COVER 3TORY
CALCULATING A COMEBACK A scaled-down business consulting industry hopes to reconnect with the chemical sector
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RICK M U L L I N , C & E N NORTHEAST NEWS BUREAU
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ONSULTANT CALVIN COBB RECALLS A 1 9 9 8 M E E T I N G
in Boca Raton, Fla., of the business consulting partners at Ernst & ^bung as a kind ofbeginning of the end. He remembers Roger Nelson, the executive who more than doubled the consulting business's revenue over three years to $1.2 billion in 1996, proclaiming that the days of implementing enterprise resource planning (ERP) software and Y2K-compliant computer systems were coming to an end. For the first time in more than a decade, Nelson told the gathering,
there would be no "next big thing" in business consulting. "In retrospect," Cobb says, "I'd say the group didn't get it. It had all been 'up and to the right' for so long that everyone thought there would be no end to it." Information technology (IT) projects and associated busiW W W . C E N - O N L I NE.ORG
ness process reengineering had translated into big business for the consulting world, Cobb says, and "everyone assumed that the Internet would be even bigger." Nelson was right, however. Things got smaller fast for the high-flying business consulting industry of the 1990s. In 2002,
the global consulting industry experienced its first year of revenue shrinkage after more than a decade of double-digit growth. Following further revenue contraction in 2003, a fundamentally changed consulting profession began a slow cUmb back to profitability last year. The market for consulting services has changed as well. Much of the client base, including the chemical industry, is emerging from the recent recession with completely different needs. Gone are the days when busloads of consultant-deployed business school graduates could virtually take over clients' operations in order to implement industry-agnostic software packages and reengineering regimes. Clients are now looking for short-term, targeted engagements with consultants who offer industry-specific expertise, years of experience, and precise know-how George Verghese, director of strategic planning and business analysis at Dow C&EN
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COVER STORY Chemical, sums up the new take on consulting in the chemical sector. "Our use of consultants has decreased substantially in the last decade," Verghese says. "We no longer rely on them for strategic decision analysis, but rather to tap a particular tool or skill set that we find beneficial." At Chemtura, the company recently formed by Crompton's acquisition of Great Lakes Chemical, consultants are used to provide what Myles S. Odaniell, senior vice president for performance chemicals, refers to as "surge capacity" —an extra boost of industry know-how or expertise when in-house resources run short. Chemtura, for example, recently hired McKinsey to consult on integrating the two chemical companies and launching the new firm. Generally Odaniell sees the purview of consulting shifting from IT infrastructure, reengineering, and major cost reduction initiatives to a "more focused" deployment in areas such as new product development and R&D efficiency improvement. "There is also a lot of work on the commercial side," Odaniell says. "On value pricingtrying to better understand the value of the products to customers." All of this requires a lot more familiarity with the chemical industry than does ERP software implementation, and none
"Every dog has its day and the consulting industry had its day But in actual fact, clients were taken advantage of. That comes back around to haunt you." Predictably there has been a shakeout. Jess Scheer, editor of Consultants News, an industry newsletter published by Kennedy
to do the same work. "Consultants have done this kind of work before, and maybe they are better at it," Scheer says. "But are they twice as good at it? This kind of math is being done over and over again." Scheer sees the downsizing of business consulting as a much-needed course cor-
B R A I N B A N K The first of Accenture's 40 global delivery centers focuses on chemicals. It opened in Wilmington, Del ., in 1996, staffed by former DuPont information technologists.
Information, sees a "war for talent" in which downsized consulting firms compete not only with each other but also with their clients for the most experienced professionals. "Industry jobs have become more attractive in CLIMBING BACK the downturn and will likely Business consultants, like their clients, are in a remain more attractive until postrecession recovery we get to the point where {consultant} fees start inAnnual change of global business consulting revenues, % creasing," Scheer says. 30 According to Scheer, ITbased consulting firms laid off 15-20% of their workforces during the downturn. Non-IT business consulting firms saw their staff shrink by 10-15%, mostly through voluntary attrition. "The NOTE: Based on annual market analysis of business consulting to all vast majority of those who industries. SOURCE: Kennedy Information left went into industry," Scheer says. Many are now in the position of hiring consultants. "This of it will fuel 10 years of double-digit has dramatically changed what clients will growth for high-priced consultants. buy and what consultants sell," he adds. Most observers agree that business conIt has also changed what consultants sulting is dealing with a major comeupearn, given that an in-house strategy propance. "In my view, consulting got a black fessional is paid roughly half of what busieye" in the 1990s, says Cobb, who recentness consultants have historically been paid ly formed an independent consulting firm.
