Given the magnitude of potential policy and legislative changes looming on the horizon, the next 11 months are going to be an absolute boon to most companies and their consulting partners. Unless, of course, those changes never materialize because they are trumped by legislative gridlock, geopolitical strife and a fear-inducing cocktail of uncertainty and volatility. In this scenario, 2017 could be a historic bust.
A third possible future seems more likely to occur: The same technological, economic, geopolitical and environmental drivers of risk and opportunity that influenced businesses in 2016 are likely to continue to drive companies to seek help from their consulting partners in 2017. Depending on the extent to which President Trump’s policy intentions (at least what was known of them at press time) materialize, these existing drivers of change will be joined by a new set of disruptions, including deregulation, infrastructure spending, and U.S. trade and immigration changes.
These potential policy shifts would have major impacts on numerous industries, including healthcare, financial services, oil and gas, energy, manufacturing, retail, technology and public sector. Some specific policy changes (e.g., the repeal of the Affordable Care Act) could have an outsized impact on certain segments (e.g., small businesses and certain health insurers). Other policy changes, such as corporate tax reform and new trade tariffs, likely would stimulate demand for specific consulting service offerings, such as tax advisory and supply chain management.
“Change is always good for consultants,” says Cumberland Consulting Group CEO Brian Cahill. “What can be challenging for consultants and our clients is uncertainty.”
With the election and pre-inauguration uncertainty behind us, major policy question marks should give way to greater clarity. “It all boils down to the next 100 to 200 days being a time to pay close attention to developments inside the Beltway,” asserts Jim DeLoach, a Protiviti Managing Director.
Same Old, Same Old
As policy and new laws are hashed out in Washington, businesses will continue to contend with the same risk and opportunities they sought help addressing prior to Jan. 20.
“The global trends of the past few years—the move to digital, machine learning, analytics, cybersecurity and other trends we’re all familiar with—are going to continue,” asserts Grant Thornton National Managing Principal of Advisory Services Srikant Sastry. “The genie is out of the bottle so to speak, and we’re all trying to figure out how to best respond to these trends. I don’t see those areas being affected by the political changes that have occurred.”
PwC U.S. Advisory Leader Mohamed Kande expresses a similar perspective. “No matter who is in the new administration, technology will continue to be a disruptor in every sector,” he asserts. “Whether it’s considering changes to the nation’s energy mix, new automotive capabilities and innovations, or healthcare delivery methods and the use of wearables for tracking health—each of these industries have seen radical change in the last decade, and we expect that to continue apace.”
Most of the dozen consulting leaders who weighed in on the how the Trump Presidency might affect the 2017 business climate in a recent Consulting “Executive Outlook” fundamentally agree with Sastry and Kande. Deloitte Chairman and CEO Janet Foutty stressed that the “core work business leaders do every day—optimizing talent, driving innovation, determining where to invest, focusing on customers, driving growth—remains a priority regardless of who is president.”
100 Days to Clarity?
The new President is dramatically different from any recent President. In terms of recent comparisons, the Obama-to-Trump policy shift appears to harken back to the Carter-to-Regan policy shift that overhauled the country’s tax system and geopolitical stance.
While emphasizing the continuing influence of non-political drivers of change, Sastry also expects businesses and industries to experience disruptions due to policy changes made by the new administration and Congress. “In the consulting market disruption always means there is an opportunity,” he says. “We need to home in on the right areas of disruption and areas where we can make a difference and add value for our clients.”
Those areas will become apparent in due course. “In the aftermath of any presidential election with a change in party leadership, it is often difficult to distinguish campaign promises from what is actually achievable within the Beltway,” DeLoach explains. “Time is a great clarifier as to the point at which what was promised intersects with what is politically feasible.” For the next few months, DeLoach and other consulting leaders say, it would be prudent to key in on how the new administration and congress take actions related to the potential replacement of Obamacare, immigration policy, tax reform (including simplifying the Internal Revenue Code and reducing corporate taxes),and trade policy.
When consulting leaders are asked to project the impact of the new administration and congress on the 2017 business climate, they tend to say that it depends on how the following questions are addressed:
What, if anything, will replace the Affordable Care Act?
How large will infrastructure investments be?
How dramatically will regulations be rolled back and to what extent will tax rules be reformed?
What will be the extent of trade-policy changes, and how will those help and hamper various industries?
“Most industries are expecting an improved regulatory environment, which should ease compliance spending and improve trade flow and development,” says Ernst & Young LLP Principal, Advisory Go To Market and Sector Leader, Mark Hawn. “Industries most likely to benefit would include financial services and oil and gas.”
