Financial services: life and soul of the party

The consultancy industry is posting double-digit growth in its biggest client
sector once again, according to the Management Consultancies Association. The
MCA reckons that the financial services sector is spending up to 50% more on
consultancy than it was doing a year ago, with banking clients alone generating
a fee income hike of 65%. Overall, the MCA calculates that management
consultancies earned £1.4bn from the financial services industry last year.

Banking represents nearly half of consultancy fee income in the financial
services sector (larger than the insurance and investment sectors combined) and
its demand for outsourcing-related consultancy rose by a whopping 370% last
year. Although IT was actually down slightly in banking, there were 25%-plus
increases in HR and strategy consultancy. Many put this surge down to three main

First, the sector is performing well. Profits are high, so companies can
afford to buy in expertise.

Second, a lengthy period of wound-licking after the downturn in financial
markets is over. In all kinds of system, regulation and process areas, financial
companies feel a need to make up for lost ground, leading to an explosion of
pent-up demand.

And third, enough time has now elapsed since the consultancy excesses of the
late 1990s to allow many companies to forget the hugely expensive and low-value
projects that many consultancies led them into at that time.

The massive amounts spent by the financial services sector on fixing the
Millennium Bug in systems code meant that future years’ spend was bound to
suffer. Since Y2K was followed by 9/11 and the subsequent downturn in capital
markets, a reduction if not a freeze on consultancy-intensive projects was
inevitable. But that was back then.


The fact that there is something of a catch-up going on is shown by the
difference between the demand for outsourcing consultancy in banking and other
sectors. While banking nearly quadrupled its spend last year, across all
industry sectors the demand for consultancy grew by only 15%. If anything, that
shows that others are probably further down the outsourcing path.

‘We did see a strong upswing last year which has continued,’ says Andrew
Power, a partner in Deloitte Consulting. ’The UK banks ­ both retail and those
dealing only with capital markets ­ are both profitable and going through a
whole range of changes both with their customers and the way they do business.
Typically, with hedge funds, banks have to work out how to deal with them
strategically, how to service them technically and how to compete with them for

‘There has been a concerted drive to outsource both to India and China. There
is always a large demand for consultancy when there is change. In terms of
customers, demand and regulation, we see no foreseeable decline in the pace of
change and therefore expect the demand for our services, which are almost
entirely advisory, to continue. The only brake we see on demand for our services
is if bank profitability falls and they have to cut back.’


Jeremy Stanyard, head of the financial services practice at PA Consulting,
reports that the first four months of this year saw a considerable upsurge on
last year.

‘We are on something of a roll in insurance where companies are now upgrading
and integrating their systems after a few years of hanging back,’ Stanyard says.
‘There is an element of catch-up going on. Insurance companies are not only
having to improve their processes but there is also a lot of regulation-based
work to be done among some of the medium-sized players. As for the future, it’s
always difficult to predict. One problem is the lack of good people. So many
were lost to the financial services sector over the last few years that there is
a real shortage.’

Among the insurance giants spending heavily on outsourcing are Aviva,
Prudential and RSA.

All the consultancies are recruiting heavily for their financial sector
practices. Alan Russell, director of LogicaCMG’s consultancy business, says
there is every reason to be confident in the future.

‘The growth is definitely being sustained,’ he says. ‘We are all getting a
lot of information that there is a good pipeline of activity and we are not just
guilty of unbridled optimism. Our experience is that insurance has been far more
innovative and far-reaching about outsourcing projects. The margins are far
tighter than banking. I agree that a lot of the work is strategic rather than
long-term projects.’


Fiona Czerniawska, director of the Management Consultancies Association,
sounds a note of warning about how long the good times can last.‘ A lot of what
we are seeing is pent-up demand, especially in the IT area where projects have
been put off,’ she says. ‘This may mean that when the catching-up has been done,
the work will tail off. One thing is for sure: no one is going back to the big
projects of the late 1990s, which had such debatable results. People are buying
proven packages and tweaking them for their own purposes.’

But it isn’t only about better integrated systems. Banks are spending one
third more on strategy consulting and a lot more on marketing help. This is all
about looking for ways of expanding their markets and finding growth
opportunities. There has also been a third more spent on HR consultancy as banks
not only have to reorganise in the face of new markets and challenges but invest
more in getting their top teams to be more effective.

Jason McClean, Capgemini’s head of financial services in the UK, says: ‘We
did well last year and that has continued, and I can see this kind of growth
going on for at least 12 to 24months.’

Others take an even longer view. ‘The ideal situation in terms of cost and
efficiency is when half of IT and business process operations is outsourced,’
says Sid Khanna, managing partner of Accenture Outsourcing. ‘We are a long way
from that in the UK. I see growth for at least five to seven years. Unlike
others, we have not experienced any down turn; demand has remained strong.

At present we are doing major IT and business process outsourcing projects
for Barclays and RSA. Business process outsourcing is where the growth is today.
The offshore market is accelerating.’

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