Sales of consultancy to manufacturing industry boomed last year.
services than it has for much of the decade, with medium and smaller firms experiencing much of the growth. Philip Abbott examines the figures and notes that the strong pound may curtail the boom. The expectations that firms had, a year ago, for 1997 seem to have been largely realised. Actual growth was over 29 per cent taking total spend by the sector on services from the top firms to just over #370m, up some #85m on the previous year’s level. This is a massive increase whichever way one looks at it. Average project values increased enormously. For large firms the growth was over 16 per cent.
For smaller firms, the growth was over 20 per cent. The number of projects awarded increased as well, fuelling the growth. Last year, manufacturing industry spent significantly more on consultancy than it has for much of the decade. One result is that current charge-out rates have increased, reversing a decline in previous years. Rates have virtually reached the level of 1995 and look set to steadily creep up this year. Having said this, it is the smaller firms that have upped their prices. The rates of larger firms are not much changed.
Some sectors of industry, though, are poor contributors to consultancy fee income. Nearly half of the top firms’ fees comes from communications and engineering. Electronics and food manufacture each account for less than 10 per cent and the textiles and plastics industries contribute very little indeed.
Last year, communications accounted for nearly one quarter of fee income, and engineering contributed just over 23 per cent. The share of the total contributed by both increased, only by a few percentage points, but this shows where the bulk of the money is coming from. On the type of services purchased, as in previous years, information technology accounts for the lion’s share. Last year the level was nearly 10 per cent down on 1996.
This is not to suggest that the actual value of spending on IT declined, far from it, rather it was a case of expenditure on other services increasing at a faster rate. The share attributed to change management dropped by 1.6 percentage points, but this is hardly significant since the actual value increased. The share for every other type of consultancy service increased, some only slightly, but this is where much of the gain came from and it was typically the medium and smaller firms that saw much of the growth.
What we do not know from this survey is which services the communications and engineering sectors purchased. Firms are asked for overall breakdowns.
But IT would have contributed a very large proportion of fee income, particularly since these are sectors pretty well dominated by the large IT providers. Smaller firms are less successful in selling medium to large IT projects anyway, if only because they lack the resources. But what is especially interesting to note is the rapid growth of smaller firms active in the manufacturing industry marketplace. It is almost as though the traditional mentality of buying from the consultancy division of one’s auditors has gone out of the window. It is obvious that currently there is much greater acceptance of smaller consultancy companies. Large firms continue to do well but where once their daily fee rates were incrementally higher than those of smaller firms, this is now less often the case.
In fact, a number of specialist firms have higher rates than their larger competitors, and seem to be thriving. In our survey this month, we asked the firms to indicate what growth they realistically expect to achieve this year from different manufacturing industry sectors. The results are shown in Table 3.
Predictably, engineering came out on top with projected 1998 growth of 23 per cent above the level of 1997. The average for communication came next, at 17 per cent. Areas that the firms were clearly less optimistic about were textiles, automotive and aerospace; all well below the average, but the value contributed by these three sectors is not that great.
Projected growth in consultancy spending by the electronics sector works out at an average of 13 per cent, which is significant because the sector contributed 9.8 per cent of the total fees last year. The drop in expectations for the aerospace industry is particularly noteworthy. Four years ago, firms were talking of an increase of around 25 per cent, but that was never achieved and the amount spent on consultancy by this sector has shrunk in the intervening period.
It appears that overall 1998 growth in sales to manufacturing industry is expected to be above average, but this year, if the firms are not being over-optimistic, another #54m or so will be spent on consultancy, which in turn represents a growth of around 14 per cent. While above average this is not as good as the growth between 1996 and 1997.
Also, one must take into account such factors as a strong pound impacting on export business, and this in turn could affect overall consultancy expenditure by manufacturing industry this year, depending of course on how long the pound maintains its position. It could be that manufacturing industry will be one of the first to slow down in terms of consultancy spending.
There has been a sudden boom, but taking account of exchange rates and the predominance of markets that will or could be affected, it would appear on the face of it that the boom is over or, at least, unsustainable.
We asked the firms to indicate the number of projects awarded in 1997, so that we could calculate the average fees per project. In the event, not all the large players in this sector did so, for reasons best known to themselves.
The figures in table 4 show what we do know. It is clear that for the vast majority of firms, there was an increase in the number of projects but, equally, it is also possible that one reason for the reluctance to provide numbers is that a few large firms sold fewer projects.
Table 5 shows average charge-out rates. This illustrates that the progressive lowering of rates has now been reversed. One has to be very careful with statistics in this context because included in the calculations are figures supplied by a large number of small firms that do tend to bring down the average. For example, the highest reported daily rate for a director this time was over #2,000/day and the highest reported rate for a senior consultant was over #1,500; both being figures significantly higher than last year.
Smaller firms have, traditionally, had lower rates and lower fee expectations, but this is not always the case. Comparing survey returns this year with those submitted last year shows that rates have increased and much of the gain has come from smaller firms putting their prices up. Equally, however, one must take account of the fact that some of the smaller firms, particularly those with heavy emphasis on sales to this sector, have rates that compare directly with their larger competitors.
One must suspect that at some point during this year there will be something of a squeeze on consultancy expenditure by manufacturing industry. If this starts to happen, it is relatively certain that there will be a squeeze on rates: a large number of firms are currently selling services and it would seem likely that those that are flexible about their prices will continue to win business from manufacturers.
CONSULTANTS TO MANUFACTURING INDUSTRY
Arthur D Little
Beaufort Management Consultants
Boston Consulting Group
Clark Whitehill Consultants
Collinson Grant Consultants
Coopers & Lybrand
CSC Computer Sciences
Deloitte & Touche
Development Dimensions International
Environmental Resources Management
Ernst & Young
Hay Management Consultants
IBM Management Consultants
MCG Consulting Group
McKinsey & Co
MMM Consultancy Group
National Computing Centre
PA Consulting Group
Partners for Change
REL Consultancy Group
Roland Berger & Partner
Softa & Co
Sterling Management Consultants
The Coba Group
The Consultancy Company
The DMR Group
The LEK Partnership
The Merchants Group
The Nichols Group
WS Atkins Planning & Management Consultants.