Top firms make sizeable gains in upbeat market

It is clear that there has been a substantial improvement in the fortunes of the largest management consultants. This year, the list of top firms comprises 87 companies and virtually all saw gains in fee income during 1995. Even taking into account that it has been necessary to estimate the position for some firms, the total fee income of the top firms on our list increased by some #261.5m last year, a gain of over 15 per cent.

The total fees of the top firms in Management Consultancy’s list amounted to #1.9bn last year, against #1.6bn in 1994. It is an upbeat market.

Real growth has returned to the industry and with it, much improved profitability.

The share of total fees held by the 10 largest consultancies was 69.5 per cent in 1994. Last year this share dropped by 3 per cent to 66.5 per cent. It is not a significant decline when one takes into account the point that the fees of the 10 largest firms increased by over #123m last year, accounting for nearly half of the total gain of all MC’s listed firms.

This year we list 19 firms with annual fees in excess of #25m. This group, which effectively comprises all the large and medium sized consulting firms, saw annual fees increase from #1.4bn in 1994 to #1.6bn last year, an increase of 13.6 per cent, way above the industry average achieved in the first half of the decade.

This year, amongst the largest firms, there are a number of new names.

IBM appears in fourth place with an estimated consultancy fee income of #105m, a figure that specifically excludes software, systems and facilities management.

McKinsey & Co appears in ninth place with an estimated fee income for 1995 of #76m. ICL Group also appears for the first time this year with estimated fees just short of #60m, and AT Kearney/EDS appears with estimated fees of #28m.

One major change at the top of the running order of firms is KPMG moving up to third place this year. Alan Reid explains that historically KPMG has deducted subcontracts and other outlays from its fee figures. This year the figures reflect all revenues from clients and the comparative 1994 revenue figure is #96.3m.

Not all firms volunteered information this year. Andersen Consulting, for example, was unable to respond. The figure of #320m for 1995 fees is regarded by Andersen insiders as being a fair reflection of earnings in the year. It reflects growth at much the same level as in 1994. Given that Andersen’s fee income is substantially greater than that of the next largest firm, Coopers & Lybrand, even if the number given this year is hopelessly optimistic, it would have no impact on their position in the ranking table.

In some cases it is possible for MC to make a reasonable assessment based upon what is known of the firms and the trends in the industry generally.

It is, after all, our eighth annual league table. In other cases, it has been necessary to look at accounting records at Companies House.

These showed, for example, that McKinsey is substantially larger and more influential than many in the industry might otherwise have believed.

Our estimate of #76m is based on slightly slower growth than in 1994 and may well be a conservative estimate. The figures for 1994 and previous years are taken from published accounts.

With any ranking table, there is inevitably some jostling for position.

What was noticeable this year was that, at the top end of the scale, consistency in reporting was not a strong point. To a certain extent this can be explained by the difficulty large firms have in determining accurate figures due to their complex organisational structure. Small operating divisions may well have good information about what has been sold, and to whom, but bringing all the figures together is sometimes impossible.

The other problem is one of definition and this is especially true of services. The majority of firms have difficulty with determining where change management ends and BPR begins, for example. Then there are those who say that all their information technology work is consultancy, while others specifically cut out software development and facilities management from their figures.

Andersen Consulting, for example, have always provided a total IT consultancy figure that includes systems, software and facilities management. If Sema Group and IBM applied the same rule, the ranking order would be significantly different. Sema can add another #222m in this way, which would move their position right up the league table. IBM could add significantly more and if the provision of hardware was added on the basis that it was part of consultancy implementation, one would be into the realm of silly numbers.

Much the same can be said of ICL, Hoskyns and CMG.

Another problem lies in billing. A British-based company may well buy consultancy on behalf of a foreign subsidiary, but it is the subsidiary that pays the invoice. Some firms regard this as a UK sale while others say it is foreign work and should be categorised as such.

Definition is a key problem in consultancy, and has been so for as long as MC has conducted surveys. Some firms baulked this year when asked to break figures down by both services and market sectors. In some cases it has been possible to estimate their positions, based on previous returns to surveys during the year. With others, it has not been possible to do this so that on some tables where a firm might feature, it does not.

It does also have to be said that there are firms that just do not wish to be seen to be of a certain size in a particular market. Their marketing may have led clients to believe they are considerably larger than they are in reality.

Further down the scale, the problem of definition is less difficult.

Smaller firms, dealing with smaller numbers, are able to pinpoint far more precisely where revenue is from. Also, the rapidity with which smaller firms respond demonstrates not only that it is rather easier for them to define what they do, but also that they are rather more anxious to be seen as active players in the marketplace than some of their larger competitors.

Some 20 firms have joined the list for the first time this year. Among these are various ICL companies and with their input it was possible to provide an estimated overall figure for ICL Group’s consultancy business.

ICL is anxious to present itself as a major player in the consultancy industry and, indeed, the company is a substantial force, particularly in the IT market.

This year, we asked the firms to provide an explanation if their 1995 fees were substantially different to 1994 fees. This provoked several comments about favourable market conditions and organic growth. Mergers, particularly in the latter part of last year, will materially affect figures for 1996 however. Braxton Associates, for example, merged the former Deloitte & Touche Strategy and Economics consulting group into their London operation, increasing the number of staff by over 40 per cent but without increasing turnover during the year. This means that Braxton’s 1996 fees could well reach #10m, taking them a number of places up next year’s ranking table.

As our main ranking table shows, only a small handful of firms experienced a downturn last year. The vast majority saw growth. What is perhaps most revealing is that last year smaller firms, those with annual fees below #20m, had an overall growth rate approaching 30 per cent.

While on the one hand one can argue that their share of the top firms’ market (less than 15 per cent) is not especially significant, one can equally well argue that because they are more visible and more pragmatic in terms of their fee income expectations, their acceptability to some of the larger buyers of consultancy is gaining ground.

This is not to suggest that the market share held by the larger firms is being progressively undermined. The implication is that the smaller firms are picking up on the projects that large firms regard as either unprofitable or too small to be concerned about. Greater acceptability by buyers, and the reluctance of large competitors to bid for small projects is fuelling the growth of small firms.

The consultancy industry is clearly well out of economic downturn and the ravages of recession. This year we also asked the firms to tell us about their growth expectations for 1996 and judging from their response, the overall growth based on sales in the first half of this year looks to be in the region of 20 per cent. It is a massive increase and while it may not herald a hike in charge-out rates, what it does indicate is that the industry is once again confident of substantial growth, which is not something we have been able to report for the past few years. mc

Current Trends in Management Consultancy, which summarises the last five years of survey data is still available, price #45 (including postage) from Management Consultancy, 32-34 Broadwick St London W1A 2HG.