IT consultancies feel the budget pinch

The economic downturn that hit vendors hard in recent months has sideswipped IT consultancies -- the latest casualties of shrinking customer budgets.

The IT consulting industry is hurting worldwide with powerhouses like CSC, Accenture, CapGemini Ernst & Young,Fujitsu and KPMG downsizing and cutting fees to maintain a foothold in the market.

IT consultancy staff have been cut by the thousands worldwide as customers demand more tailored projects with proven ROI and shorter project cycles.

Peter Bars, Gartner group vice president of consulting for the Asia-Pacific region, said the IT consulting business in the last eight months has seen a marked drop in demand, namely for implementation services, which has affected there venues of the implementation arms of both the Big Five and niche consultancies.

A Perth-based CSC technical sales consultant, who requested anonymity, agreed, saying: "My sales order numbers have not been looking good for the past two months now."

Companies now prefer to inject IT dollars in projects they view as high-return investments, like enterprise applications, infrastructure software and middleware, Bars said.

Explaining clients' rationale for retreating from large implementation deals, he said: "Enterprises are saying 'we can make do with what we've got, but we have to do better with it'. They're saying they can recoup existing [IT]resources and staff.

"[Clients] will be very cost-focused and seeking real ROI on investments in this climate, particularly in telco and desktop support costs -- two areas where if you do some smart work, you can get some return."

Overall, Bars is pessimistic about the outlook for the consulting industry for the next 12 months and described the downturn as long term.

He said the seriousness of current economic circumstances has forced the Big Five to cut fees for projects of any magnitude by around 30 per cent.

The Big Five traditionally billed clients on the basis of a common fee structure and skills metrix; however, Bars said they were changing their tack in the current climate, now charging discounted rates and delivering "very individualised, tailored deals".

"The large consultancy space is now becoming a risk-reward game."

For Gerard Florian, general manager of Dimension Data's multiservice network business, the most obvious impact of a tightening economy is a lack of large-scale projects. "They aren't happening, but are more likely to be broken up and treated as separate pieces," he said.

The slowing economy has opened the eyes of firms like CSC, continuing to earn its piece of the consulting pie now by managing more customised projects "within the client's overall vision".

"It's a matter of price perspective at say $15,000, rather than $100,000 to $200,000 for a full project," Florian said.

While the company has not discounted its services, it has broken them into simpler "pieces", offering shorter consulting contracts at around five to 10 days rather than a six-month agreement, he said.

Corporate customers are taking a tougher stance with consultancies now, demanding "hard cost justification rather than fluffy, esoteric savings that they can't see for two or more years", Florian said.

"They want to see immediate cost savings and see ROI in six to 12 months.

"The sheer size of projects, such as CRM, ERP or SCM, is scaring most people from undertaking them," Florian said.

Over the last 12 months, total IT spending at Sydney-headquartered Royal and Sun Alliance Insurance has increased, as the company has remained focused on what it regards as mission-critical initiatives, like a Windows 2000 desktop rollout, various e-commerce projects and business application development work, according to the company's IT managerJohn McKibben.

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