Consultant Calvin Cobb recalls a 1998 meeting in Boca Raton, Fla., of the business consulting partners at Ernst & Young as a kind of beginning of the end. He remembers Roger Nelson, the executive who more than doubled the consulting business's revenue over three years to $1.2 billion in 1996, proclaiming that the days of implementing enterprise resource planning (ERP) software and Y2K-compliant computer systems were coming to an end. For the first time in more than a decade, Nelson told the gathering, there would be no "next big thing" in business consulting.

"In retrospect," Cobb says, "I'd say the group didn't get it. It had all been 'up and to the right' for so long that everyone thought there would be no end to it." Information technology (IT) projects and associated business process reengineering had translated into big business for the consulting world, Cobb says, and "everyone assumed that the Internet would be even bigger."

Nelson was right, however. Things got smaller fast for the high-flying business consulting industry of the 1990s. In 2002, the global consulting industry experienced its first year of revenue shrinkage after more than a decade of double-digit growth. Following further revenue contraction in 2003, a fundamentally changed consulting profession began a slow climb back to profitability last year.

BRAIN BANK The first of Accenture's 40 global delivery centers focuses on chemicals. It opened in Wilmington, Del., in 1996, staffed by former DuPont information technologists. ACCENTURE PHOTO

George Verghese, director of strategic planning and business analysis at Dow Chemical, sums up the new take on consulting in the chemical sector. "Our use of consultants has decreased substantially in the last decade," Verghese says. "We no longer rely on them for strategic decision analysis, but rather to tap a particular tool or skill set that we find beneficial."

At Chemtura, the company recently formed by Crompton's acquisition of Great Lakes Chemical, consultants are used to provide what Myles S. Odaniell, senior vice president for performance chemicals, refers to as "surge capacity"--an extra boost of industry know-how or expertise when in-house resources run short. Chemtura, for example, recently hired McKinsey to consult on integrating the two chemical companies and launching the new firm.

Generally, Odaniell sees the purview of consulting shifting from IT infrastructure, reengineering, and major cost reduction initiatives to a "more focused" deployment in areas such as new product development and R&D efficiency improvement. "There is also a lot of work on the commercial side," Odaniell says. "On value pricing--trying to better understand the value of the products to customers."

All of this requires a lot more familiarity with the chemical industry than does ERP software implementation, and none of it will fuel 10 years of double-digit growth for high-priced consultants.

Most observers agree that business consulting is dealing with a major comeuppance. "In my view, consulting got a black eye" in the 1990s, says Cobb, who recently formed an independent consulting firm. "Every dog has its day, and the consulting industry had its day. But in actual fact, clients were taken advantage of. That comes back around to haunt you."

Predictably, there has been a shakeout. Jess Scheer, editor of Consultants News, an industry newsletter published by Kennedy Information, sees a "war for talent" in which downsized consulting firms compete not only with each other but also with their clients for the most experienced professionals. "Industry jobs have become more attractive in the downturn and will likely remain more attractive until we get to the point where [consultant] fees start increasing," Scheer says.

According to Scheer, IT-based consulting firms laid off 15­20% of their workforces during the downturn. Non-IT business consulting firms saw their staff shrink by 10­15%, mostly through voluntary attrition. "The vast majority of those who left went into industry," Scheer says. Many are now in the position of hiring consultants. "This has dramatically changed what clients will buy and what consultants sell," he adds.

It has also changed what consultants earn, given that an in-house strategy professional is paid roughly half of what business consultants have historically been paid to do the same work. "Consultants have done this kind of work before, and maybe they are better at it," Scheer says. "But are they twice as good at it? This kind of math is being done over and over again."

Scheer sees the downsizing of business consulting as a much-needed course correction. "Consultants should be trusted advisers," he says. As such, the chemical industry's difficult period from 2001­04 "should have been the growth years for the consulting industry." Instead, he says, consultants were eliminated as an unjustifiable cost when the recession hit. "Clients are still upset with the way too many consultants overpromised and underdelivered," Scheer says.

Still, in a recent report, Christine Ferrusi Ross, an analyst with Forrester Research, cites ample opportunity going forward for business consultants to help corporate clients meet new challenges.

Industrial firms, for example, will put increased attention on understanding the strategic implications, beyond simple cost cutting, of operating in China, India, and elsewhere offshore. A changed regulatory environment--specifically the advent of the Sarbanes-Oxley Act, the Patriot Act, and the Health Insurance Portability & Accountability Act--will have far-reaching implications for how companies handle their business processes, technologies, and relations with employees.

However, Ferrusi Ross also anticipates changes in the way industrial clients hire and work with consultants. She argues that clients will take a more active role in consulting engagements than they have in recent years, using consultants primarily as coaches for projects that are implemented in-house.

