Industry Analysis

3 May 2011

ROBERT PAUL ELLENTUCK

BACKGROUND

In evaluating the competitive forces affecting Deloittes future performance, it was quickly

apparent that the size and diversity of the firm demanded more focused scrutiny. Accordingly, I elected to ignore the audit, tax and advisory sectors, instead focusing on my own service line federal consulting services. Within this area, a variety of work streams exist supply chain, single entity for the purposes of this assignment. Negative Force Buyer Power

financial, change management, technology transformation but Ill attempt to address them as a The single biggest impediment to Deloittes future growth stems from buyer power. More

specifically, the ability of the government to leverage their power to strike favorable contracts revisions to the Federal Acquisition Regulations (FAR) favor firm fixed-price contracts an their bids must demonstrate a 10% cost savings over government performance to even be would have been subverted by the individual agencies through the hiring of additional realized with every contract renewal or option year extension Sec. Gates has already guidance, so the agencies have readily complied. arrangement that requires the contractor to absorb the majority of risk. Unlike private sector

and/or to curtail those relationships is a threat to Deloittes federal contracting business. Recent contracts, Deloitte cannot increase prices to compensate for assuming the additional risk; rather, considered by procurement specialists. The recent budget crisis, the cap on civilian salaries and of curbed spending habits under the Obama administration. In other times, these restrictions to reduced spending levels), Secretary Gates has announced a strategic objective to reduce all

the reduced recruitment of government personnel (even in the face of attrition) are all indicative contractors, but quite the opposite is currently true. Even in the defense sector (usually immune federal defense contracts by 10%. Across service lines and OSD agencies, this objective is being demonstrated his commitment to rejecting any budget request not in keeping with his planning for existing and proposed work. Despite the number of federal consulting vendors, there are

The effect of this increased buyer power will translate into more fierce competition between firms relatively few firms of commensurate size and ability for any given type of support. That said, the ability of small, boutique firms to win awards by undercutting on price is a real threat that cannot

be ignored. With firm fixed-price contracts, the government is only concerned about the final

product arriving on the specified delivery date; the means by which the product is produced is of no material significance, so price often becomes the deciding factor. Additionally, the switching reallocate the obligation to another vendor. Theres absolutely no chance of forward vertical competitor might be struggling to deliver. Deloitte should also focus on producing highly differentiated products/services, so that theres a stark availability of substitutes for the government to consider. Positive Force Barriers to Entry / Exit

costs for the government are minimal; in fact, they can terminate any contract without cause and should mitigate this risk by pursuing increased efficiency with existing contracts doing more

integration by the consultancy, since private firms cannot acquire government entities. Deloitte

with less and anticipate emerging areas where support might be required whitespace or a

In the realm of federal consulting, there are few barriers to entry and exit for most firms

excepting the highly technical, specialized procurement contracts in aerospace and defense for equipment, weapons systems, etc. Well confine our consideration of the industry to the more management, business process re-engineering, etc. While many of the factors low capital software would seem to indicate increased competition between firms, there are really only between the firms, the absence of barriers to entry allows firms like Deloitte to leverage their account capture from an incumbent. Government acquisition policy mitigates the risk of any

generic functions that are routinely outsourced strategy and operations, supply chain, change

requirements, low switching costs, few unrecoverable expenses, absence of patents/proprietary experience to enter different market segments and frequently pursue whitespace, as opposed to

three other companies of commensurate size and function to Deloitte. While some rivalry exists retaliation from competitors, since vendors are expected to adhere to certain standards. Deloitte arrangement. The absence of entry barriers both into the world of consulting as well as within the different segment of the industry enable firms to compete in a new profitable arena with relative ease.

also has the ability to strike highly specialized agreements with the government through teaming

arrangements with smaller firms; more specifically, the technical knowledge of the few specialists can be combined with Deloittes resources/knowledge for federal contracting to create a lucrative

If a particular focus turns unprofitable, then Deloitte can quickly exit the arena and focus its

resources toward another government function. More specifically, there are few specialized

assets or fixed costs of exit. Usually, the contractual commitment to finish the current period of diverse firm, the learning curve for new ventures is minimal since a library of knowledge and cost or specialized assets of little use in other pursuits.

performance will be the only hindrance to exiting an unprofitable consulting realm. As a large and resources can be consulted and leveraged. In the teaming arrangements described earlier, those joint ventures can be quickly dissolved in the event of strategic redirection. The absence of exit barriers enables firms to leave unprofitable schemes without being saddled with extraordinary