Plunging fee growth rates are not wholly due to the economic slowdown, says Steve Tappin. He attributes much of the malaise affecting the industry to the fact that clients want real value from consultants not gobbledegook.
The definition of a consultant as someone who borrows your watch to tell you the time is an old cliche, but it’s a view that many corporate clients believe to be true. Traditional consultants in Big Five firms and strategy houses have long made a fat living by telling company executives what they (should) already know. They have delivered opinions wrapped in the consulting industry’s own brand of gobbledegook in order to bewitch anyone willing enough to listen.
The problem is that, increasingly, corporate executives are no longer prepared to do so. In the post-Enron world, clients are now calling time on consultants. The timing of this rebellion couldn’t be worse, as tough times already beset the industry. Growth, once 40% a year or more for many of the established firms, is currently pitiful. The Management Consultancy Association’s latest report tells the story: strip out revenues from the outsourcing boom, and the growth rate for more traditional consultancy services fell from 44% in 1999-2000 to just 8% in 2000-2001.
These figures reflect the dramatic plunge in staff utilisation rates, especially in the Big Five firms. Typically around 70% in normal times, utilisation is trailing as low as 50% and even 40% – around or below break-even point. Any firm operating at that level is living on borrowed time.
Many large firms are also slashing fees by up to 50%. Combine that with the fact that you might have more than half your fee-earners sitting idle, and you have a potential disaster on your hands.
The early result of all this is massive lay-offs. Since the recruiting binge in 2000, we’ve seen waves of redundancies sweep through the largest consultancies. A profits warning and 2,700 lay-offs at Cap Gemini Ernst & Young in June 2001 triggered cuts of around 10% or more among rivals including PricewaterhouseCoopers and KPMG. Even Accenture wasn’t entirely spared, while strategy house Boston Consulting Group said it would slash jobs by 12% in Q1 after a 5% fall in revenue.
So why is the industry in such trouble? Certainly, economic slowdown has been a factor. Then came the Enron affair, leading clients and regulators to question the independence of consultancies and auditors. But the key reasons run deeper than that.
A fundamental problem is that the interests of many consultancies and their clients have diverged, resulting in consultants’ services often failing to address clients’ needs. Why? First, “traditional” consultants’ business models are still largely based on sending in armies of people who deliver textbook-derived verdicts contained in mammoth – and expensive – written reports. But like their own clients, they often lack entrepreneurial “execution” skills to actually deliver real value.
No wonder the punters aren’t buying. Look again at the MCA figures. Stripping out the boom in project management revenues as well reveals that consultants’ core advisory work has plunged from a growth rate of 58% in 1999-2000, to an actual fall of 10% for 2000-2001.
The message is that smarter clients want value from consultants, in terms of more revenue, profit, or strategic gain. Edengene’s own research supports this: out of 80 FTSE companies surveyed last month, only 28% – less than a third – said that consultants they used actually delivered value for money on growth initiatives.
So Big Five and large strategy firms are suffering a growing backlash from clients tired of struggling to convert their clever reports into anything of commercial value. One example is a global energy company keen to launch a new offering. Three big strategy firms each produced a detailed report that confirmed the client’s strategy, but failed to help deliver any value-creating initiative.
Second, “traditional” consultancy models (and partners’ income) rely on maximising fees, time, and bodies. They rarely offer success-driven remuneration based on shared risk, unless pushed. And they’re not incentivised to work at speed. As a result, clients complain about value for money.
Third is the independence issue: clients rightly question the partiality of advice when recommended systems or services are provided by another part of the consultant’s business.
Fourth comes Enron. Before the scandal broke, the voluntary spinning off of consulting arms from the Big Five firms was driven as much by professional jealousies as conflict of interest concerns. But the Enron effect has forced everyone to do it.
Yet such a move may not help the former Big Five consultancies to survive.
As standalone general consulting firms with high cost bases, they will be forced to acquire clients by themselves, without cross-referrals from their audit colleagues. And they also face fierce competition from strategy house rivals and younger, more agile firms.
Steve Tappin is CEO of corporate venturing company Edengene