Huron Consulting Group (HURN)

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Z K

Michael Luddy

Andrew Lewis

Huron Consulting (NASDAQ: HURN) is a consulting firm speicalizing in financial analysis for M&A transactions and liability analysis for legal disputes. The firm also provides clients with operational consulting services aimed at helping them to reduce costs. Huron works with a broad range of clients including Fortune 500 companies and 50 of the largest US law firms.^[1]

Business Overview

Business Segments^[2]

Huron provides services through two segments: Financial Consulting and Operational Consulting. Huron's clients include corporations, law firms, academic institutions, health care organizations, and government entities.

Financial Consulting (16.4% of total revenues)

Consultants in this practice provide economic and financial analysis and expert testimony regarding issues that arise from litigation, business disputes, and governmental regulations. Consultants also perform valuations on assets and transactions, and serve as interim management for distressed hospital systems.^[3]

Corporate Consulting and Accounting (85.7% of total revenues)

Consultants in this practice aim to help clients improve the overall efficiency and effectiveness of operations by enhancing revenue, reducing costs, and managing regulatory compliance. Huron seeks to understand each client's unique situation and thus give tailored advisory services to generate sustainable results.^[4] This segment can be further broken up into the following: Legal Consulting, Health and Education Consulting, and Corporate Consulting.^[5]

Huron's strong revenue growth is attributable to the depth and breadth of its client relationships, the non-discretionary nature of its advisory services, and the firm's ability to maintain steady billing rates while rapidly growing its consultant headcount.

^[2]

Key Trends and Forces

Operational Challenges in the Health Care Industry

Huron is a leading provider of consulting services within the Health Care industry. Huron has provided services to 50% of the nation's largest Health Care systems, and strengthened this practice with the acquisition of Aegis Advisors, a strategic consulting firm focused specifically on advising healthcare providers. The constant changes in rules and regulations surrounding Health Care administration, including rising insurance premiums and the increasing number of uninsured citizens, has driven demand for Huron's services, and continued challenges in this industry will positively affect Huron's results.

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. The volume of this activity, along with litigation arising from business disputes, does not necessarily correlate with the economic cycle. Specifically, Huron's legal consultants have seen consistent demand as these conditions require firms to focus on better managing risks in the litigation process.

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, although Huron currently has no material international presence. Huron faces significant challenges in building an international platform, but it nonetheless represents a significant growth opportunity for the firm.

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.

Huron'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

• FTI Consulting is a global consulting firm that addresses financial, legal, and operational issues for a diverse range of clients.^[6]

• CRA International is an economic, financial and management consulting services firm.^[7]

• Navigant Consulting is a provider of regulatory, financial and operational advisory services.^[8]

• LECG is a provider of expert services that include economic and financial analysis, testimony, litigation support and strategic management consulting.^[9]

Competing Organizational 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. ↑ HURN 2007 10-K, pg.5
2. ↑ ^{2.0 2.1} HURN 2009 10-K pg. F-46  
3. ↑ HURN 2007 10-K, pg.31
4. ↑ HURN 2007 10-K, pg.31
5. ↑ HURN 2007 10-K, pg.31
6. ↑ FTI 2007 10-K, pg.39
7. ↑ CRAI 2007 10-K, pg.24
8. ↑ NCI 2007 10-K, pg.17
9. ↑ XPRT 2007 10-K, pg.39