Other policy changes, such as the imposition of new trade tariffs or curbs on immigration, could create hurdles for retailers and the technology companies. Based on what the President expressed during his candidacy, immediately after his election, the following industry challenges seem likely to materialize:
Healthcare: The fate of the Affordable Care Act (ACA) looms one of the largest business issues in early 2017. The law’s repeal would significantly affect healthcare providers and payers (i.e., insurers) as well as small business across all industries. National and regional insurers also face the possibility of competing across state lines. Additionally, a major corporate tax cut would benefit insurers given that their business is U.S.-based. Life sciences companies are contending with pushback on drug prices and where they manufacture their products (in most cases, outside the U.S.). The biggest questions, however, concern the ACA. “Will it get repealed?” Cahill asks. “Will it be replaced? At the moment we have no idea what, if any, aspects of the law will be allowed to survive. We also don’t know what a repeal would mean to the slowly evolving migration from fee-for-service to value-based pricing. And what will it mean to that doctor shortage that we talked about a few months ago?”
Public Sector: Consulting leaders expect significant headcount reductions at the federal level, new missions for certain agencies and departments, and a greater emphasis on public-private cooperation. State-level public-sector agencies are also expected to assume more authority. The public sector “may be the industry that undergoes the most change,” Sastry observes.
Financial Services: Regulations adopted following the global financial crisis (namely Dodd-Frank) may be scaled back. These deregulatory actions would likely unleash financial services companies to take on more risk while pursuing growth opportunities, Srikant and others agree. Expected interest rate hikes could boost lending revenues.
Energy: The President’s social media communication and appointments suggest that environmental regulations and standards concerning fossil fuels (e.g., greenhouse gas performance standards and fuel efficiency standards for automobiles) will be rolled back. The President’s election pledge to make the country energy independent bodes well for oil and gas companies and their suppliers. “On the regulatory front, it is clear that fossil fuels in the U.S. have a better future with the [new] President than it did with the predecessor administration,” DeLoach notes. “The Trump administration is much more likely to let the market figure out the best and cheapest sources of energy and thereby eliminate subsidies to renewables.”
Manufacturing: The President has made it clear that he intends to focus on domestic job growth particularly in the manufacturing industry. The methods deployed to fulfill this campaign promise obviously will pose new opportunities and new challenges for the industry, especially related to their decisions regarding where they locate production facilities and how many new jobs they create. Any policy-driven industry impacts will occur at a time when many manufacturing sectors are in the throes of longer-term transformation due to technological advancements, such as advanced robotics and machine learning. For decades, automotive manufacturers’ core competency was “bending metal,” Iler notes. “Now, suddenly, they’re technology companies.”
Retail: If new trade tariffs materialize, retailers and consumer products companies could suffer. “Go into any large U.S. retailers,” says The NorthPoint Group COO Rich Iler, “and look at how many products are made in the U.S. Not a lot…. The largest retailers are saying, ‘Where are we going to get product from? Holy mackerel, we’re going to have to redo our entire supply chain!’” Several well-known retailers recently closed stores and intensified other their cost-cutting measures. Retailers and consumer product companies, Iler adds, “are going to need a lot of procurement and sourcing expertise.”µ
Technology: Stricter immigration restrictions, such as scaling back the H1B visa program, would pose talent management challenges to many technology companies. Other changes could provide opportunities, however. The possibility of a tax break for repatriating overseas profits would help many of the largest technology companies. Start-up and smaller, fast-growing tech firms that passed on public offerings in recent years may find initial public offerings (IPOs) more lucrative as public-company regulations lessen, taxes decrease and more capital is available. “I would assume that we’re going to see more IPOs,” Iler says.
Defense: During the election, candidate Trump indicated that he would do away with defense-spending cuts originally implemented during the 2013 federal budget sequester. Protecting U.S. borders marked perhaps his central campaign message. “[I]ncreasing defense funding and securing our borders will be top priorities of the administration, which will benefit the defense industry and its suppliers,” DeLoach notes. “Increasing the size of the Army, expanding the Navy fleet, adding more combat jets, and preparing for cyber warfare are likely to be on the list.” While the Trump presidency seems to bode well for the industry, the President has sent some mixed signals to defense contractors. “Mr. Trump took to the 21st century bully pulpit—Twitter—to attack the cost of Lockheed’s F-35 fighter jet, and after that, the sector went nowhere,” noted The Wall Street Journal’s James Mackintosh while reporting on the up-then-level performance of defense stocks in two months following election day.
Services Demand: Think Small, Grow Organically
Consulting firms with industry practices in the areas described above should be busy this year. Other consulting offerings also seem poised to flourish. A repeal/replacement of the ACA along with tax reform would be highly favorable to small business. “If Obamacare and other regulations are scaled back, I see small businesses hiring and really trying to grow,” says Iler. Throw tax reform into the mix, and small- to mid-sized companies will be poised for significant growth. If that occurs, Iler believes that second-tier and regional accounting and consulting firms, in particular, would benefit.
The safest forecast for 2017 consulting services calls for a nearly 100 percent chance of increasing investment and interest in digital transformation, new technologies (e.g., blockchain, machine learning and robotics), data analytics and cybersecurity. “Regardless of the election, the common denominator for PwC as a consultancy going into 2017 is technology,” Kande reports. “These new technologies are going to continue yielding new products and services, new forms of customer engagement and a platform upon which unique experiences can be built. So for us, looking at each of these different sectors, the common theme will continue to be how organizations use technology to connect with people, deliver power, innovative transportation methods, and create smarter, healthier communities.”
While the following forecasts are a bit less certain, the next 12 months seem bright for the following service areas, given the favorable odds of certain policy and legislative changes occurring:
Tax and compliance: Tax planning has steadily become more strategic in the past decade as more companies venture into overseas markets and as global tax reform activities have taken center stage. Nancy Manzano, director, chief tax office, with global tax software company Vertex, notes that recent developments in international fiscal, government and tax policy—such as Brexit, the U.S. elections, the European Union’s state aid investigations, and the Organization for Economic Cooperation and Development’s (OECD’s) sweeping Base Erosion and Profit Shifting (BEPS) actions—will have potentially lasting impacts on the global economy. “The impact could lead multinational enterprises to unwind or restructure some of their tax planning strategies, especially international tax planning,” Manzano notes.
Domestically, the President’s focus on tax reform and trade tariffs would seem to ensure that tax planning becomes even more important in 2017. “I think tax advisory services will grow significantly,” Iler says, pointing to growing need for tax expertise to be integrated with other service offerings. For example, EY’s “Tax Effective Supply Chain Management” offering blends tax and supply chain expertise. “When you start looking at re-engineering your supply chain, a big piece of that work relates to taxes,” Iler adds.
Growth strategy: Given the extent to which rock-bottom interest rates fueled growth through acquisitions in the past several years, leadership teams may be a bit rusty when it comes to that other form of growth. “How many companies can really grow organically?” Iler asks. “How many know how to take an offering to the marketplace and make it successful when the evidence shows that more than 70 percent of all new offerings fail to meet expectations? I think this is a huge opportunity for the strategy consulting firms to help companies with their growth strategies.”
Supply chain: If new trade policies impose new tariffs on imports, many U.S. manufacturers will need to develop new sourcing strategies and find new sourcing partners. “If the tariffs we’ve heard about become a reality, almost everybody’s going to change their supply chain,” Iler says. “If there’s a theme running across all of these possible policy impacts, it would probably be supply chain.”
The industry and service forecasts above are the product of second-level tea-leaf reading— projected impacts of projected policy changes that may or may not come to pass. If these policies are implemented, they also will cause ripple effects: a major fiscal stimulus could result in much larger deficits along with spikes to inflation and interest rates.
In a November column questioning the incoming President’s “muscular” social media interactions with Apple, Boeing, Carrier and other companies, The Economist reminded readers that, “American capitalism has flourished thanks to the predictable application to rules.” The column warned that if this rules-bases system were to be replaced with an ad hoc approach dictated by the president, the economic damage would be grave.
So far, predictability does not appear to be a high priority of the new presidential administration. Late last month, a Republican political strategist from the George W. Bush White House described the president’s approach to The Wall Street Journal as “deliberate chaos,” and a “type of chaos that preserves maximum control for him.”
Hopefully, the next 100 days will be less chaotic and reduce the uncertainty as to whether the implications of the new administration’s governing approach will be grave—or gravy—for businesses and their consulting partners.
Sidebar: What to Watch
Jim DeLoach, a Protiviti managing director, identifies a number of specific steps for companies to consider while watching how policy and legislative proposals play out during the next six months or so. Some of these recommendations are also useful for consulting firms, including the following:
Watch the initial developments on trade closely—These issues include possible resets of the North American Free Trade Agreement and the Trans-Pacific Partnership as well as ways to address trade issues with China. “How these and other policy initiatives play out can significantly affect companies’ operations in, or exports to, these foreign markets and even critical suppliers based in these markets,” DeLoach notes.
