The Business of Government Consulting
“Geographically, DC might be small, but in terms of consulting, it’s huge,” according to Drew Deogracias, MBA ’10. Washington, DC’s high concentration of consulting firms, particularly those that specialize in federal practice, is what attracted Deogracias, a consultant at Deloitte, to the area.
“I knew I wanted to work [in federal consulting], so when the opportunity to come [to DC] came up, I seized it,” he said.
Twenty years ago, federal consulting didn’t exist as an industry, at least not on a large scale. Today, it’s a multibillion-dollar field, with firms—big and small—vying for high-dollar projects from government agencies and departments.
In 2012 alone, more than $500 billion in federal dollars was awarded in contracts to hundreds of companies, most in the DC region.
BIRTH OF AN INDUSTRY
The number of companies entering the consulting field has grown exponentially in recent years, in large part because regulations limiting the services one firm can provide have been lifted. The expansion of the large accounting firms Deloitte, KPMG, EY (formerly Ernst & Young), and PricewaterhouseCoopers into consulting is a prime example.
When Congress passed the Financial Services Modernization Act of 1999, known as the Gramm- Leach-Bliley Act, many of the regulations that had limited large firms’ reach since the stock market crash of 1929 and the Great Depression were stripped away. For the first time in decades, large professional services corporations were now free to acquire smaller, more narrowly focused companies and expand their business.
“Firms that used to be incredibly specialized, like the big accounting firms, [could] broaden their practice base because those regulations weren’t there to prevent them from branching out,” said Associate Professor Mark Clark, an expert in human capital management. “They moved far beyond just bookkeeping.”
One firm could now provide any combination of insurance coverage, investment banking advice, and commercial banking services, among other resources, to the same client. PricewaterhouseCoopers alone now had specific departments for audits, risk assurance, tax accounting, and consulting services, for both the private and public sectors.
“Now these large firms, who [had] gotten to know their client agencies very well over the years, [were] free to tap into that knowledge and offer more,” said Clark.
But reducing regulations around client service offerings didn’t reduce outside scrutiny. The Big Four were still subject to close study for any signs that they might be violating conflict of interest by offering investment advice and auditing services to the same client.
During the years surrounding the turn of the century, the consulting branches of these firms grew rapidly. But as the Securities and Exchange Commission voiced mounting concern, especially after the Enron scandal, most firms slammed on the brakes.
After nearly a decade of lucrative expansions into professional consulting coupled with financial auditing work, the Big Four began divesting their consulting practices. By the end of the decade, only Deloitte remained deeply entrenched in the consulting business. Other firms, such as Lockheed Martin, CSC, and Booz Allen Hamilton, reaped the benefits, picking up big contracts in defense and technology.
WORKING FOR THE MAN
By focusing on federal clients, consulting practices face fewer concerns about conflicts of interest while still winning high-dollar contracts. Lockheed Martin, based in Bethesda, Maryland, earned nearly $37 billion in federal contracts in 2012, more than any other company.
According to the US Bureau of Labor Statistics, the umbrella industry “Management Analysis,” which includes government consulting, is projected to grow 22 percent by 2020, much faster than the 14 percent average of all other industries tracked.
To Clark, this projection is conservative. “As more and more firms and agencies realize it’s a better use of their resources to hire itinerant consultants to oversee the regulatory components of bigger projects than to build expertise internally, we’re going to see an even bigger need.”
WHERE THE WORK IS
There’s no denying DC is a town of consultants, particularly federal. Of the top 200 federal contractors by dollars awarded in 2012, nearly 20 percent have company headquarters in the area. According to a report by Bloomberg Government, 32 companies in the greater Washington area won more than $104 billion, or 20 percent, of all contract dollars just last year.
A high concentration of big firms acts as a magnet for those interested in getting into federal consulting. “We are right in the middle of the strongest market for federal consultants,” said Professor J. Alberto Espinosa, who has seen many of his students enter the IT consulting field after graduation.
“This is a big reason why our students come here.” According to Arlene Hill, director of the Kogod Center for Career Development, since 2009 at least 15 percent of MBA students employed after graduation have entered the federal consulting field. In 2010, all graduates who went into consulting were on the federal side.
As bright as the industry has become, its future is nearly as uncertain. As sequestration continues— mandated by the Budget Control Act of 2011, which calls for federal budget cuts of $917 billion by 2021—many government departments and agencies will have to do the same work with less money. Whether or not this will have a negative effect on the federal consulting industry is up for debate.
“It’s hard to guess how [government agencies] are going to let the sequester impact their consulting contracts,” Espinosa said. “They may award fewer contracts, or [think it’s] easier to hire temporary consultants than to lay off an entire department, or decide they need help streamlining and bring in even more consultants. A lot is still unknown.”
An annual survey of 366 government consulting firms recently released by Deltek Inc., an information-solutions firm based in Herndon, Virginia, shows that the No. 1 financial challenge these firms expect going forward is the “Decreasing and/or Unpredictable Federal Spending Environment.”
The industry’s complete reversal in self-outlook reflects this worry. While most respondents of the 2011 survey on average predicted a staggering 20 percent growth rate from 2011 to 2012—nearly three times the actual rate of 7 percent—expectations for 2012–2013 are a much more subdued 0-9 percent growth.
“The industry is definitely changing in light of [government] cost cutting,” said Deogracias. “It’s possible we’ve seen some decline [in growth], but it’s still a steady industry.”
Steady, and increasing in profit. Firms of all sizes reported an increase in profit margins from 2011 to 2012. Of the largest firms that completed the survey—those that did more than $100 million of business in 2012—13 percent reported an increase in profit of more than 15 percent.
But whether those numbers will continue to rise is anyone’s guess.