Survey: Booming market, but uncertain outlook

by Phillip Abbott

03 Jun 2004

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After two years of decline, the management consultancy industry is starting to pick up where it left off before the gloomy days of 2001/2002.

The top 75 firms ranked by fee income F/Y 2003

The response to Management Consultancy's top 75 consulting firms' survey has shown a significant halt in the steep decline in the large majority of businesses. Fee income for most firms has started to improve again and the outlook is for a short-term period of steady and sustained growth, but definitely not the annual average 20% experienced by the industry three or four years ago. Those heady days are, it seems, long gone.

By our calculations, the total 2003 fee income of all firms has increased slightly with a total figure that is up by £31m. This means growth was fractionally more than half of 1%.

To some this would seem like standing still or even an undecided market, but in fact what it shows is that the sharp decline that started in 2001 has stopped rather than continued.

The combined 2003 consulting fee income of the top firms on our list is around £490m lower than it was for the same firms in 2001 and approximately £600m lower than in 2000.

These are big numbers, and, translated into consulting staff employed by the firms, Management Consultancy has estimated that the top firms now employ around 3,100 fewer consultants than two years ago.

The days when the main concern firms had was attracting and recruiting staff now seem a distant memory.

However, things have improved, with smaller firms reporting rises in fee income and an increasing number of new business enquiries, although much depends upon the type of markets they are in.

Sector specifics

The financial services industry is still in the doldrums but there may yet be light, however flickering, at the end of the tunnel. Manufacturing is not providing as much work either and those firms involved in the travel and tourism industries are still feeling the combined pinch of SARS, Iraq and the persistent threat of terrorism.

Come a recession and the traditionally large markets for consultancy tend to shrink rapidly. Three years ago the financial services industry provided around one third of total fee income, as well as a huge proportion of outsourcing business. Today, that share has dropped to around one quarter.

The communications industry ð the rising star of the millennium ð has continued to do well, but not as well as some expected.

What is very clear is that public sector spending has effectively been the saviour of the industry. Most firms that have experienced positive gains in fee income in the last financial year have been heavily involved in public sector and local government work.

Capita and Hedra are two that stand out. Year on year, both firm's fee income continues to increase, showing perhaps that competitive pricing and sector focus pay enormous dividends when the market is tough.

Capita set out to gain market share in sectors that other large consultancies once sneeringly described as less than profitable, and did just that. It has one of the highest growth rates in the industry and, as if to reinforce what can be done by pricing and focus, Hedra's fee income last year grew by nearly 23%.

While there has been some improvement in the fortunes of the medium-sized and smaller firms, at the top end of the spectrum it's a different story. There has been a huge amount of restructuring and integration and this has made a big difference to the shape of the industry. Many familiar names have gone and others have taken their place.

Market conditions for the largest consulting firms have been challenging to say the least, however, there has hardly been any fee income change. Growth has slowed and many of the big firms are perhaps fortunate to have earned much the same in 2003 as they did in 2002.

Eleven firms had a 2003 fee income over £100m, although their combined fee income fell by £14m last year to just below £3.3bn. But combined, these firms earned nearly 80% of the total fee income of all firms.

One does have to be careful when reading figures. Of the 11 firms, eight experienced some form of growth last year compared to 2002, two declined and one firm experienced a significant fall driving the overall figure downwards.

The heat is on

Even so, things are reportedly still difficult in some areas, particularly with the emergence of foreign competition. Just as call centres have been moved to Bangalore, so Indian IT specialists have started to move into European markets. Considering that more than half of UK consultancy fee income is IT services related, this represents a huge market and has not gone unnoticed by foreign firms.

Similarly, manufacturing in the UK has been declining for some time. There is still a large industrial base, but more and more companies are importing cheaper products. This translates into an inferior demand for consultants from this sector.

At one stage medium-sized firms worried about price competition from smaller companies as well as the greater technical capabilities of large firms. There also used to be a reasonable number of medium-sized £50m to £100m consultancies, nowadays there are five. This is down to smaller firms with lower price expectations knocking on the doors of the blue chip firms that traditionally spend a small fortune on consultancy. This is also due to clients who are all too aware of just how expensive consultancy can be and who are starting to exert more downward pressure on the prices they are quoted by the large firms.

Positive thinking

One clue that conditions are improving is actually staring straight out of our table. Only around 12 firms reported a drop in fee income last year and the amounts concerned are very small. In fact, the vast majority of small and medium-sized firms had fee income gains. This, in turn, indicates that demand for consultancy is improving.