rection. "Consultants should be trusted advisers," he says. As such, the chemical industry's difficult period from 2001-04 "should have been the growth years for the consulting industry" Instead, he says, consultants were eliminated as an unjustifiable cost when the recession hit. "Clients are still upset with the way too many consultants overpromised and underdelivered," Scheer says. Still, in a recent report, Christine Ferrusi Ross, an analyst with Forrester Research, cites ample opportunity going forward for business consultants to help corporate clients meet new challenges. Industrial firms, for example, will put increased attention on understanding the strategic implications, beyond simple cost cutting, of operating in China, India, and elsewhere offshore. A changed regulatory environment— specifically the advent of the Sarbanes-Oxley Act, the Patriot Act, and the Health Insurance Portability & Accountability Act—will have far-reaching implications for how companies handle their business processes, technologies, and relations with employees. However, Ferrusi Ross also anticipates changes in the way industrial clients hire
Every dog has its day, and the consulting industry had its day. But in actual fact, clients were taken advantage of. That comes back around to haunt you." 18
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and work with consultants. She argues that clients will take a more active role in con sulting engagements than they have in re cent years, using consultants primarily as coaches for projects that are implement ed in-house. Companies will cut back on the number of consultants employed per project and re quire a higher level of expertise of con sultants, she says. "This is a marked shift from the dot-com days when firms hired consultants to describe new technologies and potential uses," Ferrusi Ross writes. CONSOLIDATION in the consulting in dustry actually started in the midst of its boom, fueled by a move in the mid-1990s to separate business consulting units from tax and auditing divisions at the big ac counting firms. This became headline news in 2001 dur ing the demise of Arthur Andersen in the wake of the Enron scandal, by which time several consulting firms, notably Ander sen Consulting, had already spun off from their accounting counterparts in a response to competitive pressures and an effort to avoid conflicts of interest. Andersen Con sulting spun off in 2000, forming Accenture, though Andersen Consulting and Arthur Andersen had been operating as separate entities with their own chief ex ecutives since the early 1990s. Ernst ScYoung also split its auditing and consulting businesses in the 1990s. Its con sulting practices in chemicals and in oth er industry sectors were purchased by Paris-based Cap Gemini in 2 0 0 0 in an ef fort by the latter to establish a stronger North American practice. Subsequently, PricewaterhouseCoopers, formed by the merger of Coopers & Lybrand and Price Waterhouse in 1998, sold its consulting practice to IBM, a lastminute change from the original plan to spin off the consulting operation as a com pany called Monday. K P M G Peat Marwick followed with a spin-off of its con sulting business as Bearing Point. Deloitte & Touche moved to separate its consulting and auditing practices by cre ating a new consulting firm called Braxton. The deal fell apart, according to Tom Mar riott, head of the chemicals consulting prac tice at Deloitte, when the bottom dropped out of consulting revenues in 2002. The separation of consulting from tax and auditing had some surprising effects, most ofwhich played out in favor of the au diting divisions, Cobb says. While it was as sumed that tax and audit services would stagnate with the loss of the fast-growing business consulting arms, it soon became
apparent how dependent the flashy reengi neering gurus were on the comparably drab number crunchers. Cobb says Ernst Sc ^bung's consulting practice dropped sig nificantly one year after the split. And Sarbanes-Oxley, he says, has been more of a boost to the tax and audit outfits than to the business consultants. Most of the large consulting firms have a similar story to tell. Marriott, for exam ple, describes a late-1990s wake-up call at Deloitte. "It was like driving 100 miles per
hour into a brick wall," he says. "It was like, 'Whoops! Where did all that demand go?' It was a rough adjustment, but no more so for the consulting industry than any other. Everyone had a rude awakening in 2001." After that, Marriott acknowledges, De loitte lost its timing. Rather than count ing on the Internet and e-business, the firm had decided to promote the kind of topline growth strategies that wouldn't end up catching on until the economy rebounded in 2004. "We started gearing up for it in
