What will happen to the big consultancies?

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Bearing Point filed for bankruptcy protection this week. Word on the street is that clients are pushing the big guys to cut rates 25-30%. As budgets are cut and projects are cancelled, overall demand for consulting is down. Additionally, from what I’ve seen and heard, clients are more interested in usual in using smaller consultancies that provide the same or better value at lower prices.

Profitability at consulting firms is based on two key metrics: utilization and rates. As both drop, these firms cannot stay profitable unless they cut people or salaries. Kennedy research says layoffs are not likely, and salaries will continue to increase, but I’m not so sure. The consulting model breaks quickly with both key metrics going in the wrong direction.

Kennedy research also says that hiring continues to be focused on senior people, which is interesting, and problematic if true. In the short term, senior people may be more utilized, but their individual profit margins are likely much lower than the junior people. In the long term, these companies are going to have a top heavy organization without the critical junior and mid-level talent necessary to be profitable and grow.

The big guys that can afford to take a hit on profitability have a great opportunity to prune their current talent and pick up some key talent, as long as it is focused on the best talent for the longer term, the more junior hires. I’ll be impressed with the firms who use this downturn to their advantage, as their shareholders or partners will have to take a serious hit now to be rewarded later.

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