Prepare for more discretionary spending capacity—The corporate tax rate could be slashed to 15 percent. If this and/or similar tax changes materialize, many companies will have an enticing challenge to address: How will they deploy the additional cash flow and/or repatriated funds? Possible answers, according to DeLoach, include making new investments, pursuing merger and acquisition (M&A) targets, pulling deferred projects off the back burner, expanding facilities, upgrading systems, enhancing compensation structures to retain talented employees and more.
Update M&A plans/strategies—The possible changes described above along with the likely trend toward deregulation may encourage more M&A transactions. “Companies should take these changing dynamics under consideration,” DeLoach adds, “and assess their M&A appetite in view of their overall corporate strategy and the economic climate.”
Sidebar: Q&A: The State of Strategy Consulting with ALM Intelligence Director, Lead for Strategy & Operations Consulting Research Nathan Simon
Strategy consulting did not help companies predict the Brexit vote outcome, the winner of the U.S. Presidential elections or the U.S. equity markets’ surge on Nov. 12. But that’s not what strategy consulting is designed to deliver, notes ALM Intelligence Director, Lead for Strategy & Operations Consulting Research Nathan Simon. That said, strategy consulting is evolving to help make clients better prepared for contingencies when unexpected events arise.
Consulting: Has political uncertainty—along with unexpected outcomes, like Brexit and the 2016 U.S. Presidential elections —highlighted any strategy-consulting strengths or weaknesses?
Simon: Although strategy consulting generally has gotten much better at helping companies deal with contingencies in a general way, strategy consulting isn’t very useful in addressing the problem of how to respond when major uncertainty is actually happening. Strategy is more of a process. When a company wants to know on June 24 what the implications of Brexit are—well, first of all, nobody knows at that moment. Second, I don’t think strategy consulting is the right tool to use for navigating uncertainty as it unfolds. Strategy consulting is a highly useful tool, it just has a different function, which is also evolving.
Consulting: How is strategy consulting evolving?
Simon: It has gotten much better helping companies deal with contingencies. Strategy consultants are building contingency planning processes into strategic planning so that companies develop much more systematic ways of responding to changes. Strategy as a discipline has become more of a risk-adjusted tool. Strategy consulting traditionally favored a very deterministic outlook: You’re at Point A and you want to get to Point Z, so we’ll define with you what Point Z is and then we’ll map out the other letters of the alphabet to get you there. That’s changed as the discipline has evolved to help companies think about multiple futures. And when an event occurs, strategy consulting helps leadership teams: 1) assess and categorize the event; 2) determine the ways in which the event might affect their strategy; and 3) have responses in place to adjust for this kind of an event.
Consulting: If a company received this type of strategy consulting prior to a major change event, then, it should be better prepared to respond?
Simon: Yes, exactly.
Consulting: How else is the discipline changing?
Simon: The old-school, strategy-on-its-own project is gone. There’s been a reinvention that has created a number of interfaces between strategy and things like investor relations, operations and operational assets, the customer, and technology. For example, the activist-investor response has become more tightly bound up with strategy. Historically, this response was a PR/communications function activity that was completely divorced from strategic planning activities. Today, more strategy consultants spend a lot of time helping clients think about how their strategy is contingent on being able to access financial resources, the value proposition they put forward to access those funds, what would occur if they could not access those funds, and how they would articulate their case if their access to those funds were at risk. This type of strategy consulting uses very compelling connections to tie financial strategy to business strategy. It also includes highly practical event-response work.
Consulting: What are the best opportunities for strategy firms and practices in 2017 and beyond?
Simon: When I look across the strategy and operation space I cover—the kind of work that gets done for CEOs, CMOs, and COOs—I see two core opportunities. One is that clients still want to know something about the world outside of their four walls that they don’t know and feel they should know. That used to be about understanding markets but those insights are no longer as relevant because companies know more and more about the external environment. Clients are now looking to consultants for more specialized technical knowledge. In the manufacturing space, where information and physical assets are converging, clients are looking for an engineering point of view. These insights cannot be generic.
Consulting: What’s the other opportunity?
Simon: Clients need help making their organizations actually work, which ultimately depends on cross-functional coordination. If companies could coordinate across their internal silos, there would be essentially nothing for consultants to do. Consultants traditionally entered a company and, in the context of a project, created connections where there were none and created new norms to overcome functional boundaries. The project’s success depended on them by virtue of the fact that they were from outside and didn’t have to play by the rules and could therefore make it work. After the consultants left, the new process or capabilities kept working for a couple of months. Within six months, though, the company regresses 80 percent back toward its previous state. In a year, the company was 100 percent back to where they started. I think the big opportunity inside the four walls is for strategy consultants to enable the organization to function across its internal silos in a durable and sustainable way. This is ultimately a behavioral problem so there is a big opportunity for consultants to get better at the behavioral change piece.