Consulting in the shadow of Ukraine

By Fiona Czerniawska

The tragic events in Ukraine over the summer are a salutary reminder of just how desperately unpredictable the situation there remains.

“Most Eastern European economies are growing, and that translates into growth in the consulting market, too,” says Leszek Wronski of KPMG, in our new report on consulting in the region. “On the other hand, we’re clearly worried about what could happen: the Ukraine border is 250km from where I’m sitting. We hope the situation will be resolved, but it’s unprecedented.”

Even before this latest crisis emerged towards the end of 2013, trouble was brewing.  For Eastern Europe, our research shows that demand for consulting was stronger than it was in 2012, with 6.5% growth taking the market to a shade under €1.1bn.  Poland, the biggest market by far, grew by almost 17%, but the much smaller markets in the Czech Republic and Slovakia are growing too.  Outside these countries, the remaining market barely scrapes €350m and some of the larger markets, notably Hungary, were still shrinking.

But while the Eastern European market is growing more quickly, growth rates in Russia were falling, down from a heady 17% in 2012 to 9% in 2013 (making the market worth around €840m).  In a country which Winston Churchill famously described as “a riddle wrapped in a mystery inside an enigma”, most of the consultants we spoke to were pessimistic about the prospects for 2014: business confidence is falling; projects are being put on ice.  It’s the attitude of investors at home and abroad which is critical now: as one partner put it, “Political uncertainty has a high impact on investment decisions – not only for international investors, but also for local investors and companies in export-led markets.”  Many are convinced that the economy will go into recession as a result, meaning that Russian businesses and state-owned enterprises are unlikely to make up the shortfall in demand created by Western companies which are radically curtailing their investment in the country.  Rates, already low, are expected to tumble.

This is going to lead to some difficult decisions for the big Western consulting firms based in Russia.  Despite the size of the Russian population and a generally excellent education system, the pool of people these firms want to recruit from among native Russian speakers is very small.  If they let people go now, when demand falls, they’ll not only find it hard to entice these people back when the market picks up (and the Russian consulting market has always had a boom-bust-boom quality to it) but may find that they have created a cadre of spin-off firms which have used the intervening period to build strong relationships with key corporations.  The alternative, though, will be to hang on at a time when it has become politically unacceptable to do business in Russia.

Most, we suspect, will dim the lights but not turn them out entirely.