Strategy firms continue to see healthy growth

> It is, perhaps, little wonder that the strategy consultants are pleased with the way things are going. For the fourth consecutive year, they have seen growth at levels far above the average for consultancy generally. Profitability is way up and the outlook for the future is bright.

In our survey this month we asked the firms to indicate the growth they had experienced in revenue terms in the period to the end of June this year. Table 1 shows the position. Strategy houses report a massive 22 per cent hike, followed by small firms at 18 per cent. Large consultancies trail at 11 per cent, but that is a level that is not to be sniffed at.

The small firms may well be starting from a much smaller base, but considering that they have seen strategy sales increase by almost one fifth, their impact on the market is worth noting. Strategy sales are no longer the exclusive prerogative of the strategy houses. A significant number of firms have been selling strategy work for some time. It is only in the last three years that the small firms have seen meaningful growth. Back in 1993, few were even involved in the market. Now, there are many more.

However, it is the dedicated strategy houses, large and small, that have experienced the highest levels of growth over the past four years. In value terms, the average has been a fraction short of 23 per cent, whereas strategy sales by the large consulting firms have only grown by an average of 13 per cent.

It is only when the economy is at its lowest ebb that strategy is almost impossible to sell and gloom sets into the strategy houses. However, the moment there is a sniff of growth in the air, strategy takes off once again, as it has done since 1993. More to the point, there seems little, at present, that might negatively impact on the growth prospects for next year. Across the board, strategy people are optimistic about 1997 in a broad range of market sectors.

As in previous years, we asked the firms to indicate what level of growth they confidently expected to see in terms of strategy consulting sales to different industry sectors. Table 2 shows the result. A year ago, telecommunications led the field with expected growth of 18 per cent.

This time around the strategy consultants reckon that it will be the financial sector that will grow at the fastest rate, 20 per cent, closely followed, in growth terms, by healthcare.

The financial sector is booming for consultants at present, and it is no surprise at all to see that the strategy people have very great expectations of this market. It is not only the most lucrative, but it is also the largest contributor of strategy fee income.

What Table 2 also illustrates is a declining degree of confidence in the public sector as a contributor of strategy fee income. A year ago the firms suggested that growth of public-sector spending on strategy consulting would be around 15 per cent in the 12 months to the end of June this year. Since then, of course, the public-sector market has tightened.

Anticipated spending levels across a very wide range of consultancy services this year are only fractionally above 1995 levels. That the strategy people have indicated spending growth of around 8.5 per cent is indicative of consultancy spending trends in the public sector as a whole anyway.

The level of 8.5 per cent that the strategy consultants project is, in fact, above the level of growth projected for the sale of other consultancy services to the public sector. Even so, that the firms have marked down their expectation from what they thought would happen a year ago shows that while the public sector is still an important market, many will be looking to develop sales in the more lucrative markets.

Table 3 shows where the strategy fees come from. Around one quarter of strategy fee income is from the financial sector and this is a level that has been slowly increasing over the past few years. However, it is not that long ago that the public sector was clearly the most important market for the strategy consultants, contributing over one third of their 1993/4 fee income.

This level dropped in the year to June 1995, and has dropped again this year. While the share of total strategy consulting fees is down, the actual value of spending is up. The amount spent on strategy consulting has increased each year since 1993 after all. However, as Table 3 shows, the relative importance of the public sector as a market for strategy consultancy is slipping.

In a similar way, the share contributed by the utilities is declining.

It is not a rapid decline, but it is there anyway. On the other hand, the amount coming from the healthcare industry is progressively increasing.

What Table 3 also shows is that there is, in addition to the traditional markets for strategy consultancy, a very substantial market which is outside the traditional markets. The share of the “Other” category in the table has doubled since last year. None of the firms responding to our survey this time ventured to suggest which industries actually fell into this category, which leads one to the conclusion that out there, somewhere, a whole raft of industries have suddenly started to buy strategy consultancy.

Clearly, if there is growth in spending from the traditional markets for strategy consultancy, there would also be growth from other, typically smaller sectors. What is unfortunate is that, until next year, we have no way of determining which industries are actually doing the spending.

Tables 4 to 7 show the average daily rates charged for strategy consultancy to various main market sectors. These figures are based on our mid-year Top Firms survey when the responding firms were asked to indicate what fees they charged for different grades of staff. As such, the figures represent average current daily charge-out rates.

Something that immediately stands out from these tables is the fact that rates to the financial sector are more or less the same, irrespective of the size of consultancy firm. Large, medium and small firms all charge over #1,300 a day for their partners or directors, for example. The same does not apply in any other sector.

Something that is less clear is that the rates charged by small firms are not necessarily the lowest in the business. For the most part, they are the lowest but there are a number of exceptions. By the same token, it does have to be pointed out that small firms do not always have project managers in place to work on strategy projects, hence the lack of data on rates for these people.

These daily charge-out rates are, in general terms, above average for the consultancy industry. To a certain extent, they need to be, since the sort of people that the strategy consultants employ are invariably particularly gifted and typically bring with them fairly considerable industry experience. In short, they are rewarded with above-average remuneration packages and the charge-out rates have to reflect this.

To those wondering whether the strategy growth bubble will burst, the short answer must be that in the short to medium term this seems unlikely.

Strategy consultancy is growing at a rate faster than consultancy itself is growing, and it is extremely unlikely that this will slow in the immediate future.

Future Markets for Consultancy 1997, the new book by Management Consultancy survey editor Philip Abbott is now available from VNU Business Publications, price #65. To order your copy of this exclusive look at trends in the consultancy industry contact Sue Burnell on 0171-316 9000 or by fax on 0171 316 9345.