suppliers within 30 days of implementation.
Consulting firms have also adjusted to the downturn by reducing fees. According to ARC Advisory Group's Banker, the average price per hour by consultants has fallen during the downturn by at least 20 percent. But while pricing models have made adjustments, the amount of consultant use has continued to move up in certain industries.
Not the Norm
Some areas in the market are not feeling the market pinch and still lean heavily on consultants to help them out. According to AMR Research, ERP upgrades are still the domain of outside consultancies. AMR Research surveyed 109 companies that have upgraded their Baan, J.D. Edwards, Oracle, PeopleSoft or SAP systems in the past 18 months in order to learn about their ERP upgrades. Of those surveyed, 25 percent worked with a third-party consultant for the planning phase of the upgrade, and 39 percent hired one of the following top consulting services: PwC Consulting, Deloitte Consulting, Accenture, Cap Gemini Ernst and Young, or KPMG Consulting. The survey also revealed that 55 percent of companies that responded say they are satisfied with their consultants; another 29 percent say they are very satisfied with the support.
In the logistics technology area, one firm actually suggests a rebound in business. There has been a resurgence in the logistics business due to margin pressures and the need to improve efficiencies that have lapsed for the past several months, notes Nick Pacitti, vice president of Sterling Solutions LLC in Houston, Ohio. Sterling is a consulting firm specializing in the implementation of supply chain systems. Benjamin Gordon, managing director at BG Strategic Advisors in Cambridge, Mass., voiced this same opinion. We're seeing terrific growth across all areas of strategy, technology and finance in the logistics vertical, he says.
So with a surge in consulting use in some verticals, the $19.6 billion U.S. consulting market can be expected to grow by 29 percent annually and is predicted to reach $52.8 billion by 2003, according to Consulting Information Services, LLC. With this kind of growth expected, the consulting and IT services market can always find the buying customer, but one that demands improved efficiencies.
Promise of the Future
The large service providers are still learning to adapt to smaller projects, says Chew. Business consultants in the late 1980s and 1990s built themselves around the big ERP projects. Most of the firms have tried to go to market the same way with procurement and supply chain management projects to their own detriment. So you see a current mismatch. Integrators must implement small project management skills, downsize projects, and then deep process knowledge will come out of process and strategy groups in these firms. It's a marriage between good mid-market project management skills and supply chain process management skills.
Many analysts also suggest that software suppliers and consultants that can prove ROI through legitimate calculation models will get the business faster. Several ROI calculators exist, but purchasing and supply management professionals evaluating systems often conclude the tool is self-serving on the part of the software provider.
Per Forrester Research's advice, to avoid project overruns and lengthening timelines, firms are encouraged to control scope creep and visibility to costs. Says Forrester: So a supplier like SAP needs to decompose its mySAP SCM into fixed-price mini-projects like supply chain event management or collaborative procurement. The deals should include application licenses and implementation consulting fees.
Specifically Forrester and others still see the large consulting firms organized around delivering large projects to large clients. As a result, the big guys are in danger of missing out on market opportunity on small-scope supply chain projects. From their research perspective, the medium-sized integrators like Inforte, CCP global, RCG Information Technology and eSync will move in on the Big Five's turf if the larger players don't develop a mid-market strategy. Players like Deloitte Consulting have already begun to merge SCM practices to provide niche delivery services to a range of market sizes and even accommodate small projects for large companies. Either way, traditional consulting firms are quickly learning to be adaptive.
Finally, as the market is currently showing, application providers like SAP and J.D. Edwards are in a good position to offer configuration and small-project methodology consulting to customers, suggests Forrester. These two providers have already been boosting implementation services practices. Others are following. Forrester expects even these major application suppliers to go beyond traditional rollout assistance and begin offering guaranteed ROI for their projects and deferred license payments until after results are seen in order to compete with smaller application suppliers, which are already offering aggressive fixed-price deals with focused process scope.
The downturn and competition by smaller players should guarantee one thing in this market: better IT services.