By Steve Crandall

"We are going to be the McKinsey of the 21st Century" was the battle cry of a Viant Consulting executive in the summer of 2000. Little did she know that two years later, what was left of Viant would be sold off to Divine, another internet consulting firm (which subsequently filed for Chapter 11 later that year). Many firms suffered this same fate during the dot-com bust, and while the economy played a major role in their collapse, poor management and vision also played a key role.

When the economy began to recover in 2003, a new host of firms emerged. The leadership of these firms (Archstone, Katzenbach Partners and Huron) was quickly able to identify opportunities in the market. These firms, unlike the first wave of new consulting firms placed significantly more emphasis on firm and client management, not just top line growth, and while some did not survive the financial crisis of 2008 (Archstone and Katzenbach were each sold in 2009) the leadership of these firms were able to create more viable businesses than their predecessors by developing meaningful long-term client relationships, managing their firms' performance by understanding the metrics that drive profitability and holding down costs.

So now with some hopeful signs that the economy may be improving, will we see another generation of firms spring up from the ashes? We at KIA certainly believe this will be the case, for the following reasons:

  • There has been significant market consolidation over the past two years, such as with the merger of HP and EDS, and Towers Perrin and Watson Wyatt, creating holes in the market for new and nimble firms.
  • Clients are actively seeking alternative suppliers so as to "not to put all their eggs in one basket."
  • There is a large pool of talented consultants currently on the street hungry for opportunities.
  • Venture capital firms are slowly beginning to loosen their purse strings again.


Lessons Learned
The last two waves of firms taught some valuable lessons. If you plan to start your own consulting firm, here are a few takeaways from our perspective:

  • Be in it for the long-term; And make sure your venture capital is in it as well. The days of flipping businesses in three to five years are over. Buyers will be looking under the hood more carefully.
  • Invest in your firm's infrastructure early; KIA has seen many firms stall when they reach the $20 million revenue mark because leadership could no longer effectively manage the business.
  • Manage your metrics; It is critical for firms to identify trends in sales cycles, utilization, etc. on a timely basis to take pro-active steps.
  • Be prepared to be countercyclical; Build when the market is tough, reap benefits when the market is starting to recover, stabilize and harmonize your business model before the market gets hot again.

The Opportunities
KIA sees plenty of opportunity across all consulting segments:

  • Business Advisory Services: There is demand for high quality/low cost alternatives to the Big Four.
  • Human Resources: With the fall out over Wall Street inspired C-level compensation packages, many investors are beginning to take a closer look at executive pay, which will drive demand to build new creative compensation structures.
  • Operations management: Clients will continue to look to become "leaner and meaner." Everything "green" and related to "sustainability" is an underserved consulting domain.
  • Information Technology: Truly innovative technologies consulting and mobile technologies helping companies virtualizing their workforce will be in high demand. Project management consultancies specializing in managing large scale legacy modernization projects will be in high demand.
  • Strategy: Players with practical and analytical understanding of particular areas of an industry vertical will be in high demand. T-shaped industry expertise (wide in general, and deep in some specialty area) will enable new entrants to advise on the strategic direction and downstream activities.

Verticals
Healthcare and energy are obvious verticals to focus on right now. Despite the collapse in the financial services industry, it continues to be the largest
commercial sector in terms of spend and should be quite aggressive coming out of the downturn.

Meanwhile, public sector work on the state and federal level is on the rise again. Small and nimble companies, often set up and run by former large practice area leaders or executives from the public sector, have an edge here.

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