Companies will cut back on the number of consultants employed per project and require a higher level of expertise of consultants, she says. "This is a marked shift from the dot-com days when firms hired consultants to describe new technologies and potential uses," Ferrusi Ross writes.

CONSOLIDATION in the consulting industry actually started in the midst of its boom, fueled by a move in the mid-1990s to separate business consulting units from tax and auditing divisions at the big accounting firms.

This became headline news in 2001 during the demise of Arthur Andersen in the wake of the Enron scandal, by which time several consulting firms, notably Andersen Consulting, had already spun off from their accounting counterparts in a response to competitive pressures and an effort to avoid conflicts of interest. Andersen Consulting spun off in 2000, forming Accenture, though Andersen Consulting and Arthur Andersen had been operating as separate entities with their own chief executives since the early 1990s.

Ernst & Young also split its auditing and consulting businesses in the 1990s. Its consulting practices in chemicals and in other industry sectors were purchased by Paris-based Cap Gemini in 2000 in an effort by the latter to establish a stronger North American practice.

Subsequently, PricewaterhouseCoopers, formed by the merger of Coopers & Lybrand and Price Waterhouse in 1998, sold its consulting practice to IBM, a last-minute change from the original plan to spin off the consulting operation as a company called Monday. KPMG Peat Marwick followed with a spin-off of its consulting business as Bearing Point.

Deloitte & Touche moved to separate its consulting and auditing practices by creating a new consulting firm called Braxton. The deal fell apart, according to Tom Marriott, head of the chemicals consulting practice at Deloitte, when the bottom dropped out of consulting revenues in 2002.

The separation of consulting from tax and auditing had some surprising effects, most of which played out in favor of the auditing divisions, Cobb says. While it was assumed that tax and audit services would stagnate with the loss of the fast-growing business consulting arms, it soon became apparent how dependent the flashy reengineering gurus were on the comparably drab number crunchers. Cobb says Ernst & Young's consulting practice dropped significantly one year after the split. And Sarbanes-Oxley, he says, has been more of a boost to the tax and audit outfits than to the business consultants.

Most of the large consulting firms have a similar story to tell. Marriott, for example, describes a late-1990s wake-up call at Deloitte. "It was like driving 100 miles per hour into a brick wall," he says. "It was like, 'Whoops! Where did all that demand go?' It was a rough adjustment, but no more so for the consulting industry than any other. Everyone had a rude a wakening in 2001."

After that, Marriott acknowledges, Deloitte lost its timing. Rather than counting on the Internet and e-business, the firm had decided to promote the kind of top-line growth strategies that wouldn't end up catching on until the economy rebounded in 2004. "We started gearing up for it in 1999 and 2000," he says. "I still have PowerPoint slides from that time titled 'Are You Ready for the Upturn?' We were a little bit ahead of where people were."

The question of how the business savants got it so wrong will likely linger as an embarrassment to the consulting industry. Current practitioners in the chemical market, however, claim they have moved on, recalibrating their approach and reconnecting with clients. While IT continues to constitute a significant portion of the work being done--Marriott says it has dropped from nearly 70% of Deloitte's overall business to about 35%--the projects tend not to be the big, multiyear projects typical of the 1990s. And the relationship between client and consultant has "flipped," according to Marriott, with the client running the project and the consultant taking orders.

Outsourcing, a major hallmark of the 1990s, has also reemerged in a scaled-down format that caters to specific needs of the chemical industry. Accenture, which pioneered industry-specific IT application development when it took over DuPont's IT development in 1997, has set up 40 "global delivery centers" for this work in India, Spain, Brazil, Canada, and the U.S.

The first of these, staffed originally by the outsourced IT department of DuPont, is housed in a former John Wannamaker department store in Wilmington, Del., and still serves the chemical industry.

SAP software implementation was a major focus at first, but according to Tommy Mann, who heads Accenture's chemicals practice, the firm in recent years has gravitated toward business consulting projects. Supply-chain management, sales, and marketing work are tailored to the needs of chemical producers, he says. R&D is also a new focus. "We aren't doing the science," he says. "We are improving how the client does science."

Accenture's background in reengineering comes in handy. "When you get into the R&D centers of a lot of chemical companies, it's pretty archaic," Mann says. "There are still a lot of notebooks." Some clients are technically unprepared to process the data from new techniques such as high-throughput screening. "We create services to help them manage and analyze the data," he says. "The scientists still do their job, but they focus more on designing and analyzing experiments than on executing them."

Accenture recently formed a partnership with Symyx under which Accenture develops applications for Symyx' software, which Mann calls "the SAP of R&D."

At Deloitte, the outsourcing process has been reengineered, Marriott maintains. Rather than the typical approach of taking over IT systems and staff "and renting them back at a lower cost," he says the firm takes over application support for specific IT products or projects.

