Select band still dominate the telecoms arena

There is some excitement out there about the future of the telecommunications market for consulting firms. It would appear that last year sales to the industry grew by some 23 per cent, which means that the industry purchased some #120m worth of consultancy during 1997.

The double-digit growth is encouraging but, as we have reported in the past, the number of firms active in the market is not large and the total value of consultancy sales represents a fairly small proportion of the total consultancy market. From preliminary and estimated figures, the telecoms industry contributes just over 4 per cent of the total consultancy revenues of the top firms.

The growth achieved in 1997 would appear to be very much in line with the expectations of consulting firms at the mid point of last year when we asked them to project annual sales based on first-half revenues. Also, this growth rate is pretty much in line with the expected growth rate for the whole of the consultancy industry. It is by no means phenomenal.

What has not changed since we conducted our last telecoms survey is the dominance of a mere handful of firms. Coopers & Lybrand is the largest player with a share exceeding 30 per cent. The six firms with sales of over #5m last year share over 80 per cent of all consultancy revenues from this market. It is little wonder, then, that well over one third of sales last year were IT-related, as was the case in 1996 and 1995.

When a relatively small market is dominated by the few, there is often little change in the actual structure.

Having said this, there have been some slight changes in what the telecoms industry has purchased, and from whom. When we conducted the survey, we asked the firms to project total 1997 sales even if they did not have final figures. Even so, it was abundantly clear that average project value has increased for both the large and small firms. In addition, the number of projects awarded increased last year. This indicates that the growth was not brought about simply by larger consultancy projects being awarded, it was rather more a case of much more work being shared around.

1997 figures show that for the large and medium-sized consultancy firms, average project value increased by some 11 per cent over 1996 levels.

For these firms, average project value exceeded the previous high point of 1994. Average project value for these firms dipped to a low in 1995. The 1997 level, two years on, is up some 22 per cent on 1995.

By contrast, in the period from 1994, small firms have seen average project value more than double. Also, the current level of #42,385 is significantly above that of 1996 and represents an increase of 60 per cent. What has happened here is that the size of projects awarded to smaller firms has increased: it does not appear to be so much a function of a larger number of projects.

We asked the firms to break down sales to this sector by type of service sold. While it does have to be said that many firms rounded figures down, IT remains the most purchased consultancy service. The proportion attributed to change management has declined but the share of BPR consultancy has increased accordingly. The combined share of these two services, at 37 per cent, remains exactly the same as in 1996 which leads one to wonder whether some firms have attributed figures to BPR this year which they put down as change management a year ago. To many, there is a grey area in terms of the definition of both BPR and change management. Having said this, one does need to consider the fact that in 1995, change management held a 22 per cent share. The 1997 level does show a progressive decline in sales of this particular service to the telecoms market.

The shares held by strategy and marketing are down slightly on the 1996 level but higher than the shares in 1995. The decline in percentage terms is largely a function of increased sales of IT but even so, the actual value of sales of these two services in 1997 would appear to be higher than the value in 1996, in line with the overall increase in consultancy sales.

As in previous years, we also asked about the origin of sales by industry sector. Again, it is largely the telephone companies that buy consultancy. 71 per cent of consultancy sales to the industry came from this sector last year, compared to 74 per cent the previous year.

The cable companies contributed a lower proportion last year while the share from the television companies, at 4 per cent, remains the same as in 1996. There were reported sales to satellite and broadcast companies, but these amounted to less than 1 per cent. A number of respondents simply provided figures without saying what type of organisation had purchased consultancy.

We also asked about sales of consultancy to foreign telecoms clients.

As before, we asked the firms to show the increase in percentage terms rather than the actual value increase, which means that we are not able to say what the value of foreign sales actually is. However, foreign sales last year were 23 per cent above the 1996 level, on average.

It is a very similar increase to the UK sales gain last year though it does represent growth at a slower rate than in the previous two years.

Similarly, the growth in terms of the number of projects has also slowed, indicating that the larger firms (which for the most part are the only firms with foreign sales) have seen the size of foreign projects increase, rather than experienced a massive hike in the number of projects.

Smaller firms do not appear to have been as successful in selling to foreign telecoms clients. Foreign sales are clearly difficult to achieve, especially when so much of the market is shared by the few.

Finally, we asked about charge-out rates. The question hinged on what firms currently achieve from this sector, that is at the end of last year.

Rates have effectively shot up. The medium and large firms are currently charging an average of #1,200 for a senior consultants, against #900 a year ago. This is a third more. It is clear that there has been a significant mark-up in rates in the past 12 months and even the small consulting firms have followed suit. We were unable to get a current figure for an industry expert from the large firms, but smaller firms are charging slightly less for these people now than a year ago. Similarly, the smaller firms are charging slightly less for more junior employees.

For project managers and senior consultants rates have significantly increased and part of the reason for this may be the nature of what is being sold to the telecoms industry. IT consultancy does attract a higher than average price.

Also, it’s possible that with an increasing number of projects, the firms have found they can actually charge more because competition for the projects has diminished. There are, after all, relatively few players in the market.

We did not ask the firms to project 1998 earnings from this sector, but it looks as if sales will continue to improve. The consultancy market as a whole is buoyant at present and it is quite possible that sales to this sector will increase at much the same rate as they did in 1997.

However, with sales to other market sectors increasing rapidly, no-one should be too confident that the share of total revenues of the top firms contributed by the telecoms industry will increase much beyond the current level of less than 5 per cent.