Although the majority of attention regarding the current recession has focused on the consumer sector, business are being forced to cut back on expenditures as well. With businesses in nearly every industry looking for ways to lower non-critical expenses, we expect the business consulting industry to face a challenging operating environment in the near term.

OUTLOOK

We have a negative outlook for the business consulting services industry, based upon the difficult economic environment facing the companies' existing and potential customers.

Business consulting companies provide a wide range of services to their clients. Typical services include litigation support, business strategy planning, market and demand forecasting, policy analysis and consulting in the areas such as corporate finance, human resources, technology and restructuring.

With the economy currently in recession, companies in all industries are searching for ways to control expenses. Even in situations where a customer attributes significant value to the services provided by business consulting firms, these services may not be deemed critical in the short-run. As such, we expect that the operating environment faced by the business consulting firms will be challenging for the foreseeable future.

There are several ways in which we expect the current recession to negatively impact the business consulting industry.

First, existing clients may either delay decisions on whether or not to retain a consultant firm until economic visibility improves, or add fewer services than they would in periods of economic growth. With demand down, utilization rates (the amount of time billed in relation to amount of time worked) would likely continue to fall, and operating margins would contract. This scenario would lead to the most significant short-term impact on the consulting firms.

Second, existing clients that delay services may find that they can get by without the support provided by consulting firms. This scenario could potentially have a longer-term impact on the business consulting firms. Just as it is more difficult for retail companies to raise product prices after they have been lowered, so too would it become more challenging to convince customers to increase their expenditures on consulting services after a period of going without.

Third, customer growth could slow significantly, as potential new customers would be significantly less likely to add consulting services when budgets are tight. This scenario is the most significant, in our opinion, as it has the potential to cause the greatest long-term negative impact on the business consulting industry.

The amount of revenue growth that can be generated by existing customers is naturally limited.