The client retains ownership and decision-making regarding use of the technology, accessing the consultant's expertise in applying SAP and other software to chemical industry applications when and where needed. This approach has required Deloitte to hire IT system consultants with chemical industry backgrounds, he says.

Cobb says this kind of know-how will be needed to help chemical companies deal with a unique problem--connecting new business IT systems to manufacturing control and data monitoring systems. This is an engineering puzzle that requires intimate knowledge of chemical manufacturing and business management. Cobb says he seized on this opportunity by leaving Cap Gemini to establish a consulting business at Invensys, a major supplier of digital control systems and other manufacturing management software. The new consulting group gravitated more toward Invensys' refinery and upstream petrochemical business by the time Cobb retired and formed Calvin Cobb & Co.

Broad outsourcing of IT support has not completely dried up, however. According to Lute Quintrell, a partner in the petroleum and chemicals practice at IBM, the outsourcing of global IT management is still an important business for large consulting firms with resources in Asia and Latin America.

Last year, Dow Chemical awarded IBM a seven-year contract to manage its global IT infrastructure and implement a range of upgrades to support local- and wide-area networks, as well as voice, video, and e-enabled conference rooms. And early this month, Dow renewed a software applications contract with Accenture.

STILL, David E. Kepler, Dow's chief information officer, contends that the firm uses consultants sparingly beyond basic infrastructure support. "At Dow, we are very aware of the key knowledge we need to retain to remain competitive," he says. "Outsourcing and consultants are tools we use to manage our business model and the variable demands of our markets."

Marriott DELOITTE PHOTO

Consultants News's Scheer agrees that this is a fair assessment. "They are a smart firm with a reputation of having more seasoned veterans," he says. "They are mostly staffed by Ph.D.s and industry experts rather than a mix of relatively inexperienced types."

Much of the chemical industry expertise now deployed at CRA was added when the company bought A. D. Little's chemicals and energy unit in 2002. Top-line growth strategies are a major consulting focus, according to Coote, as is finance.

"There is intense interest in the private equity sector, driven by the perceived narrowing of risk differential between private and public equity portfolios and the continued out-performance of private versus public equity," he says. "People say the chemical industry is mature and that returns aren't great, but actually there is a very strong record of performance."

Cobb COURTESY OF CALVIN COBB

According to Wright, managers in the chemical industry are taking a close look at assets, customers, and product portfolios to determine new means of increasing efficiencies and revenue. They are deploying consultants "on a tighter brief to work on specific problems."

Wright argues that much of the redirection of consulting services stems from a change in the chemical industry unrelated to IT implementation or the recent economic downturn. He sees the industry coming to grips with a longer term evolution in business management. "Things have changed in the sense that in the 1990s, it was believed that you could innovate your way out of trouble or that people would see new value in new chemicals," he says. "In fact, what you've got is a lot of materials that are mature."

While this realization began to sink in as early as the 1980s, he says, the industry is only now tackling the challenge of managing mature businesses. "I think that you had a generation of managers through the 1990s who had lived in a world of continual market growth and who, for the first time in their executive careers, were dealing with stagnation, downsizing, and reshaping businesses," Wright says. "That required a set of strengths they didn't really have." Companies are now hiring consultants to work on the problem, he says.

Wright, in fact, does not see "in-house consulting" taking the place of hired expertise. "There are a lot of political issues at companies that inside consultants aren't good at dealing with," he says. Outside consultants, on the other hand, need to package their offerings more effectively.

"People value a consultant's ability to show them what to do in a language they understand," Wright says. "A lot of the generic consulting models have been so bound in consultant-speak that people haven't understood the thought behind it. It immunizes the client to the idea. They don't get the full impact, just a piece of the thinking. They implement it halfway without the power of the idea. We are careful in Solutia not to use 'consultantese.'"

Accenture's Mann points out that there is a key change at the top in chemical industry management. "There are new people coming into the senior executive ranks in the chemical industry," he says, pointing to Robert L. Wood, who took the top post at Crompton, now Chemtura, last year. "There is a younger generation of leadership that worked with consultants when they were midlevel managers." Thanks to these executives, the newly focused consulting industry is forging stronger partnerships with the chemical industry.

Deloitte's Marriott agrees. He sees relationships reverting to something akin to those of the late 1980s and early 1990s before the extravagances of the ERP software era. "Projects are smaller again, and there is a greater emphasis on achieving specific and measurable results," he says. "Clients are more disciplined buyers of consulting services. They want us to leave them capable of doing things themselves."

Observers agree that providing this kind of service will require consulting firms to cultivate their own discipline, given the unlikely prospect of a return to the big-ticket consulting engagements of the late 1990s. "I don't see a scenario in which clients get dumb again," Scheer says.