FTI Consulting (FCN)

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Thomas Shyr

FTI Consulting (NYSE: FCN) is a global consulting firm that addresses financial, legal, and operational issues for a diverse range of clients, including corporations, law firms, and government entities. In the wake of the Enron and WorldCom scandals, the Sarbanes-Oxley Act excluded auditors from providing consulting work to their public clients. This fundamentally changed the landscape of the consulting industry, creating a mass migration of consultants from large accounting firms to independent advisory groups, like FTI.

The firm has, however, faced stiff competition from a wide range of advisory firms, and its operating margins have fallen. To sustain growth and improve profitability, FTI has focused on addressing fast growing niche markets, such as forensic accounting and environmental compliance. As evidenced by its acquisition of London-based Financial Dynamics, FTI is also to seeking to strengthen its international presence.

Company Overview

Business Financials

In 2009, FCN earned a total of $1.4 billion in total revenues. This was a modest improvement from its 2008 total revenues of $1.3 billion. Unsurprisingly, this had a positive effect on FCN's net income. Between 2008 and 2009, FCN's net income increased from $125 million in 2008 to $143 million in 2009.^[1]

Business Segments

FTI is divided into five distinct business segments:

Corporate Finance/Restructuring Consulting

This practice provides advisory services to firms dealing with financial and operational restructuring issues. This practice also advises firms undergoing mergers or acquisitions.

Forensic/Litigation Consulting

This practice assists clients in all aspects of investigation, litigation, and trial support services.

Economic Consulting

Consultants in this practice provide expert testimony on intellectual property, antitrust legislation, and other regulatory matters.

Technology Consulting

This practice focuses on the collection and production of electronically stored information, including e-mail, computer files, voice mail, and instant messaging.

Strategic and Financial Communications Consulting

Consultants in this practice provide advisory services related to brand communications and public affairs management.

Key Trends and Forces

Bankruptcy / Restructuring Cycle

As the housing slump and credit crunch continue to weigh on the U.S. economy, FTI's corporate finance and restructuring advisory services are positioned to benefit from an increase in bankruptcies and defaults on corporate debt. Demand for FTI's market leading restructuring practice is highly cyclical but also fairly non-discretionary; a firm in severe financial distress has little choice but to turn to firms like FTI.

'Rise in Volume and Monetary Stakes of Litigation

The heightened focus on corporate mismanagement, fraud-related investigations (following the Enron and WorldCom scandals), and ongoing SEC regulatory activity drive demand for external advisory services. Specifically, FTI's forensic, litigation, and economic practices have seen tremendous growth as increasing litigation costs require firms to focus on better managing risks in the litigation process, particularly by utilizing consultants in complex and high-stakes cases.

Regulatory Reform

As a result of increased regulatory complexity, firms engage consulting firms to provide objective and independent expertise. Indeed, according to Glass Lewis & Co., an institutional investor advisory firm, the number of financial restatements by U.S. public companies reached 1,195.^[2] The emerging trend of hiring consulting firms unaffiliated with company auditors (a result of The Sarbanes-Oxley Act of 2002) represents an ongoing shift in the composition of the industry.

Globalization

The increasing globalization of the economy drives business consolidations and compliance requirements. Multinational firms are seeking to establish global footprints and expect consulting firms to assist them along the way. Globalization stands to generate increased demand for external advisory services, and FTI's long term goal is to generate 40% of its total revenue from non U.S. case work.

Competition

Market Overview

The consulting industry is loosely divided into four categories that feature highly fragmented competitive landscapes:

• Human Resources Consulting: Mercer International, Hewitt Associates, Towers Perrin, Deloitte Consulting.
• Information Technology (IT) Consulting: Accenture, BearingPoint, IBM Global Business Services.
• Outsourcing / Staffing Consulting: Robert Half International, Manpower, Korn/Ferry International.
• Operational and Financial Consulting: McKinsey, Boston Consulting Group, Bain, Booze Allen Hamilton, Watson Wyatt, Huron Consulting Group, FTI Consulting, CRA International, LECG, Navigant Consulting, Exponent, Corporate Executive Board Company.

FTI's closest peers are the independent consulting firms that provide similar financial and operational consulting services to many of the same clients. As the "Big 4" accounting firms continue to bleed market share in the financial and operating consulting market, a tremendous opportunity exists to become the dominant provider of these advisory services. This market has several unique characteristics:

1. Demand is typically non-discretionary and insensitive to economic cycles, but is highly volatile quarter to quarter, as the work is largely case or project-based.
2. Price is typically not relevant in a firm's decision in choosing a consulting firm, as these fees are rounding errors in high stakes litigation cases or restructuring efforts. Moreover, seeking the cheap option in forensic investigation of financial records can be seen as a failure of due diligence for boards of directors. Thus, clients choose consulting firms based on organizational or individual consultants' reputations.
3. Consulting requires little capital investment or working capital requirements, thus resulting in low levels of debt and strong free cash flows , which provide important performance and valuation metrics.

Relevant Peer Group

• Huron Consulting Group is a consulting firm that provides financial and operational advisory services.

• CRA International is an economic, financial and management consulting services firm.

• Navigant Consulting is a provider of regulatory, financial and operational advisory services.

• LECG is a provider of expert services that include economic and financial analysis, testimony, litigation support and strategic management consulting.

Competing Cost Structures

Demand for financial and operational consulting services is non-cyclical and has shown no signs of slowing down. Thus, the key determinant of these firms' future success is their ability to contain costs, especially costs related to consultant hiring, compensation, and retention. These firms operate under two distinct organizational structures that determine how consultants are paid:

• The Star Model (LECG, CRA International,Inc. ): In this model, consultants receive a majority of their hourly billing fees as direct compensation. This, combined with a decentralized structure and minimal hierarchy, gives consultants significant independence and autonomy. This model creates an attractive environment for top talent, and allows the firm to provide unique services that are difficult to imitate. However, compensation is based on individual work, not firm profitability, and thus there is no collective effort to build organizational brand equity or realize economies of scope.

• The Partnership Model (FTI Consulting, Huron Consulting Group , Navigant Consulting): In this model, consultant revenues are pooled and distributed based on partner status. This, combined with a bureaucratic hierarchy designed to maximize operational efficiency, forces consultants to work to improve overall firm performance. Revenue becomes less case-driven, as demand is not tied to individual consultants but to firm reputation. However, this organizational standardization can lead to a commoditization of services, and the extra layers of management can dissuade top talent from joining the firm.

References

1. ↑ FCN 10-K 2009 Item 6 Pg. 30
2. ↑ Huron Consulting 2007 Annual Report, Industry Background, Pages 9 - 10. [1]