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COVER STORY EYE
ON THE
MARKET
Watching Petrochemicals
A
rough swing through the petrochemical business cycle and a deluge of new chemical investments in the Middle East and Asia have only made chemical executives more dependent on impartial opinions about chemical markets. Companies that provide such information—firms that include Chemical Market Associates Inc. (CMAI), DeWitt & Co., and Nexant Chem Systems—are expanding their geographic reach and services in response. CMAI has seized on the opportunity to expand its business, according to President Gary Adams. "We expanded all through that period and have doubled the number of people in our firm over the last six years," he says. "Our clients became more thirsty for analysis of market conditions as the industry evolved through the down cycle and got to a period of better earnings." The company has also expanded its business beyond market analysis reports and conferences to offer single-client services for customers working on particular projects. To this end, the company last year purchased CPI Consulting, a specialist in this area. CMAI, Adams adds, has been moving beyond its core petrochemical clientele,
1999 and 2000," he says. "I still have PowerPoint slides from that time titled Are Ifou Ready for the Upturn?' We were a little bit ahead of where people were." The question of how the business savants got it so wrong will likely linger as an embarrassment to the consulting industry Current practitioners in the chemical market, however, claim they have moved on,
reaching out to the financial community and final product producers. For example, last year CMAI purchased Geerdes International, a company that analyzes trade in finished textile goods. DeWitt & Co. is Coca-Cola to CMAI's Pepsi. CMAI actually has its roots in DeWitt; in 1979, two DeWitt consultants struck out on their own to form CMAI. And the companies have traditionally overlapped services. Their annual petrochemical conferences are held simultaneously and, until recently, across the street from one another in Houston. Even their Web addresses—cmaiglobal.com and dewitt world.com—seem to taunt each other. In recent years, however, DeWitt has been more adventurous than CMAI in its business ventures. The firm conceived of the online chemical trading firm CheMatch.com and spun it off in 1999 to a venture capital firm. The burst of the dotcom bubble dashed CheMatch's initial public offering prospects, and the company was bought out in 2002 by rival ChemConnect. DeWitt Managing Director Earl H. Armstrong notes, however, that his firm profited significantly from the spin-off despite CheMatch's later fate. DeWitt and CheMatch also partnered
recalibrating their approach and reconnecting with clients. While I T continues to constitute a significant portion of the work being done—Marriott says it has dropped from nearly 70% of Deloitte's overall business to about 35%—the projects tend not to be the big, multiyear projects typical of the 1990s. And the relationship between client and consultant has
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with the Chicago Mercantile Exchange on futures trading in benzene and mixed xylenes. The products were listed in late 2001, but trading was minimal and eventually halted. "It looked like a market that didn't want to go," Armstrong acknowledges. DeWitt's core consulting business, Armstrong says, is growing again after its client base was narrowed by industry consolidation and the Asian currency crisis. The company is expanding, particularly in Asia. "We're adding more people overseas than domestically," he says. Moreover, DeWitt has been adding to its consulting business. This fall, the company is rolling out an online database of plastics volumes in final market applications. The company has also been expanding its practice in fibers and hydrocarbon resins. Nexant Chem Systems is different from the other consultancies in that it focuses on single-client work and on technical and financial rather than market analysis. IBM bought Chem Systems in the late 1990s, intending it to provide a foothold in the chemical industry. While with IBM, Chem Systems focused on e-business strategy, enterprise resource planning, and supply-chain management. By 2001, however, IBM's attention had shifted, and it sold Chem Systems to Nexant, a consultant to the energy and consumer products industries.
