If you read analysts’ reports on decreased IT spending, you can easily extrapolate leaner times for the consulting industry. PricewaterhouseCoopers (PwC) supported that outlook when it cut loose 1,000 U.S. consultants last week. I suspect it’s just a matter of time before other major firms start trimming staff.

Already the rumor mill is abuzz with impending cuts as utilization rates hover in the 40 percent range. Without belittling the very real effect on individuals, layoffs might finally convince folks that consulting in its current form is not a perpetual growth business.

The reason is quite simple: There are inherent limitations to consulting’s old-fashioned pyramid structure. In a “people” business like consulting, the pyramid simplifies any proposed cuts. In the good old days, firms would typically chip a few stones from the bottom of the structural pyramid when times got tough. Out go the analysts and few junior consultants. In a really bad economy, partners would forego annual bonuses.

Over the last several years, many firms made hurried decisions in trying to “win the war for talent.” New titles and phantom stock were created for non-equity-holding partners. Compensation shot through the roof as consultants and MBAs held their firms ransom against lucrative dot-com offers.

Essentially, consultancies tried to become much flatter organizations from an operational standpoint. But in reality, the partnership model still exists, even with public consultancies. The difference now, though, is that when profits dip and Wall Street demands draconian measures, public consultancies will react with brutal swiftness. The natural inclination is to remove more bricks from the bottom of the pyramid (which makes Diamond’s decision to hold off on layoffs either brave or foolhardy, depending on your perspective).

Those firms aspiring to the public markets may be taking that same prescription. The whispering behind PwC’s cuts revolves around its inevitable IPO. Internet chat rooms are awash with gossip that Accenture will use the same rationale to trim its work force.

But consultancies are not manufacturing plants. Firms may end up tossing out otherwise good performers in the rush to become leaner and meaner. And MBAs, who have come slinking back to consultancies after jilting them over the last few years, may find themselves spurned.

It’s the painful price of being in the people business.

Heard on the street
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Inside Consulting is written by Tom Rodenhauser as a free weekly supplement to The Rodenhauser Report. The report informs senior advisors and business executives of consulting trends and best practices. Subscription cost is $295 per year for 10 issues. Copyright 2001, Consulting Information Services, LLC. Reproduction is prohibited. Quotation with attribution is encouraged.