Three years ago, recruiting and retaining staff was seen as a major limitation to growth, especially on the part of the large consulting firms.
The problem of getting people in who can do the work at least competently has not gone away but for the last two years the heads of firms have not seen this as the single most important issue affecting their businesses.
Now they do. The problem of attracting and retaining staff has become a major issue. It has become the issue. The problem is perhaps compounded by the fact that it is not a case of just getting people in the door, it is a case of getting people in who can perform and who do not need extensive training.
In our survey we asked the heads of firms to comment on what single factor they saw as currently affecting the growth potential of consulting firms.
The vast majority talked about staff. For the large firms which have an annual requirement that might run into hundreds of new people to replace those who have left and to cater for growth, the problem is acute. The main problem, according to one chief executive, was not so much recruiting people as retaining them.
For some years, staff-churn has been seen as desirable but that view is changing. It is obvious that the costs of recruitment would be significantly lower if staff turnover was much lower.
However, the staffing problem is rather more severe than that. At the mid-point of this year we asked the firms to project 1997 earnings based on first half sales, and in our survey this month we asked them to indicate what revenue growth improvement they reckoned on for 1997 compared with 1996. In both surveys the response was about the same; the firms were looking at increased revenues in 1997 of between 23 and 26 per cent.
Just taking the Top 100 consulting firms, growth of this magnitude means that the additional revenues in 1997 would be some #60m more than the current combined fee income of Coopers & Lybrand, Andersen Consulting and KPMG Management Consultants, the top three firms on the Top 100 list.
If the growth rate continues through this year, and it is expected to do so, then one is looking at much the same amount being added on top again.
This equates to a huge number of new people, each year. It is no surprise at all that the consulting firms now view this as a critical issue. Without the extra staff, there is a finite limit as to how much they can grow.
We asked the heads of firms to tell us about their target growth expectations for 1998. On average they cited 48 per cent. Even allowing for some optimism, the figure represents a massive hike.
It is exaggerated by the expectations of a large number of smaller firms who are clearly doing well, but even so, it does show that the market is tremendously buoyant.
What is less plausible is the expected improvement in profitability in 1998. The average for all firms in 1997 worked out at 16.7 per cent above 1996 profitability levels, but what the firms suggest for 1998 is a level of some 42 per cent above 1997 levels. Again, this figure is exaggerated by a large number of small firms with higher expectations than their larger competitors.
This is a clear case of the statistic being misleading for two main reasons.
First the figure is artificially inflated by small firms anyway but, second, if the firms are battling to find staff there is the possibility that they may not be able to much improve revenues or profitability.
One really must suspect that what we will ultimately see is a profitability increase that may be around 20 per cent for the year.
We also asked the heads of firms how markets changed, as well as how sales of services changed last year.
Some firms saw revenues from some originally prime markets decline in the year. Were one to calculate the change in value terms then clearly all markets would show a significant improvement.
However, what seems to have happened is that some of the large and medium-sized firms have sold less to certain markets, and the slack has been taken up by smaller firms.
The average revenue increase of 36 per cent for the financial sector is very much inflated by a number of small firms reporting growth of over 50 per cent from this market.
The same applies to services sold. Not all firms sold more project management or BPR or change management. There were some surprises in terms of which firms sold less. But this is perhaps inevitable as firms change emphasis in terms of what they do and which sectors they sell into.
What was particularly noticeable was that very few firms mentioned growth of less than 10 per cent in terms of the sale of IT consultancy and strategy.
In fact, sales of corporate strategy would appear to have boomed in 1997.
The average growth rate of some 63 per cent is significantly above the growth of any other service.
We had anticipated that staff would be an issue when we started this survey and we asked the heads of firms to tell us what increase they anticipated in the next year, broken down by different categories of staff.
An increase in the number of project managers does have to be seen in the context of the fact that there are very few project managers anyway.
However an increase in the number of directors reflects the revenue growth of the firms, especially smaller firms.
Few firms indicated much of an increase for industry specialists, but there again these people are often freelance and used on an ad-hoc basis.
The real growth in numbers is in terms of senior consultants. The firms also expect a fairly massive increase in terms of the number of junior consultants they employ.
The level of 9.5 per cent for recent graduates does not mean much across the board since it is mostly the larger firms that take graduates. Very few smaller firms have any recent graduates.
From what we know of the existing consultancy staff population, what these increases add up to in total is for at least an extra 2,300 people to come into the business this year. The true figure will probably be more like 3,000.
Most firms will be looking to recruit these employees from other firms and also to take on people who are effectively freelance consultants. Very few expect to go to the public sector and not very many expect to recruit from the financial sector, the main market for consultancy.
Finally, this year, we asked about the annual salaries bill. Last year there was an increase of nearly 15 per cent on average for all firms. The anticipated increase this year is close to 30 per cent.
This does not suggest that individual salaries will go up. Rather it is a case of more smaller firms taking on new people and seeing their total salaries expenditure shift upwards. The change reflects the number of new employees that the industry hopes to take on.
Chances are, however, that the number of people the firms hope to recruit and the number who do actually come into the industry will be substantially different. Recruitment is clearly going to dominate the list of major issues this year.
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