"flipped," according to Marriott, with the client running the project and the consultant taking orders. Outsourcing, a major hallmark of the 1990s, has also reemerged in a scaled-down format that caters to specific needs of the chemical industry Accenture, which pioneered industry-specific I T application development when it took over DuPont's I T development in 1997, has set up 40 "global delivery centers" for this work in India, Spain, Brazil, Canada, and the U.S. The first of these, staffed originally by the outsourced I T department of DuPont, is housed in a former John Wannamaker department store m Wilmington, Del., and still serves the chemical industry SAP software implementation was a major focus at first, but according to Tommy Mann, who heads Accenture's chemicals practice, the firm in recent years has gravitated toward business consulting projects. Supply-chain management, sales, and marketing work are tailored to the needs of chemical producers, he says. R&D is also
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Now independent from IBM, Chem Systems consultants are back to the kind of consulting they did before IBM, according to Don F. Bari, senior vice president of Asia and the Americas, and are no longer focused on e-business. "We had to rebuild our brand," he says. One vestige of its IBM days, however, is the petrochemical simulation software Chem Systems launched about two years ago. The product, for which IBM footed over a million dollars, is a real-time simulation of about 50 petrochemical products. Data such as economic assumptions and oil prices are plugged in and chemical forecasts are read out. Included in the simulator are about U.000 chemical plants. Bari says Chem Systems is now growing at double-digit rates, thanks to the new platform and strong regional demand for its services. It has some 20 consultants and associates in Asia alone. In these emerging markets, it provides analysis of new projects, while in the U.S. and Europe it helps clients run their existing assets. Despite the overlapping services, the three firms maintain there's not much rivalry among them. "The industry needs more than one consultant, and we're happy to see quality work done by any consultant," CMAI's Adams says. "We encourage our clients to seek multiple views of the market."—ALEX TULLO
takes over application support for specific I T products or projects. The client retains ownership and decision-making regarding use of the technology, accessing the consultant's expertise in applying SAP and other software to chemical industry applications when and where needed. This approach has required Deloitte to hire I T system consultants with chemical industry backgrounds, he says. Cobb says this kind ofknow-how will be needed to help chemical companies deal
with a unique problem—connecting new business I T systems to manufacturing control and data monitoring systems. This is an engineering puzzle that requires intimate knowledge of chemical manufacturing and business management. Cobb says he seized on this opportunity by leaving Cap Gemini to establish a consulting business at Invensys, a major supplier of digital control systems and other manufacturing management software. T h e new consulting group gravitated more toward
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a new focus. "We aren't doing the science," he says. "We are improving how the client does science." Accenture's background in reengineering comes in handy "When you get into the R&D centers of a lot of chemical companies, it's pretty archaic," Mann says. "There are still a lot of notebooks." Some clients are technically unprepared to process the data from new techniques such as high-throughput screening. "We create services to help them manage and analyze the data," he says. "The scientists still do their job, but they focus more on designing and analyzing experiments than on executing them." Accenture recently formed a partnership with Symyx under which Accenture develops applications for Symyx' software, which Mann calls "the SAP of R&D." At Deloitte, the outsourcing process has been reengineered, Marriott maintains. Rather than the typical approach of taking over I T systems and staff "and renting them back at a lower cost," he says the firm W W W . C E N - O N L I NE.ORG
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COVER STORY Invensys' refinery and upstream petrochemical business by the time Cobb retired and formed Calvin Cobb & Co. Broad outsourcing of IT support has not completely dried up, however. According to Lute Quintrell, a partner in the petroleum and chemicals practice at IBM, the outsourcing ofglobal ITmanagement is still an important business for large consulting firms with resources in Asia and Latin America. Last year, Dow Chemical awarded IBM
