It will come as no surprise to learn that human resources consultancy grew at a rate more or less in line with other consultancy services last year. The overall growth, in value terms, was in the region of 14 per cent over 1996 levels. This is a useful figure for the firms selling human resources though it does have to be said with the consultancy market booming and the economy doing well, one might have expected something in the region of 18 to 20 per cent.
However, what 14 per cent means is that the HR fee income of the largest consulting firms increased from about #101m in 1996 to around #115m last year. It is a significant slice of the total consultancy market. Our survey this month revealed some interesting surprises though. At the mid-point of last year, when we conducted the Top 100 survey, we did not have an HR figure for Hay Management Consultants and, indeed, we did not have firms like Mitac and the Albemarle Group on our list. Hay turns out to be the market leader in terms of HR consultancy, holding a share equivalent to one fifth of the market. Mitac, by our reckoning, currently ranks fourth largest and the Albemarle Group ranks ninth largest.
There have also been some very strong growth curves, though it is the firms starting from a relatively low base that have seen the best. Horwath Consulting, for example has seen its HR fees increase five-fold. The Consultancy Company has increased four-fold. The Merchants Group has increased HR fees by some 27 per cent. Collinson Grant is up 36 per cent.
One difficulty that arose this month was that a number of firms had to estimate their figures, chiefly because they do not yet have final figures for the 1997 financial year and are comparing against 1996. Having said this, it would appear on the face of it that the majority have a pretty good idea of what they did sell, though at the top end of the scale the figures became rather vague.
Indeed, two of the largest firms were unable to provide figures at all, which means that when talking about market size one does have to make some allowance for this. Another difficulty this month is that this was the first time we tried to conduct a survey by e-mail rather than post.
Now, one would think that consultants, who are mostly at the forefront of information technology, could cope with electronic mail.
Actually, the reverse is true. Since we already had paper copies of the survey forms, we sent them too and, surprisingly, it was the paper copies that came back. And, you’ve guessed it, the people who could not cope with e-mail were the IT firms. We asked firms to break down their 1997 HR sales by market sector.
What was immediately noticeable this month was that the traditional markets for consultancy generally are not necessarily the traditional markets for HR consultancy. Most firms showed that a significant portion of their sales came from other, undefined market sectors. A few volunteered what these sectors actually were; oil, petrochemicals, pharmaceuticals and even the rather obscure category of “foreign investors”. We also asked the firms to indicate what growth they reasonably expected to obtain from different markets during the current year. Manufacturing industry scored the highest, with an expected gain in value terms of 21 per cent.
The financial sector, central government, transport and communications sectors scored high, but then so too did “other” with some of the smaller firms indicating 100 per cent in these categories, which does not tell us a great deal about the dynamics of the HR consultancy market. However, if one looks at the specialisation and prime markets of different firms, an altogether different picture emerges. Many of the small and medium-sized firms in this market operate in only a handful of sectors. They tend to concentrate on those sectors, rather than being spread across a broad spectrum, as is the case with the larger firms. Looking at the expected growth rates for the current year in this way, one sees that there is much greater optimism for the main markets that individual firms operate in than there is for those sectors which produce only a small fraction of their HR income. We also asked the firms to indicate the number of projects they were awarded by different sectors last year, so that we could calculate average project value. Two distinct patterns emerged from this. The first was that those firms specialising in specific market sectors were getting higher average project values from those sectors and, second, the size of firm is not a guarantee of higher than average project values. If anything, the reverse is true. It is a myth that larger firms pick up higher value projects. This may be peculiar only to HR consultancy since it is not the case with many other consultancy services sold, most especially IT.
We also asked the firms to indicate what increase in the number of projects awarded they expected this year, broken down by different market sectors.
This was perhaps too ambitious a question since many firms only gave an overall increase which ranged between 20 and 25 per cent. Of course, if one expects the overall value of HR consultancy to increase by a certain amount this year, and the number of projects to increase at a lower rate, it is a sure-fire indication that average project values are increasing.
The converse is also true; a greater increase in the number of projects than the expected increase in sales value equates to a lower average project value. No clear pattern emerged from this, whichever way one looks at it. Some small firms clearly expected values to increase, while others expected the number of projects to increase at a higher rate. Much the same applies to larger firms. On balance, though, more firms indicated that they expected the number of projects to increase at a rate somewhat faster than project values. It is difficult to know what to read into this other than to say that this early in the year, projected final figures for 1998 are, at best, pure conjecture. We also asked about the number of staff employed, the object being to get a feel for annual earnings per member of professional staff. What emerged from this was that annualised earnings vary significantly from firm to firm, ranging from below #50,000 per annum/member of professional staff to over #300,000. True, more smaller firms were at the bottom of this scale, but what is equally true is that larger firms are not getting above-average earnings. Finally in our survey this month, we asked about current daily charge-out rates, the subject that most interests the directors of consulting firms. The short answer is that the large firms do obtain rather more for their staff than smaller firms. Daily fee rates for partners and directors in excess of #2,200 are not uncommon. For smaller firms, the daily rates for senior staff are considerably less.
This is not unexpected but it also holds true for the niche operators, those smaller firms selling into specific markets. Their rates are not significantly different in any way except perhaps that the rates they obtain for their junior HR consultancy staff are much lower than the rates the larger firms obtain. What was interesting to note in this context was that the firms with expectations of above average fee income growth this year are also the firms with more modest charge-out rates. Firms with higher rates were not as optimistic about their fee income growth.
One can only speculate as to whether the purchasers of HR consultancy have learnt a thing or two about rates and are buying from an increasing number of smaller firms. On the other hand, of course, it remains to be seen whether the anticipated growth is actually realised.