Organizations Moving to Stay Afloat

IT consulting companies, outsourcers grapple with cutbacks and layoffs

Fallout from the slowing economy is reaching well into the highest services levels with even the largest IT consulting companies and outsourcers facing cutbacks and layoffs.

But it could mean that the end of the tough times is near.

The biggest cuts are being felt by the Big 5 professional services organizations, with Cap Gemini Ernst & Young SA cutting 2,700 jobs and Accenture Ltd. cutting 1,400. The major outsourcers are also feeling the pinch. IBM Global Services revealed earlier this month that it is cutting 1,000 jobs, and Electronic Data Systems Corp.s struggling A.T. Kearney unit is cutting 400.

The numbers may seem small to companies that employ hundreds of thousands of workers, but the effects of the downturn—both positive and negative—are more subtle.

"Consultants are often the precursor for good times and bad times," said Tom Rodenhauser, principal at Consulting Information Services LLC, in Keene, N.H. "In a sense, they are last to be affected by the downturn and often the first to show the upturn is on the way. So they have a small window of experiencing pain, but the pain is pretty noticeable."

"The sales cycle on a consulting project is typically six to nine months. If that starts drying up, you dont see the effects of it for six to nine months," said Rodenhauser, whose organization is releasing a new study at the end of the month called "The Market for Management Consultancy Services in the USA: 2001 to 2006." For the first half of this year, the market grew at a mere 3 percent, the study found.

The pipeline is even longer for big outsourcers such as EDS, said Linda Cohen, an analyst at Gartner Inc., in Stamford, Conn.

But the primary motivation behind many of those outsourcing deals has shifted away from once-dominant business process re-engineering aims.

"It has come back to show me how you can save me money," said Bob Zapfel, general manager of IBMs strategic outsourcing and integrated technology services, in Somers, N.Y.

Outsourcers are also seeing a shift in demand and are having to "rebalance" their skill sets, said Charles Ansley, president of EDS Information Solutions U.S. unit, in Plano, Texas.

Still, the weakening economy has been less harsh to the big outsourcers than to smaller IT services companies.

"The biggest brands are being hit the least," said Dean McMann, CEO at The Ransford Group, a Houston consulting company. "Some of the smaller firms of up to $500 million have had to lay off up to 50 percent of their people—especially IT consulting firms that did anything around implementation of software or firms that did augmentation of internal technical staffs."

The byword for the Big 5 consulting companies is retrenchment. "They were spending all their money and time building up for ERP [enterprise resource planning] and e-business integration skills, and you dont want that anymore. Its not like you can take those people and have them do management consulting," Gartners Cohen said.

"You purge them, hire less expensive people and train them. That is how the machine works," she said.

But the rebalancing act that many of the large companies must carry out as demand for different skill sets shifts is a complex exercise. Most companies anticipate a rekindling of demand for e-business integration services once decisions are made to move delayed projects onto the front burner. Although no one knows the exact time frame, many expect demand to pick up again in the first or second quarter of next year.

To prepare for that demand but keep its costs down in the interim—and in preparation for its initial public offering—Accenture took a more creative approach to cutting back. The company last month instituted a voluntary sabbatical leave program targeted at more seasoned consultants, who are allowed to leave the company for anywhere from six to 12 months and still retain 20 percent of their pay.

"It lets us retain the highly talented people we spent so much time training [and] helps us reduce costs in the downturn. And it enables us to provide the flexibility people are looking for," said Larry Solomon, managing partner for U.S. operations at Accenture, in Philadelphia.

The program has already exceeded Accentures estimate of 800 participants—about 1,000 have signed up for the FlexLeave program.