Management consultancy special: top firms 2007

Management consultancy firms have enjoyed their third consecutive year of fee
income growth with the total advisory fee income of the top consulting firms
growing 12% in the past 12 months to reach £5.9bn. Include non-advisory revenue
streams like outsourcing, implementation, computer hardware and software and the
total fee income rises to an estimated £10bn.

To download the management consultancy
Top
50 table as a pdf, click here.

Our survey asks for fee income, which is wholly attributable to business
advisory work. This is to provide a level playing field. After all, one can
hardly compare the total pre-tax income of giants like IBM, Accenture and Serco
with smaller and more traditional consulting firms.

In the past three years, total advisory fee income has grown by nearly £2bn.
Fee income plunged in both 2002 and 2003, but has risen steadily since. A very
large proportion of the gains made in the past three years have been due to
increased spending by the financial services sector. This particular market is
the most important of all to consultants and last year it provided nearly 30% of
total fee income.

And taking last year’s figures in isolation, much of the growth came from the
two largest markets for the consultants ­ the financial services sector and
central government ­ which accounted for 45% of total fee income.

Financial services

Consulting firms earned a total of £1.7bn from the financial services
companies last year, which is £220m more than in the previous financial year.
While the fee income increase of 14% was above the average for all consultancy
markets, it was by no means the highest percentage change. But what will not be
lost on the firms themselves is the fact that the financial services market
single-handedly contributed more than one-third of the total fee income gain
from all markets last year.

It has long been the largest market for consultancy and it has also been the
most profitable. The downside for consultants is that it is also the most
volatile market. When the economy slows, spending on consultancy by the banks
and building societies falls dramatically, usually with devastating effect.

One concern expressed by some of the firms responding to the survey this year
was that with jittery financial markets, the financial services sector could be
poised to turn off the tap. This is potentially serious since the last time this
happened, the year-to-year fee income decline from just this one market was 27%,
or more than £430m. Put in perspective, that amount was roughly two-thirds of
the total fee income decline from all markets.

Central government

The second largest market for consultancy, central government, also spent
more on consultancy advisory work last year, but the increase was a rather more
modest 10.8%. The actual increase was £93m, taking total fees to just less than
£950m. Surprisingly, the percentage fee income change was one of the lowest of
all markets last year, though the actual gain in cash terms was the second
largest of all markets.

Newspaper reports that Whitehall is awash with consultants seem to be a
little exaggerated, judging by these fee income figures, though many of the
firms are selling other, non-advisory services to the central government market.

Communications industry

The third largest market for consultancy has, for some time, been the
communications industry. Last year, fee income from this sector increased by
nearly 16% to a total of £598m, up £82m on the previous year and marking the
highest percentage growth for the sector since 2001. Both Detica and PA
Consulting Group reported fee income gains in this market of 150%.

Between them, the three largest markets account for nearly 55% of the total
advisory fee income of all firms, and 62% of the total fee income gain of £645m
last year. Add in fee income from the manufacturing industry, the fourth largest
market last year, and the combined total spend on consultancy rises to £3,625m,
or 60% of total fee income. Together, these four markets accounted for 70% of
the total fee income gain in the last financial year.

Change in fortunes

There has been some change in the ranking of market sectors. Last year, the
NHS ranked as the fourth largest market, ahead of the manufacturing sector.
However, while spending by the NHS on all types of services from the consultants
was up last year, spending on advisory work went down by 13%. This was
apparently due to the large health service IT projects going past advisory
stages and into implementation. This helped push the manufacturing industry into
fourth place. It provided total fee income of £336m last year, an improvement of
17%, or £49m, on the previous financial year.

Not all markets performed particularly well. While fee income from local
government, manufacturing and the healthcare and pharmaceutical industries
increased at well-above average rates, with local government spending 39% more
on consultancy than in the previous financial year, fee income from the media
industry increased at less than 5%, and fees from the professions and
professional associations increased at just under 9%. However, sectors like
aerospace and defence (up 15.7%) and consumer goods (up 15.5%) redressed the
balance.

Each year, the survey asks the firms to provide fee income figures broken
down by the same broad market sectors as in previous years. They are also asked
to identify other often quite small market sectors. In the past, however, few
have done so and around £100m has been attributed to markets that are described
as being either ‘too numerous to list’ or as simply ‘other’.

This year, the firms were a little more willing to put figures to market
sectors not specified on our survey form. While there is still £65m in fee
income from totally unidentified markets, the firms identified public bodies as
providing £18m in fees, education providing nearly £14m in fees and agriculture
stumping up just over £11m. Construction companies spent £9.6m on consultancy
and mining companies spent £6.8m. These are not large amounts when compared with
the major markets, but the figures do provide just a little more insight into
the origin of fees.

Some small markets have become niche markets for relatively few consulting
firms. Aerospace and defence, for example, is a £200m a year market for
consultancy, but last year this revenue was shared by 20 firms. Consulting to IT
companies brings in £37m, shared by nine firms.