When firms were asked, based on sales and enquiries, to state their fee incomes, Management Consultancy received an interesting series of responses. The overall response was for a gain of between 4 to 5% percent. But smaller firms were more optimistic with some projecting gains of between 10 and 15%.

By way of contrast, large firms told us that market conditions in 2004 were still very difficult but perhaps brightening a little.

Since we began the annual survey of top consulting firms, this was the first time that what can best be described as the 'optimism bubble' was lacking at the top end. There may have been some gains in the current financial year, and there may well be some in the next financial year, but things are changing. With new competitors on the horizon offering lower prices and with low British economic growth projections, it would seem that growth prospects for the big players is limited.

Smaller firms have no such perspective on market demand and are feeling more positive about the next step. For them, the cycle has bottomed out and demand is improving. They are starting to look for new staff to manage growth and this time around can be very selective.

However, one has to remember that smaller firms account for just over a fifth of fee income. This translates into around less than a fifth of consultancy staff. When small firms say they are looking to take on extra staff, they are often talking about a handful of people, not the dozens large firms needed.

Things have been tough over the past few years. Many firms have had to shed staff and there have been some casualties. What changed in 2003 was that the downward slide slowed, stopped and demand started to pick up.

Consultancy spending by the financial sector slowed in 2001 and declined by over £340m in 2002. If this continued last year, the market would have contributed around £1.1bn in fees in 2003. It would still be the largest market, but not as lucrative as it once was.

Public sector spending on consultancy accounted for 19.6% of total 2002 fee income. This proportion rose last year to around 22%, meaning the sector contributed around £930m in fee income in 2003.

The amount spent by the manufacturing industry has declined for the last three years. At one stage it was one of the larger consultancy markets, but last year accounted for around £270m in fee income. As for the utilities, the proportion of the total spent has hardly changed. The sector spent between £290m and £300m last year.

The communications sector spent an increasing amount on consultancy between 1998 and 2001, but began to cut back in 2002. It still contributes between 10 and 12% of the total fee income which, in turn, suggests around £510m in fees in 2003.

Of course, these figures are an estimated amount spent on consultancy. If you look at fee income from another perspective and ask what the firms earned from these markets in total, you would get very different figures. All you have to add in are the outsourcing figures and the numbers go through the roof.

Data dissection

For this year's survey, Management Consultancy asked the firms to provide figures that showed UK consultancy fee income. Our emphasis here was on consulting, rather than other services. Many firms now have huge outsourcing revenues and we have tried as far as possible to take these out of the fee income table simply because they artificially alter the results.

For example, include outsourcing in Accenture's figure and the total rises to over £1.1bn.

Add the other services Capita provides and you multiply the figure by five.

We estimate that outsourcing adds another £3bn to £4bn to the total fee income of the top firms in our table. Add in audit or tax advice or even property portfolios, and it's even more complicated. That's the main reason we have so many estimates. Many of the larger firms do not break down their fees in their accounts and often the only way to obtain a consultancy figure is to take a view on what appears the most likely scenario. All the estimates are our own and it is possible that in some cases we have understated the position.

Another reason for estimates is that final accounts have not yet been prepared or else have not been signed off by auditors. Some firms simply do not provide financial information.

In previous years, we have also asked for a fee income breakdown by market and service sector. While this will be the subject of later surveys, we thought it useful to apply 2003 fee income to what we know about the structure of the industry, if only to get an idea of the size of the major markets.

Inevitably, some firms will be disappointed that the figures are lower than those they might have wished their clients or staff to see, but if you are researching the market for men's socks, you can hardly use the total revenue figure in the Marks & Spencer's annual report as a guide.

To some extent, a great deal depends on what one understands consultancy to be. It is often labelled as a focal point for business advice. But there are firms that argue otherwise. Corporate finance advice, some say, is also consultancy. Tax advice, others say, is also consultancy. By our definition, these are not strictly consultancy.

One inevitable question is whether we may have actually overstated estimated revenues. We think not. Time and time again, firms have told us that in 2003 the market was tough, that new projects were few and far between and that maintaining fee income levels was a priority. The market has now started to improve but there was not very much movement last year.

Our take on the industry is that the large firms have held their own simply because they have sizeable on-going projects. They have probably not had much in the way of any new large projects and, as a result, their fee income has stayed at much the same level as the previous year.

The smaller firms, on the other hand, were the first to suffer from the recession. Small firms find themselves dropped once recession bites but tend to be the first back when conditions improve. Clients start their consultancy spending cycle with small projects building up to larger versions. These projects can then only be handled by larger firms with greater resources.

Next Month's survey: salaries

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