Survey - IT comes out top in sales to telecoms sector

In June last year when we conducted our first telecommunications survey, we reported that despite this being a vast global industry with huge growth potential, opportunities for consultancy seemed to be decidedly limited. In fact, we went so far as to say that not only was this an apparently small market for consultancy, it also appeared that the industry was to a certain extent consultancy-averse.

Subsequently, a number of firms told Management Consultancy that they were particularly surprised at the results of the survey since they were doing rather well out of the telecommunications industry and they were certainly selling a great deal more information technology than the 24 per cent of services by value that we reported.

So we had another go. There were two reasons for this. One was the paucity of response to our survey in June last year and the other was the niggling suspicion that perhaps this really was a much larger market.

After all, telecoms really is a very large industry. Logic dictates that there must be a significant market for consultancy services within it.

There was, however, still an element of doubt. Response to our top consultancy firms survey (published in July/August last year) showed that there were actually very few major players in the market. Coopers & Lybrand, Andersen Consulting, KPMG, PA Consulting and Price Waterhouse are the only firms with annual fees from telecoms in excess of u5m, and together these five share something like 83 per cent of the market. True there are other players, but their annual fees from sales to this industry are small by comparison. Several other firms do sell to the industry, but the value of their annual fees is typically well below the u100,000 mark and the sector is not their main market.

In the event, there is a need to revise some of the figures we reported last year. However, before anyone starts to get excited about a booming market, it has to be made clear that most numbers need to be revised downwards.

What this survey did confirm, however, was that the consultancy services bought are in proportions which are clearly unusual and not at all typical of other market sectors. What we do not know is the extent of the use of technology consultants; people with industry-specific skills in electronics or even perhaps satellite technology. This is not the sort of thing that management consultancies typically offer.

Figures from the larger firms show that average project value for 1996, for example, turns out to be lower than was anticipated for the period to the end of June last year. As Table 1 shows, average project value for larger firms last year was still well below the level of 1994. On the other hand, it appears that smaller firms are seeing average project value rocket, by almost 37 per cent last year, against an increase of fractionally less than 10 per cent for their larger competitors.

Next, we asked companies about services sold to the telecoms industry.

Instead of asking for 12-month figures to the mid-point of the year, as we did six months ago, we asked respondents about services sold in the full 1995 and 1996 years.

Table 2 shows the result. The surprise is that the firms seriously underestimated the value of their IT sales in our mid-year survey. IT appears to account for around one third of the value of services sold, followed by change management and BPR, in that order.

What we could not find in our telecoms survey last year was any significant sale of other services. Now it is clear that the market is not dominated by change management and BPR, as we had reported.

Rather it is a case of these two services each contributing a modest slice of total fees, by value, with strategy, marketing and product development as well as financial management together contributing around one quarter of total fees.

It is a rather different picture. Not much different, but sufficiently so. That IT contributes around one third of the fees is pretty well what one might expect, though some would have one believe the proportion was very much higher, perhaps closer to 50 per cent. We cannot find that volume. The contribution of change management, and indeed of BPR, is perhaps higher than most industry watchers would expect, and it is certainly a higher contribution than is the case in other market sectors.

With hindsight, the sale of change management services to this industry is entirely logical. It is an industry that moves fast and which is continuously evolving, to the extent that what is new today will be old hat by the end of the year, if not sooner.

What one has here are large companies that are constantly dealing with change, not only in terms of their own customer base but also in terms of the technology they make use of.

Next, we asked respondents about sales by UK consultancies to foreign telecoms clients. As Table 3 shows, the growth has been more or less constant over the past two years. In value terms, this was 30 per cent in 1995 compared with 1994 levels, and 28 per cent last year compared to 1995 levels.

Selling to foreign clients does appear to be the prerogative of the larger firms which are operating in a global market. Smaller firms, which have significantly lower sales to this industry, are hardly getting a look-in, which is not at all surprising.

While it is not possible to put a number to it, the impression we have is that sales of consultancy to international telecoms clients are substantial, to the extent that larger players in this market are using their foreign offices to help run projects. Telecoms, after all, is hardly about being able to make a call from one end of the country to another, it is rather more about being able to link up with anyone, anywhere in the world, or even with several people at the same time.

We also asked about sales broken down by type of client. Table 4 shows the result for 1996. The proportions are not, in fact, that much different from the proportions we reported last year. Three quarters of the value of consultancy comes from the telephone companies and around one fifth from the cable people. There is very little consultancy from other markets.

Sales to the television and radio companies are minuscule and, as one respondent pointed out, these organisations are more often than not classified as media, rather than telecoms companies anyway, so that selling telecoms consulting to them is a bit of a lost cause.

Finally this month, we asked respondents to the survey about charge-out rates currently obtained from the industry. The response, which is shown in Table 5, differs in many respects to the response that we had last year. Rates charged by the smaller firms have increased in the last six months, whereas the rates charged by the larger firms have, in general terms, come down.

In June last year, when we asked the same question, small firms were charging partners at u850 a day, industry experts at u700 and senior consultants at u590. As the table shows, this has now increased.

What is interesting is that last year the larger firms were charging partners out at u1,710 a day, and this has now come down to a current rate of u1,660. Industry experts are being charged at the same rate, but project managers are being charged at u980 now against u1,100 in June last year. Similarly, senior consultants are being charged at u900 now, against u920 six months ago.

It is difficult to attribute this drop to anything other than a seasonal fluctuation. In any event, it is not a large drop in rates but one must wonder whether the fact that there are so few large companies involved in the telecoms industry has had the effect of bringing rates down to be more competitive.

One thing is certain, though, and that is that the larger firms can hardly be concerned about the impact smaller competitors are having on their market.

With an industry clearly dominated by the few, small firms are only picking up relatively small projects, and their fee expectations are inevitably going to be considerably lower than the expectations of the large firms.