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IT consulting: Small firms flourishing
Getting a piece of the IT services pie...

By Anthony Plewes

Published: Thursday 18 November 2004

Anthony Plewes examines how the small consultancies are faring in the burgeoning IT services market - and how they can compete against the big guns.

The IT services market is huge - $539bn in 2003 says Gartner - and is getting bigger every year. The sector grew by 6.2 per cent last year and that is against a backdrop of static or even falling IT budgets.

The big firms like HP and Accenture profited nicely from this growth. The top ten reaped some $135bn, with IBM alone accounting for $42bn.

But it is wrong to think there is work for giants only. Tens of thousands of small IT consultancies and freelancers supply their services to all manner of companies - those of a similar stature to giant multinationals. And with the market continuing to grow quicker than GDP, IT services remains a healthy market to be in, whatever your size. The good times are back.

All sizes of IT consultancies felt a financial squeeze at the end of the Y2K gravy train and ecommerce fad. The market contracted as clients cut back on their external IT spend. But instead of merely keeping activities in-house, thousands of skilled in-house staff and contractors were lost as budgets got further squeezed following 9/11. Now, with confidence returning to most sectors, companies are crying out for the skills they once had in-house.

Steve Watmough, managing director at Chester-based IT consultancy Xantus, says: "The corporate IT consultancy function does not exist in big companies. They made so many of their staff redundant. We offer them specialist advice in matters such as change control and disaster recovery."

The main differentiating strategy for smaller consultancies is honing in on niche areas. Software development, for example, is area where specialist small consultancies can help larger companies cope with their reduced internal resources.

Another consulting house, Exoftware, provides mentoring for companies who want to change the methodology of their software development processes with 'agile' techniques such as dynamic systems development methodology (DSDM) and extreme programming (XP). Priya Patel, director at Exoftware, says: "This type of development can really cut down on development times. For one client, it brought the software test cycle from three months down to two weeks."

Some companies may have started out as general consultant but have found the specialist route more productive. Bob Moul, operations director at consultancy Zeda, says: "It became increasingly difficult to differentiate ourselves with a general proposition, so we now focus on specific skills. This scores over the big consultancies as they are typically programme managers for large deals. Plus, the big firms have to find partners to help them deliver and this is often where we fit in."

Although they operate in the same market, smaller consultancies do not typically compete directly with the larger consultancies. This is partly because the contract sizes are different but also because there are subtle differences in the nature of the work.

"Over the last four years many of the big consultants have moved into service delivery rather than just advising," says Xantus's Watmough. "We can therefore target the advising opportunity. We can also position ourselves as independent because we are not only looking to win work for ourselves."

They also tackle IT problems more strategically than big firms. "Our approach is different to the larger consultants, we do not take an 'army' approach and send in loads of consultants," says Exoftware's Patel. "We think that there is a backlash against that sort of approach."

However, not all industry sectors welcome small-scale consultants. Chief amongst these is the public sector, where the procurement process does not do smaller businesses any favours.

"Most tenders for the public sector in our experience have several hurdles that companies have to pass before they can even be considered for tendering for a government contract," says Patel. "While some of them clearly make sense, often these criteria favour larger companies and smaller companies cannot even get a look in. In the private sector you have more room for negotiation because there is less structure and rules."

But even if smaller consultancies find it difficult to compete directly in public sector tenders, others will be able to get involved by working in partnership with a larger consultancy. Partnerships are an important part of doing business for smaller consultancies. They can, for example, broaden the skills base of specialist consultancies.

Zeda forms alliances with both product vendors and other services companies as needs dictate. "We have alliances with product companies because we are not interested in throwing bodies at problems," says Moul. "We will go into a project with a product vendor if it makes sense, for example where the project involves 40 per cent product with 60 per cent services wrapped around it."

"We also have partnerships with other service providers," adds Moul. "Many companies have gaps in their portfolio and we can fill these with our own core specialities. For example, we have specialists in application testing and this makes us obvious partners for application development companies who sometimes skimp on back-end testing. We do the product testing for them before the application goes live."

Smaller companies are also unlikely to market directly to the end user because of the cost that is involved. Nigel Atkinson, co-founder of software services firm Neoworks, says: "We partner with marketing and design agencies or with other IT companies. It is simply too expensive to market ourselves directly to the end-user market."

Unfortunately small IT consultancies can't draw upon the trust that is built into a brand such as IBM and therefore need to work hard at building trust within their customer base. This is particularly important for start-ups which typically do not have a client base to call upon.

"It is hard to get into the market. You need to build up trust and experience in your practice," says Watmough. "Trust is hard won and easily lost. Smaller consultancies can't afford to lose that trust - which makes each contract very important to us."

This makes attention to detail in customer service extremely important for small consultancies. Getting the correct staff, therefore, is very important, as the company may not get another chance if they make a mistake.

Neoworks' Atkinson says his project teams carry out peer review to make sure each others' projects are on track. This helps pick up any potential problems before it is too late. Staff also need to be kept interested and this will partly dictate which projects their firms will choose to take on.

Given that smaller consultancies strive to offer more personalised relationship management than the larger consultancies, many of them are wary about expanding too much. "We work at a CIO level and there are only so many relationships that you can work effectively on," says Watmough. "I think the optimal size for a smaller consultancy is less than 100 and probably nearer 50."

"The best way to expand beyond this while still keeping the 'small' ethos would be to split the business into practice levels and give them a certain amount of autonomy," adds Watmough.

Neowork's Atkinson says there is an even lower bar for small consultants. "Ten to 15 consultants is the perfect size because above that organisational issues become a bigger factor, such as work scheduling and team management. While we remain small we can be very responsive on availability, for example."

So despite the apparent dominance of the large consultancies in the IT services market, it is clear that much of the business is still being won by small consultancies who are happy to focus on niche areas.

Anthony Plewes is a freelance journalist based in London.