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.
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.
FTI is divided into five distinct business segments:
This practice provides advisory services to firms dealing with financial and operational restructuring issues. This practice also advises firms undergoing mergers or acquisitions.
This practice assists clients in all aspects of investigation, litigation, and trial support services.
Consultants in this practice provide expert testimony on intellectual property, antitrust legislation, and other regulatory matters.
This practice focuses on the collection and production of electronically stored information, including e-mail, computer files, voice mail, and instant messaging.
Consultants in this practice provide advisory services related to brand communications and public affairs management.
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.
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.
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. 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.
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.
The consulting industry is loosely divided into four categories that feature highly fragmented competitive landscapes:
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:
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: