BACKGROUND
Consulting clients were seeking assistance both from international and local firms in the areas of cost-reduction, performance improvement, and revenue generation. At the same time, companies continued to employ HR firms for talent management and executive succession planning, while generic, but highly qualified, “loan staff” provided for long periods by consultancy firms remained in high demand.
The levels of activity and demand for external advisors were fairly high despite the market turmoil. This was due in part to a “lag” in which market conditions do not manifest in consultants’ revenues for about 6 months. It also was due to clients’ need for advice during this very active and tumultuous period.
Demand in the first half of 2008 was slowing but remained positive, and many consultants reported strong earnings in their consulting practices. However, by the end of the year, the situation had changed dramatically. Most firms that until then would hire consultants by the ton went into lock-down mode – most halted or postponed any discretionary spending, including on external consultancy. The consulting engagements that continued were long-term projects that already had been funded and any non-discretionary work around compliance or financial reporting (e.g. Implementation of International Financial Reporting Standards for Romanian Banks).
The European consulting market contracted by more than 10% the following year, signaling the worst period in the consulting history since the 1930s. And it kept going down: both 2010 and 2011 were years in which the industry exhibited “negative growth” (a sweeter way of CEOs saying their businesses are sinking).
Although 2011 market performance was worse than anticipated, indicating the end of the line for some companies and for others the urge to conclude alliances and strategic partnerships, the 2012 and 2013 figures for Europe got slightly better, from all points of view.
In this story Romania didn’t behave differently, however the relative immaturity of this market sector (while in the US, consultancy firms existed from the late 19th century and in Europe from the 1920s, the first companies offering advisory services on the local market only opened for business in the last decade of the 20th century) meant that the local firms took the blow harder. Practically in every advisory practice people were axed, as the companies needed to adapt to the new market conditions – before they went bust.
Only in the second part of 2012 and 2013 things started to look better again, since traditional clients for consultancies (i.e. multinational companies) engaged in activities deemed at increasing both their efficiency and profitability. And this is the perfect time for consultants to do their work. However…
2014 AND BEYOND
Overall, 2014 has the premises of being a year of positive growth of the consulting sector in all relevant markets, as far as the key players keep track of the following factors:
Both potential and traditional consulting recipients will be cautious in spending – the global credit crisis has changed the strategic orientation of companies. While in the 2008-2012 period the focus was on cost reduction, capital preservation, and survival rather than on growth, 2013 signaled a return to a mode of cautious optimism. Companies are expected to slowly return to growth pursuits through 2014 and will be turning to consultants for expertise and support. However, the spending spree of the pre-2008 period will almost certainly not come back, at least in the foreseeable future;
Not only less money, less demand also – the consulting market was paralyzed in terms of discretionary activities and new initiatives during the entire 2008-2012 period. Even large companies focused on conserving cash, being wary of the future. Now that most EU Member States have emerged from the recession, companies have pent-up demand for consulting work. For the next years engagements will most probably remain shorter and projects smaller;
Internal resources are cheapest – Consultancy practices as well as many clients have had excess capacity since early 2009. Where the business case for using consultants is insufficiently compelling, clients are making more use of their own staff; Even greater emphasis on sustainable, tangible results – Although this has been the Achilles’ heel for consultancies also in the past, clients’ expectations for solid RoI or shorter payback periods are steadily increasing. Emphasis is now being put on tangible results, consultancy recipients considering long-term, high fee engagements as too risky. They are more likely to accept short engagements for small, specific needs. As regards, transformation projects, clients tend to phase each initiative into increments of several months each, looking for RoI at each phase (see below);
“Divide et impera” strategy from the side of the clients – Large projects will always happen – however their implementation shall take place in a phased and mathematical manner. Such an approach has created an environment of more intense competition among consultancies, since each stage may be potentially bid out. It has also led to consultants offering to do one phase for free in exchange for subsequent phases of work.
The fact that no consulting company worth considering on the local market has put the lock on its door, somewhat confirms the fact that there is still great hope for the future, in 2014 and beyond, that the Romanian market shall live up to its expectations.
RESHAPING THE WAY CONSULTANCY WORKS
In his book “Managing the Professional Service Firm“, David Maister, professor at the Harvard Business School, defines 3 typical types (he’s calling them “technologies”) of consultancy practices:
Brains (expertise) firms, which provide service to clients who wish to retain “the smartest kid on the block”– at almost any cost. These firms typically give their clients new ideas, and help them understand the very way in which they’re doing business from a different perspective;
Gray-hair (experience) firms, which customize ideas, but rarely are positioned at the cutting edge. Clients of these firms recognize that the problems they themselves face have probably been dealt with by other companies; the client therefore seeks an organization that can offer know-how based on past experience;
Procedure (execution) firms, which service clients who know that their problems can be handled by a broad range of firms and who are seeking a professional firm that can give them a prompt start, quick disposition and low cost.
An important aspect is that at peak, companies specializing in each “technology” still exhibit a significant array of strength in all areas of design, service and delivery. Thus, the emphasis on a particular area is the differentiating factor among consulting firms. This emphasis may be shifted by the preference (strengths) of the strategists in the firm, or by the marketplace. In the future, a consulting company shall be truly successful if it manages to provide additional added value in the typical “package” it offers to its customers.
The Romanian business model for consultancies is probably one of the most adequate to this statement, similarly to FMCG promotions in retails stores (e.g. “Buy one, get one free”, “Buy a sandwich and a beverage together and get 20% discount). This is possible by tearing down the typical “technologies” stated above. In simpler words, the potential client will be more willing to hire a Brains firm, when the consulting company will not only design the new solution, but also contribute to its implementation, or when a Grey-hair firm will not only supervise the implementation of a new tool, but also offer an army of junior consultants to test it and perform data entry.
IT’S ALL ABOUT PEOPLE
In essence, consultants must concomitantly meet 3 requirements: they must be knowledgeable, affordable and flexible. While the 3rd requirement may be relatively easy to meet, the first two are contradicting in nature, and nowhere is this more obvious than on the local market.
Typically, consultants with enough experience and sector expertise are expats – and they don’t come cheap: the time of such a consultant would be valued at no less than EUR 2,000 per day. They are usually senior managers and above, exposed to large advisory engagements across multiple countries, dispatched to Romania to handle a particular area or sector within a consultancy practice (e.g. Power & Utilities).
The ways of quickly creating sufficient local expertise in the market would imply some short- and mid-term sacrifices in revenue of the major players: either by exposing a select few of the local consultants to complex international engagements (within the firm’s other branches), or ensuring the presence of acknowledged international experts locally, acting as mentors for the local team. Either way, the aim is to increase the skill-set of the local advisory teams, in order to keep them less dependent on expensive international experts.
Since no consultancy firm ever complained on the number of well trained candidates for junior positions, the focus for the future is to be put on well trained senior level consultants and project managers, as the backbone of each practice.
With the demands of the market steadily growing (at a much steeper pace compared to the funding available), the differentiating factor between advisory firms will be “engagement efficiency”. Acting with efficiency in mind, will help firms keep the prices down and deliver quality services in the shortest amount of time. Both significant investments in local expertise and flexibility in services offered in the market are strong prerequisites, which will shape the consulting business for the years to come.
