Consulting budgets squeezed during economic downturn

Scaled-back IT plans in response to a slowing economy have led some firms to slash their IT consulting budgets in an effort to rein in spending.

The trend has taken its toll on consulting and systems integration firm Computer Sciences Corp. (CSC), which this month warned that its fiscal fourth-quarter profits would fall to 35 to 37 cents per share on a diluted basis, well below the 92 cents per share that analysts predicted. The profit warning cited a decline in demand in both the United States and Europe.

“Everywhere I look, companies are being told to ‘get rid of your contracts with consultants’ to save money,” said Dave Pensak, principal consultant in advanced computing technology at Du Pont Co. in Wilmington, Del.

El Segundo, Calif.-based CSC said it plans to eliminate as many as 900 jobs due to the earnings shortfall. Xpedior Inc., a Chicago-based e-business consulting firm, also announced last week that a decline in revenue has prompted it to lay off 300 employees, or 42 per cent its workforce. Xpedior also said it could run out of money by the end of June, and the company today disclosed that it had voluntarily asked to have its stock de-listed by the Nasdaq Stock Market Inc.

In a survey of 20 European and 50 U.S. CIOs released two weeks ago by New York-based investment banking firm Merrill Lynch & Co. Inc., nearly half of the respondents said they will spend less on this year’s IT budgets than they did last year. They also said the economic slowdown has forced their firms to prioritize or even delay projects. Forty percent said they would reduce the number of consultants they use.

“We normally maintain relationships with a number of consultants, but for the first half of this year, we’re aiming to reduce these relationships because of the change in the market environment,” said Steve Norwitz, a spokesman for Baltimore-based asset management firm T. Rowe Price Associates Inc.

Norwitz added that the consulting pullback is “being played out across the financial services industry.”

Last year, “everyone was trying to increase their revenues through consulting and Web transformation [projects],” said Joshua Randall, an analyst at Kennedy Information Research Group in Fitzwilliam, N.H. Today, “more clients are trying to control costs … one way they can do that is by cutting back on professional services spending,” he said.

Other companies are turning to offshore outsourcing. The Prudential Insurance Company of America in Newark, N.J., for instance, expects to save US$20 million or more per year by replacing some U.S. consultants with IT workers in a facility it opened last year in Ireland.