Dominant force

It has always been the case that some major markets are dominated by just a
handful of firms. Accenture, IBM and Xansa, for example, last year together
accounted for 40% of fee income from the financial services sector. Four firms
account for half of fee income from the energy industry and three firms account
for one-third of communications industry fee income.

The large consulting firms inexorably get larger, but, once again, last year
it was the smaller firms that had the higher fee income growth rates. But this,
again, is often the case and the smaller firms are starting from a much smaller
base.

The survey this year has brought a number of new names to the list of top
consulting firms. Acquisitions account for some of the new names and changes;
Hitachi Consulting acquired Impact Plus; Chaucer Group acquired ItemPlus;
Mouchel Parkman acquired Hornagold & Hills, Atkins acquired Advantage
Business Group and Mantix; Ovum acquired Orbys Consulting; and Ove Arup acquired
The Rossmore Group. Even Xansa has been bought, though that was more recent.

The acquisitions brought Atkins and Ove Arup onto the list for the first
time. KPMG and Ernst & Young have also returned to consultancy. Then there
are the firms that have never been listed before; The Structure Group, Moorhouse
Consulting, Serco Consulting and The Ultimate Solution Partnership, better known
as TUSP.

New entrants

There are nine new firms on the list this year, with a combined fee income in
financial year 2006 of £625m. The largest of these are KPMG (£242.6m) and Ernst
& Young (£197.9m). Capita this year provided figures for Capita Advisory
Services which had 2006 fee income of £14.5m. In previous years, Capita included
figures for other sections of the business and the fees reported were
substantially larger.

As in previous years, there are estimates in our figures. There are a number
of reasons for these, the main being that not all firms have the sort of
reporting mechanisms that enable them to provide figures for advisory work as
distinct from other services offered by their consulting businesses. We aim for
consistency so that the figures reflect advisory fee income from one year to the
next. There are also cases where firms do not provide any figures at all and the
fee income figures we have used are, simply, what we think the position is with
regard to advisory work. For example, our figures for Accenture and IBM are not
as high as the total figures shown in their accounts.

Top of the table

At the top end of the league table, there was very little change in the fee
income rankings of the largest firms, though PricewaterhouseCoopers moved up one
place to sixth and Ernst & Young displaced McKinsey. Deloitte remains in
third place, followed by Xansa. KPMG enters the table at eight place and Ernst
& Young rank as the tenth largest firm. Detica, with fee income growth of
47% last year, moved up two places to rank 13th.

The firm that moved up the largest number of places on the ranking table la
st year was EA Consulting Group. In financial year 2005 the form ranked as the
63rd largest. The firm’s fee income quadrupled last year taking it to the 45th
place.

A breakdown of fee income growth rate by size of firm throws up some
interesting results. There were 16 firms with financial year 2006 fee income of
more than £100m and these firms had a combined growth rate of 11%, putting on an
extra £468m of fee income. This amount represents 73% of the total fee income
gain of all the top firms put together.

The eight medium-sized firms, defined as those with fee income of £50m to
£100m, had fee income growth of more than 21% last year, adding £94m to their
combined financial year 2005 revenue figure. This is just short of 15% of the
total gain of all firms. The two largest contributors were Morse, adding £22.4m
or 54.8% and L.E.K. adding £21m, or 60%. Earlier this year, L.E.K. became the
first strategic management consultancy to win the Queen’s Award for Enterprise
in the International Trade category. The firm won the award for increasing
export revenue by 50% over a three-year period.

Last year, there were 12 small to medium firms with fee income between £20m
and £50m. Their combined fee income gain was 9.8%, which was up on the 7.2% in
the previous financial year.

Small firms make up the largest group. There were 43 firms with financial
year 2006 fee income below £20m and 30 of these had fee income of less than
£10m. The 13 firms with fees between £10m and £20m had a combined growth rate of
12.4% while the 30 much smaller firms had a combined growth rate of 14.5%.

Market share

In the quest for market share, Accenture continues to lead the field
generating 14.2% of the total fee income of all firms. IBM’s consulting business
follows, with 10.9%. KPMG’s fee income provided a market share position of 4.1%,
just above PA Consulting Group’s 3.9%. This is followed by Ernst & Young
with 3.3% of the market.

What is interesting about market share positions is that despite the fact
that the five largest firms each had higher fee incomes last year, they all
finished the year with slightly lower market share positions. In financial year
2005, the five largest firms together had a 45.8% share of total fee income. In
financial year 2006, this dropped to 43.4%. What happened was that that Ernst
& Young and KPMG took market share away from most, but not all, of the
larger firms.

Despite this slight upset, the dominance of the large firms can be seen in
the simple statistic that the 15 largest firms together earned £4.6bn last year,
or just over three quarters of the total fee income of all the firms on our
list.

Their combined share of the market dropped by less than one percentage point.

Philip Abbott is a freelance journalist