a mix of relatively inexperienced types." Much of the chemical industry expertise now deployed at CRA was added when the company bought A. D. Little's chemicals and energy unit in 2 0 0 2 . Top-line growth strategies are a major consulting focus, according to Coote, as is finance. "There is intense interest in the private equity sector, driven by the perceived narrowing of risk differential between private and public equity portfolios and the continued out-performance of private versus public equity," he says. "People say the chemical industry is mature and that returns aren't great, but actually there is a very strong record of performance." One A. D. Little chemical consultant who moved to CRA moved again this year—Jonathon Wright went from consulting with Solutia's integrated nylon Marriott Cobb business to becoming its president. Wright says he a seven-year contract to manage its global was attracted by the chance to take on full responsibility for a business. "Ifou can onI T infrastructure and implement a range ly go on giving advice for so long," he says. ofupgrades to support local- and wide-area networks, as well as voice, video, and e-en- "There comes a point at which you want to go from giving advice to seeing things abled conference rooms. And early this through." month, Dow renewed a software applications contract with Accenture. According to Wright, managers in the chemical industry are STILLp David E. Kepler, DoVs chief intaking a close look at asformation officer, contends that the firm sets, customers, and uses consultants sparingly beyond basic inproduct portfolios to defrastructure support. 'At Dow, we are very termine new means of inaware of the key knowledge we need to recreasing efficiencies and tain to remain competitive," he says. "Outrevenue. They are desourcing and consultants are tools we use ploying consultants "on to manage our business model and the varia tighter brief to work on able demands of our markets." specific problems." Some consulting firms that were less inWright argues that volved in I T managed to continue growing much of the redirection during the downturn. "The major shakeout of consulting services in consulting occurred at the larger firms," stems from a change in says Joseph L. Coote, vice president and the chemical industry director of the chemicals and petroleum unrelated to I T implementation or the repractice at Charles River Associates cent economic downturn. He sees the in(CRA). The firm has been growing at an dustry coming to grips with a longer term annual rate of about 20% for the past 10 evolution in business management. years, he says. "We have always had a val"Things have changed in the sense that in ue proposition relying on industry expertthe 1990s, it was believed that you could ise combined with very strong functional innovate your way out of trouble or that skills in economics." And no broad-scale people would see new value in new chemERP implementation work, he adds. icals," he says. "In fact, what you've got is Consultants News's Scheer agrees that this a lot of materials that are mature." is a fair assessment. "They are a smart firm While this realization began to sink in with a reputation of having more seasoned as early as the 1980s, he says, the industry veterans," he says. "They are mostly staffed is only now tackling the challenge of manby Ph.D.s and industry experts rather than aging mature businesses. "I think that you
had a generation of managers through the 1990s who had lived in a world of continual market growth and who, for the first time in their executive careers, were dealing with stagnation, downsizing, and reshaping businesses," Wright says. "That required a set of strengths they didn't really have." Companies are now hiring consultants to work on the problem, he says. Wright, in fact, does not see "in-house consulting" taking the place of hired expertise. "There are a lot of political issues at companies that inside consultants aren't good at dealing with," he says. Outside consultants, on the other hand, need to package their offerings more effectively "People value a consultant's ability to show them what to do in a language they understand," Wright says. "A lot of the generic consulting models have been so bound in consultant-speak that people haven't understood the thought behind it. It immunizes the client to the idea. They don't get the full impact, just apiece of the thinking. They implement it halfway without the power of the idea. We are careful in Solutia not to use 'consultantese.'" Accenture's Mann points out that there is a key change at the top in chemical industry management. "There are newpeople coming into the senior executive ranks in the chemical industry" he says, pointing to Robert L. Wood, who took the top post at Crompton, nowChemtura, last year. "There is ayounger generation of leadership that worked with consultants when they were midlevel managers." Thanks to these executives, the newly focused consulting industry is forging stronger partnerships with the chemical industry Deloitte's Marriott agrees. He sees relationships reverting to something akin to those of the late 1980s and early 1990s before the extravagances of the ERP software era. "Projects are smaller again, and there is a greater emphasis on achieving specific and measurable results," he says. "Clients are more disciplined buyers of consulting services. They want us to leave them capable of doing things themselves." Observers agree that providing this kind of service will require consulting firms to cultivate their own discipline, given the unlikely prospect of a return to the bigticket consulting engagements of the late 1990s. "I don't see a scenario in which clients get dumb again," Scheer says. •
You can only go on giving advice for so long. There comes a point at which you want to go from giving advice to seeing things through."
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