Utilities power growth in consultancy fees

Up until around 1993, utilities was one of those surprising markets for consultancy in that very few firms were actually involved in it.

That has completely changed. Response to our survey this month showed that in the two years since we last investigated consultancy sales to the sector, the number of firms selling into the market has more than doubled.

It does have to be said that the vast majority of small firms are not achieving a particularly high average project value. For the most part this is because few of them are selling information technology consultancy.

However, the number of projects awarded by the utilities last year appears to have increased by some 20 per cent on 1995 levels, and average project value, across the board, has improved by some 9 per cent.

We have been tracking consultancy sales to this market since 1992. For many years, this has been the third largest market for consultants, after the financial and public sectors, if one includes local government in public sector fees. Last year, when we asked firms to give an indication of what their total 1996 fees would be, it appeared that growth in the utilities market would be such that it could easily become the second largest consultancy market.

This appears to have happened. Response to our survey this month showed that many firms experienced very healthy growth in terms of their sales to the utilities in 1996, and the majority are extremely optimistic about sales this year. A few are looking to double their 1996 fees from this sector.

The firms that are doing well are, not surprisingly, those that are selling IT, change management or strategy (or all three) to the electricity companies and water companies. Those that are still trying to sell consultancy to the gas companies are, frankly, flogging a dead horse. Gas accounts for around 6 per cent of total consultancy sales, roughly half the level in 1992, and significantly lower in actual value terms.

The electricity companies spend the most on consultancy and, by our calculations, are currently spending something like #100m a year on consultancy services, excluding non-consultancy IT-related activities.

The electricity companies are accounting for a higher proportion of total utilities expenditure on consultancy now than at any time in the previous five years. The proportion of the total from the water companies is more or less the same as in 1992, though the high point was in 1994 when water accounted for nearly half of all consultancy spending by the utilities.

The proportion spent by the gas companies has been progressively declining.

This is a market that is dominated by IT consultancy. Last year this accounted for 47 per cent of total consultancy spending by the utilities, against 42 per cent in 1994 (Management Consultancy last conducted a survey of this market in 1995, reflecting 1994 sales).

The proportion spent on change management and strategy consultancy has increased, while that spent on project management remains at the same level as in 1994. The proportion derived from sales of operations management has almost halved in the intervening two years and, while a few small firms indicated some sales of HR and marketing, the total did not even amount to half of 1 per cent.

We asked the firms to indicate what they had sold to the three types of organisation. Electricity companies seem to have spent a larger proportion on IT than the water companies, but less on change management, strategy and other consultancy services.

The higher level spent by gas companies is perhaps not very surprising considering how little is actually spent on consultancy anyway. Our estimate for the total expenditure on consultancy by gas suppliers is not very much more than #10m. It is a small market for consultancy and we were actually hard pressed to find many firms selling to this sector. Inevitably there were the large-name firms, but very few small consultancies.

We also asked the firms to indicate what growth they realistically expected to achieve in terms of their own sales to the utilities this year. The high proportions indicated for water and electricity companies are actually inflated by a fairly large number of small firms who are very optimistic about their own prospects this year.

We also asked the firms to indicate what improvement they expected in terms of sales of their consultancy services to the utilities this year. There is a great deal of optimism about sales of project management which, at 35 per cent, exhibits very strong growth. However, it is important to balance this against the share of total expenditure on consultancy which project management represents. At 9 per cent, it is not a major consultancy service offering.

The expectation for sales of IT, chiefly from larger consulting firms, represents one of the highest sector levels of growth in the industry.

The expectation of IT consultancy growth in most other markets is a lot lower than 30 per cent.

What is particularly interesting is the expectation of growth for change management. This too is particularly high. To a certain extent this can be explained by a fairly large number of smaller firms looking for much greater sales of change management this year than in 1996, and while they are starting from a relatively low base, it is very likely than most will see their anticipated growth prospects from this service realised this year.

Larger firms are rather more conservative about the growth of change management but, there again, this is not a prime service offering of these firms which tend to concentrate more on sales of IT.

While we expected to see some changes in the structure of this market in 1996, by far the biggest surprise was to see by how much charge-out rates had fallen. Two years ago, the average rate for partner/directors was #1,120 a day. This time, as Table 6 shows, the level is fractionally less at #1,110.

One might have expected more but, there again, partners and directors do not make up the bulk of consultancy staff.

The average rate for project managers, however, has fallen from #960 a day in 1994 to #750 a day now. Similarly, the average rate for senior consultants has fallen from #790 a day to #645 a day. And the average rate for junior consultants has fallen by a modest fiver.

The highest reported rates for all staff except junior consultants are down by about #200 a day.

It might be argued that this drop, particularly in terms of average rates, can be attributed to a larger number of small firms reporting. Oddly, this has not made much difference. True there are some small firms with significantly lower fee structures, but there are only a few of them.

In this particular market, it is just not true that small firms charge less than their larger competitors.

Obviously, much does depend upon what they are selling, but we have the distinct impression that the utilities have put some pressure on prices.

Increasing competition for work has probably also had some impact on the fees the firms have actually been able to obtain from this market.

Top consulting firms 1997

The list of top consulting firms in the UK will be published in the July/August issue of Management Consultancy. Firms not included last year which wish to be included this time around should make contact with Philip Abbott, who conducts the survey, by telephone on 0181 542 3466 or by fax on 0181 542 3833, so that they can be added to the database.