Our 21st Top Consulting Firms survey

Despite a gloomy economic outlook and fears of a serious recession, the top consulting firms last year added well over £1bn in fee income taking total earnings to over £7.1bn. The growth rate of nearly 18% was considerably more than most firms expected a year ago. It turns out that 2007 was the fourth consecutive year of fee income growth but the signs are that 2008 will be a very different proposition.

Our 21st annual Top Consulting Firms survey has actually produced quite a number of surprises, not least being the growth rate.

A year ago, the firms were projecting that fee income in 2007 would grow at around 11%, or less than the growth of the previous year. In fact, working through all the projections, the expectation was that the total fee income of the top firms would rise to around £6.6bn which, at the time, was thought to be pretty good going considering all the warnings of economic slow-down.

Surprise package

In the event, the growth was considerably more and a good deal of it came from the financial services sector. The worry now for the consulting firms is what might happen in this market in the current financial year.

Spending on consultancy by the financial services industry started to slow towards the end of last year. With high profile losses, the credit crunch and more than a handful of mega insolvencies, spending by this market could plummet and this is a major worry for the next 12 months and probably beyond.

The problem has always been that when the economy falters, the volume of consultancy bought by the financial services industry crashes. It doesn’t just slow ­ it drops by as much as a quarter in a single year.

Between 2001 and 2002, for example, the fall was 27%, or £430m, and it took five long years for consultancy fee income from this market to get back to where it had been. Considering that this is the largest market of all for consultants, and the most profitable, it very much looks as though consultants could be in for a rough ride.
What adds to the problem is that once this sector starts to cut spending on consultancy, others follow suite in rapid succession.

Because the financial services industry is so large in consultancy fee income terms, it has fuelled much of the apparent growth.

Other sectors have also grown, in some cases at a higher rate. The big question now is whether these other markets will start to cut spending, and if so, by how much.

As in previous years, our survey has focused on consultancy defined as business advice. Many of the larger firms on our list of the top consultants have revenue streams from outsourcing, facilities management, implementation and even IT hardware. It is for this reason that for some firms the fee income figures shown on our tables are much lower than the totals shown in financial statements. Simply put, revenue figures from other non-consultancy activities have been stripped out.

It is also for this reason that we have so many estimates. Published financial statements do not always show consultancy revenue anyway and what we ask the firms to provide are figures consistent with previous years.

Mostly, the figures come from the firms themselves but in a handful of cases the revenue figures are what we think the position is. This is particularly true of the strategy houses who seldom, if ever, provide very much financial information.

Another aspect to this is that we ask for figures for the UK business. This always poses a problem for some of the larger firms which like to bunch UK revenue figures with those of Europe, the Middle East and Africa.

As if to compound the problem, there is also the issue of what actually constitutes consultancy. The accountancy-based firms talk of advisory work which often includes corporate finance and risk management.

The strategy houses see this as something far removed from their task of taking a client company from point A to desired point B. And then there is the issue of how firms perceive their competitors. Deloitte, for example, views Steria (who acquired Xansa) as being in a completely different market if not on a completely different planet. There are even firms with very similar fee income figures who operate in quite different markets with completely different services and never compete against each other.

Consultancy has changed enormously over the years. When the first Accountancy Age top consulting firms survey appeared, it effectively listed the consultancy divisions of the larger audit companies. The range of services has changed too. It is an amusing aside, but all those years ago one of the senior consultancy partners of a large firm pointed out to us that the then ‘new’ information technology thing would never catch on, if only because one of the components of the early Amstrad computers was a rubber band.

This year there are a number of new names on the list of the top consulting firms. The largest of these is Steria, the new owner of Xansa. Our figures for previous years show Xansa fee income. We have estimated the fee income figures for Booz Allen Hamilton since the company does not provide financial information for public consumption.

The interesting thing about Booz is that the firm recently split in two with the US Government business remaining BAH majority-owned by the Carlyle Group. The commercial and international firm is, as of July 31, known as Booz & Co.

Mouchel comes onto the list following the acquisition of Hornagold & Hills last year and Hedra this year. We have kept Hedra on our list of top firms since it had 2007 fee income. We have also added Business Control Solutions, Celerant Consulting and CVL (which had fee income growth last year of 140%, the largest percentage gain of any firm).

Also on the list for the first time this year is MVA Consultancy, which focuses on the transport industry. Our figures show that it is actually the second largest consulting firm serving this market, with sector fee income that is not that far short of market-leader Accenture.

Another of the surprises that came out of the survey this year was just how large the volume of some firm’s fee income growth actually was. This year, three firms had fee income growth of more than £100m. Last year there were none.

There are 14 firms reporting fee income increases of more than £25m this year and half of those had gains in excess of £50m. As always, because of their sheer size, it is the largest firms that contribute the most to the total fee income gain figure. Last year we saw nine firms with total consultancy fee income above £200m and this year there are 14. Taken together, these firms account for £5.3bn of the total fee income of all firms on our list, or roughly three quarters of the total.

In addition, their combined fee income gain amounts to very nearly £830m, which is just over three quarters of the total £1.1bn gain.

Large firms seldom have the sort of percentage fee income growth that puts them amongst the leaders in terms of percentage gain but this year that changed. Management Consulting Group, with total fee income of £215 million, had growth of nearly 47% in their last financial year, the fifth highest percentage gain of all firms.

The sixth largest gain came from PricewaterhouseCoopers with fee income up by 39% to £402m. PwC actually had the second-largest fee income gain in terms of actual revenue in the last financial year.

These are actually not just very surprising figures, they are also very unusual. Typically it is the smaller firms starting from a much lower base that have the highest growth rates. CVL, a new entrant to our list this year, is just that and with a fee income gain of just £3.1m had the largest percentage gain of all firms.

Serco Consulting, part of the giant Serco Group, had the second largest percentage fee income gain with an actual fee income increase of just over £15m. EA Consulting Group, which had the highest growth rate of all firms in our survey last year, ranked fourth this year with an improvement of just over £7m, or 54%.

Interestingly enough, EA focuses on the financial services sector and new MD John Kopij (one of the founders of Hedra) is looking to grow the business to a £50m+ company in the next few years.
At the other end of the scale, several firms reported declining fee income in their last financial year.

This may be the start of things to come. As part of our survey, we ask the firms to project their fee income for the current financial year and as many of them are already well into the new year, they have a pretty good idea of what might happen.

What came back from this was cautious optimism. Few firms expect to see growth on the scale of last year but some markets looked promising. Communications and the public sector were the most prominent of these. Fee income from the public sector tends to increase by about 10% each year, not more. Fee income growth from the communications sector is much greater.

The survey was actually done before the recent turmoil in financial markets. The outlook from that sector is grim. It accounted for around 30% of total fee income in 2007, or roughly £2.1bn. A fee income fall of the same magnitude as 2001 could easily result in something like £580m coming off the top consulting firms’ total revenue figure in the current financial year, and that would just be the start of a decline.