MBB during downturn

From the Economist:

GIVING ADVICE IN ADVERSITY
Sep 25th 2008

Wall Street's woes are yet another headache for the consulting industry

WHEN even consultants suggest that companies might want to spend less
on consultancy, you know the industry is in for a difficult time. A
recent article in the MCKINSEY QUARTERLY argues that Wall Street's
ailing banks could slash up to $2 billion each from their bloated
overheads without damaging employee morale. The authors, who work for
McKinsey, a leading strategy-consultancy, highlight several areas that
bankers could cut--including fees paid to consulting firms. Presumably
this includes McKinsey, which has advised most of America's once-mighty
investment banks at one time or another.

Convulsions on Wall Street and elsewhere are grim news for the global
consulting industry, which boasted $309 billion in revenues last year,
according to Kennedy Information, a research firm. Financial
institutions are some of the industry's biggest customers. But revenues
are also under pressure in other areas. The credit crunch has cut the
number and size of deals by private-equity firms, which are also big
consumers of consulting services. And a decline in mergers and
acquisitions means there is less demand for the nitty-gritty work of
combining computer systems, a mainstay of some consultancies.

Consultants say they have fared pretty well in the first half of 2008.
But consulting revenues are not immune to a downturn (see chart). The
impact may simply be delayed because firms such as Accenture (which was
due to unveil its latest results as THE ECONOMIST went to press) and
IBM (which earned 55% of its $98.8 billion of revenue in 2007 from
consulting-related services) have multi-year contracts that protect
them from sudden slumps. But consultants will feel the pinch next year,
as clients cancel or delay projects.

Some consultancies are already sounding cautious about the rest of this
year. "I would expect the second half of 2008 to be slow," says Shumeet
Banerji, the head of Booz & Company, a strategy consultancy.
Industry observers agree. "Consulting firms will be anaemic for a
while," reckons Christopher McKenna of Oxford University's Said
Business School, who is the author of a history of consulting.

This month Monitor, based in Cambridge, Massachusetts, cut almost 20%
of its staff. It laid off consultants in its main business, shut a unit
that produced customised software and closed down another that provided
consulting to start-ups. It also spun off e-learning and
merger-advisory activities, in which it is keeping a small stake. And
it closed several small offices, including one in Milan.

Joe Fuller, a co-founder of Monitor, says revenue is up on the previous
year, but that it is "anticipating a demanding and tough market in the
short term". In response, Monitor plans to invest some savings in
promising regions such as the Middle East, and in new areas such as its
defence practice. Other consulting firms are coy about plans to reduce
costs, but in the past the industry has dealt with slowdowns by
recruiting fewer new staff and encouraging surplus consultants to seek
jobs elsewhere.

Might tougher times lead to consolidation? Rumours of link-ups abound.
One company that has considered a merger in the past year is the
Trinsum Group, which is itself the product of a union in early 2007
between Marakon, a strategy consultancy, and Integrated Finance, a
financial- and risk-consulting company that includes Robert Merton, a
Nobel prize-winning economist, among its founders. Jim McTaggart, a
co-chairman of Trinsum, says neither of the firms that it talked to
about a combination was an ideal fit. In the meantime, Trinsum has
shelved a plan to create a private-equity-style fund because of the
chaos in financial markets. "It's been a challenging year," says Mr
McTaggart.

One consultancy that has been on an acquisition spree is Oliver Wyman,
part of Marsh & McLennan Companies, an American conglomerate that
also has insurance-broking and human-resources businesses. The
consulting firm, which has a huge financial-services practice, has seen
revenue growth slow this year, but its advice on financial
restructuring and regulation is in demand. John Drzik, Oliver Wyman's
chief executive, says the five purchases it has made in the past eight
months have bolstered its presence in fast-growing areas. In August,
for example, it snapped up ChapterHouse, a health-care consultancy.

As some consultants have tied the knot, others have divorced. In July,
Booz Allen Hamilton (BAH) split into two separate companies--one
focused on defence and government consulting and the other, Booz &
Company, focused on corporate clients. Rivals claim that the split was
inspired by BAH's government partners, who were bringing in most of the
money at the combined firm, and that the split disrupted Booz &
Company. But Booz's Mr Banerji argues that the commercial arm is better
off now because the split freed it from legal strictures associated
with BAH's government work. He says the separation was fairly smooth
because the two sides were already operating independently.

All consultants agree that emerging markets such as China, India and
the Middle East offer the best opportunities for the future. But they
accept that most of their business will come from the developed world
for a while yet. So the industry badly needs a "Big New Idea" that it
can sell to clients there. Previous consulting booms were built on
ideas such as "total quality management" and re-engineering. But at the
moment consultants have no successor to such money-spinners.

Even so, one corner of the industry is thriving. Companies such as FTI
Consulting and Huron Consulting, which advise firms and boards on
litigation, forensic accounting and many other issues, have never had
it so good. FTI Consulting has been busy helping firms caught up in the
financial crisis; its revenues shot up 41% last year to just over $1
billion. On September 18th it was appointed by Lehman Brothers'
unsecured creditors to defend their interests. Demand for FTI's crisis-
and risk-management services is soaring too. To cope with demand, the
firm hired 50 new staff in August. "Unlike strategy consultants, we're
very tactical," says Dennis Shaughnessy, the firm's chairman, who jokes
that firms such as FTI are "bad-news bulls". Given the troubles in the
banking world--and the deluge of hearings, investigations and lawsuits
it has triggered--he and his colleagues have plenty to be bullish
about.

I've also heard that LEK is shutting down their Asian offices.