Recessionary clouds threaten growth curve

While it will be another month or so before the MCA officially announces its results for 1997, those who have been following our quarterly reports on business trends over the past year, will have no difficulty in coming to the conclusion that we will announce growth year on year in the region of 25 per cent.

Most management consultants will be joyful at the news, and believing there to be no clouds on the horizon, will be marking their cards for this coming year with great optimism. I believe that those who do so without reserve may be disappointed, for there are indeed clouds which could be the precursor for a hurricane in 1999.

If I can give any message after 12 years of observation of the management consultancy industry, it is that there are clearer signs today for the need to retrench in industry than ever existed in the lead up to the 1991 recession.

Why the gloom? First management consultancy though it is seen as an investment in the future, is generally bought on discretionary spend.

Each client organisation’s allotment of budget to this heading is generally pre-allocated and normally not subject to negotiation, except downwards in a recession. A major “user” of this allotment at present is for work to counter the millennium time bomb.

Moreover, as firms, particularly SMEs, see their prospective IT problems become more critical as the year 2000 approaches, so they will need to spend rapidly to buy a solution. This will not help consultancy as much of the spend will be on body shopping rather than consultants. Thus, problem one is that there will be less money available for the purchase of other forms of management consultancy.

Problem two is the rate of exchange for sterling.

While exchange rate fluctuations generally cause little problem to multinationals when related to contractual work, this is not the case for middle-sized national consultancies. Many are showing losses following the increase of 20 per cent in sterling’s value since the date they signed initial contracts.

Overseas management consultancy work is normally “a buffer” to compensate for recessionary periods in the United Kingdom, but this is no longer the case as consultants are “priced out” through expensive sterling.

Problem three is the direction in which world economies are moving.

First, while many UK practices believe that they are immune to events in the Pacific Rim, the fact is that they are not. Like a stone dropped into a millpond, we are going to see ripples move out from the epicentre over the coming months. Ripples that will shake confidence, not only through a reduction in inward investment and a diminution in the use of consultants to assist in developing export opportunities, but also in general economic confidence. While there will be a demise of some Far Eastern suppliers, there will be an inability on the part of the UK manufacturing base to take up “the slack”.

The second consideration is Economic and Monetary Union. No one doubts the political motivation and intent of the 11 European Union countries to see EMU in place in 1999. But the discipline that will go with EMU’s introduction will undoubtedly retard the economic advance of the majority of the participating countries, even if it is only to ensure a uniform interest rate across the market: how can Spain or Italy with current interest rates of around 8 per cent reduce them to the French/German norm of 3.5 per cent? Only by tighter fiscal controls.

In short, continental Europe which accounts for 60 per cent of our national exports will not be an easy market to sell into, and with sterling probably acting as a hedge currency once EMU is set up, this will probably mean even higher interest rates, making it a positively difficult market.

In this environment, no one should be optimistic about maintaining last year’s explosive expansion rates into this coming year and next. If the last two problems that I mention coincide, we could see a tidal wave strike our economy. If management consultancy is to avoid the ensuring turbulence, then it has to prepare itself today. If growth is steady and conservative, we may be able to avoid the storm’s centre, but if, like a ship, we maintain course at “full steam ahead”, then we should not be surprised if the problems of the recession in the early 1990s are with us once again.

Caution should be the maxim in today’s climate of outstanding growth, and firms should be hesitant, both in over recruiting and in setting targets that anticipate growth rates of over 10 per cent.

Brian O’Rorke has been executive director of the Management Consultancies Association for the last 12 years and is standing down in April of this year.

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