photo credit: New York Times
Learnings from prior disruptions
Trump’s election brings so many unknowns that consulting firms could be tempted to jump into the fetal position for the next four or even eight years. To better understand the potential risks and opportunities for consulting firms, we conducted an evaluation of volatile periods of recent history. The headline of the analysis? Consulting firms tend to have lower betas, generally outperforming the S&P in volatile and disruptive times. We examined the factors that have allowed firms to outperform during prior periods of disruption and posit a few ideas as to how firms can thrive in the coming months and years.
Whatever one thinks of Trump or his platform, his brand of politics represents a massive departure from the status quo. The Economist suggests that the potential economic impact could include market gyrations, a shift back to fossil fuels from renewables, and abolishment or replacement of the ACA. Near-term stimulus could come from tax reductions, relaxed regulation, infrastructure investment (e.g. “the wall”), and perhaps hiring a deportation force. Over the long-run, contraction could come from constraints on free-trade and a ballooning deficit.
How do consulting firms tend to perform during periods of significant disruption?
To evaluate how the effects of President Trump’s election could influence the fortunes of consulting firms, we evaluated two periods of disruption: post-9/11 and the Global Financial Crisis. Everyone certainly hopes that the next four years will not be as catastrophic. In fact, some like Goldman Sachs even suggest that Trump will have minimal to no impact on the S&P. Nonetheless, it can be instructive to evaluate performance in volatile times, irrespective of whether Trump leads to a period of volatility.
The top chart below displays performance of four publicly traded consulting firms (Accenture, CRA, FTI, and Navigant) in the year following September 11th, 2001 and the dotcom bust. Prior to September 11th (not shown on this chart), the aforementioned consulting firms generally outperformed a lagging S&P. In the year after September 11th, all four of our sample firms outperformed the plodding S&P, with Accenture and FTI exhibiting particularly strong bursts.
The bottom chart below displays performance of the four firms – this time also including Huron - in the year following the September 2008 collapse of Bear Stearns. While the firms are certainly not immune from volatility immediately following the crisis, they exhibit remarkably low correlation (beta) with the market. Navigant was stable and Accenture actually appreciated in value through a challenging period.
While Accenture and Navigant’s betas are a bit over 1.0, Huron is at 0.39, FYI is at 0.29, and CRA is at 0.78. This suggests that consulting firms can position themselves to be less sensitive to dips in the market than others. Firms that are positioned as their clients’ mission-critical guides through ambiguity and uncertainty can even significantly outperform the market.
What strategies have helped consulting firms outperform during challenging times?
In public filings, these publicly-traded firms cite several approaches to deal with adverse market conditions. The firms that successfully floated above a down market doubled down on areas experiencing the most significant change, and positioned themselves as experts in those fast-evolving topics. Examples from 2008 include:
What strategies might be helpful in navigating this period?
It is unclear whether the next few years will usher in an economic upswing from stimulus activity or a downturn from global instability and/or a trade war. It is also unclear which of Trump’s stated policies will be pursued and which will fail to pass congressional muster.
Despite these uncertainties, the following two things are clear: 1) a good starting point for understanding policy direction is simply listening to what he has said and 2) a smart strategy for a consulting firm will leverage unique firm differentiators to address implications of those stated policy goals.
Firms with foresight should try to anticipate changes 3-6 months ahead, and be prepared to address the implications of those changes. Firms with expertise ranging from health care policy to energy policy will be able to help clients navigate potentially tectonic shifts in those areas; and a focus on healthy efficiency or turnaround strategy never hurts in an economic downturn.
As Darwin famously said, “it is not the strongest of the species that survives but the most adaptable.” Irrespective of previous successes, firms must be ready to pivot in this period of uncertainty towards client challenges of tomorrow.
What talent strategies and tactics can help you mitigate risk and capitalize on opportunities?
As your leadership team peers out on the horizon for potential shifts, be ready to proactively capitalize on opportunities. Place a few calculated bets by having members of your team publish white papers on topics that might appear as “what’s news” in the WSJ in 3-6 months. This approach not only builds your team’s expertise, but also increases the likelihood of appearing in organic search results when the “excrement hits the air conditioning."
Also, consider selling tangential projects that may be a bit outside of your comfort zone if those projects may deliver proof points relevant for future work. This Talent Response post on Accelerating Your Shift Towards Adjacent Practice Areas details the ways in which you can leverage project-based 1099 experts to build credibility in new practice areas while upskilling your full-time team for future projects.
Finally, acknowledge to your team that we may be in for a wild ride both as a country and as an organization for the next few years. Emphasize that unity and hard work as a firm can help get through all business cycles. As Niko Canner at Incandescent wrote his team yesterday, “When we affirm our goals, let’s apply ourselves relentlessly. Yesterday underscores the perils of overconfidence. Yesterday reminds us that our ideas are only as good as our ability to persuade diverse people to act upon them — act upon them when they are in crisis, not just when their lives feel safe. Yesterday reminds us just how much work that is and how little we can take for granted.”
Please contact us any time to think through this or other talent strategy topics, as well as to learn more about the ways in which our curated network of consulting talent might help you better respond to the coming uncertainty.