Has the consultancy market slowed or, contrary to rumour, continued tp escalate?
Contrary to rumours of a slow-down in the consultancy market, last year the total fee income of the top consulting firms grew by some 20%. This takes the total fees of all firms on Management Consultancy’s list to a record high of Pounds 5.2bn, a very significant increase on the Pounds 4.4bn figure for the previous financial year. There had been talk of the growth slowing, but the figures show a very different picture. If anything, it accelerated. 1999, for example, was a very good year for the industry with figures some 16% higher than in 1998. This was considered remarkable but what is even more remarkable is the fact that despite indications to the contrary, even more was spent on consultancy in 2000 than ever before.
There were those who said that it would not or could not last. The great concern, a year ago, was recruiting staff to manage the expected growth.
In fact, recruitment has been a major headache for the top firms for a number of years. Year-on-year growth coupled with a relatively high staff turnover ratio has meant that getting new people has been a central issue.
Without people coming into consultancy in fairly large numbers, some firms might have reached the point where they would have had to turn work away.
However, looking at the figures, it would seem that once again the firms managed to get the people they needed.
Our survey this year has provided a number of startling results. Chief of these is the overall growth rate. Much of that, of course, can be attributed to the large firms. Last year we showed 14 firms with fee income above Pounds 100m but there have been some changes and some mergers. This time 16 firms register fee income above that figure. Together, this group earned Pounds 4.4bn in fees in their last financial year, up some Pounds 760m on their combined Pounds 3.6bn a year ago. Put another way, the same 16 firms account for around 85% of the total growth in the last financial year, and also a similar proportion of the total fee income of all firms. The figures get rather more interesting when one looks at the five largest consulting firms.
Together they account for over half the total fee income of all firms.
The entire industry is dominated by a few and is seeing growth on a level that would have been unthinkable a few years ago.
These are staggering numbers but one does have to take account of the fact that there are a number of estimates involved. Ever since Management Consultancy started the annual survey, some 12 years ago, it has been necessary to make some judgements. Also, some firms either do not have final figures or must take out of the equation fee income derived from activities which are not in any way related to consultancy. Our estimates are probably fairly conservative but this does not seem to impact much on the achieved growth rate.
Before the entire industry gets ecstatic and awards itself a large pay rise, it does have to be said that there is a downside to all this. Not all firms grew last year. Also, as many consultants are already aware, recruitment is no longer the issue that it was. The response to our request for figures relating to staff numbers at the end of last year and at the end of June this year makes depressing reading. Smaller firms are indeed looking for additional people and they have plenty to choose from and can be very, very selective. The larger firms, in general terms, are not really looking for people at all. They are probably keeping up appearances by going through the motions of interviews, but the harsh reality is that they just don’t believe that they can possibly achieve the same growth rate in the current financial year. Some said that they would employ fewer consulting staff at the mid point of the year than they did last Christmas.
As for the position at the end of this year, one can only speculate. The indications are that it will be fewer still. One or two firms are encouraging staff to take sabbaticals. Others are apparently suggesting that, while things are quiet, a little industry experience out there in the real world would be a good thing for some of their people to acquire.
Those who believe that they can do just as well and earn just as much by starting their own firm may be interested to learn that not all start-ups have survived either. Last summer, we were aware of a number that had been formed by people coming out of large firms. Each had hoped to be listed among the top firms this year, albeit low on the list. In the event, not one survived to the spring of this year. Since the end of last year, things have got tougher in consultancy. In fact, market conditions may have started to get tougher in the second half of last year. Our survey this time shows that seven firms on the top consultants list recorded no growth at all in their last financial year, and 17 showed less fee income.
New names, new faces
Remember the heady days of the Big Six and the Big Five? Those familiar names have all but disappeared now. We have the Andersen Consulting metamorphosis to Accenture, and the Arthur Andersen change to just Andersen. Then we have the merger of the year which produced Cap Gemini Ernst & Young.
Other mergers and name changes produced Xansa out of the OSI/FI Group, and Penna out of Crane Davies. Further along the chain is Detica, briefly known as Idetica, that was previously known as The Smith Group. Despite all this, PricewaterhouseCoopers remains at the top of our list, having skipped an accounting year. A year ago, the firm provided figures for the year ended June 1999. This time, perhaps realising that figures for the year ended June 2000 would position them second to Accenture, PwC provided a fee income figure correct for the year ended June 2001. This indicates slightly higher growth, in fee income terms, than their main competitor for first place on the list. What was perhaps unfortunate about this was that in the process, PwC was unable to provide any breakdown of figures by type of service or, more importantly by market sector.
CGE&Y come in at third place on the list this year, due to the merger.
Cap Gemini ranked fourth on the list last year, followed by FI Group/OSI.
It too grew, merged and transformed into Xansa, which has had the net effect of displacing KPMG Consulting to fifth place. The figures for KPMG show an apparent drop in fee income. But, says the firm, its consulting business grew by 13% over the previous year on a like for like basis.
The apparent drop in revenue is because some business areas were reclassified and moved out of consulting in this financial year.
Among the 16 largest firms, the greatest growth in the last financial year is claimed by Xansa. Despite the fee income figure being an estimate, there is no evidence to suggest that the firm grew by anything less than 56%. This is followed by Andersen at 52% and Capita at 37%. CSC showed the next largest growth rate, at 34%.
More emphasis on IT
This year, for the first time, we asked the firms to provide some information about fee income from a number of new activities, like CRM, ERP and supply chain management. The idea was to provide a much better understanding of the size and main players involved in these services.
One traditional problem that the firms have, however, is being able to break their fee income figures down by type of service. The old argument that it is difficult to determine just how much of any particular project is strategy or project management or even change management still holds good. Where you have a large firm with a very large number of individual projects in any given year, the problem is immense.
Smaller firms, on the other hand, know exactly what it is that they sell, and to whom. Large firms are less able. You would think that they would have reporting mechanisms that would enable them to determine exactly what type of consultancy services they sold, but it appears not. The only alternative that they have is to estimate the figures and this perhaps explains why some services which have been hyped by the industry only have a small showing. Internet security, for example, appears to be a market worth some Pounds 24m, a number that is far lower then we expected. Also, one might have thought that a fairly large number of firms were involved in it, but the survey came up with just 10 names. Similarly, telecoms/convergence is something that many firms have banged on about in the past year. But even with the best estimate, only 11 firms seem to be involved, together earning some Pounds 63m in fees.
Another surprise involves financial systems and e-procurement. Again, this is a growing market and while the figures suggest some Pounds 158m in fee income from this service last year, the number of firms involved, at 14, is small and far fewer than expected.
Knowing that there might be a problem with actually getting figures, certainly as far as services are concerned, this year the survey asked firms to provide a number for ‘all other IT-related services’ as a form of catch-all so that we could show the size of the IT market in relation to other consultancy services. It is for this reason that there is an information technology consultancy table as well as one showing all IT-related services, including consultancy.
Working through the figures, this shows that IT in all forms accounted for around Pounds 2.9bn last year, or 55% of the total fee income of all firms on the list. It simply underscores the huge importance of IT in today’s market. By the same token, IT consultancy on its own accounted for very nearly one third of the total fee income last year.
Never before have there been such large proportions. Going back in time to when we first conducted a survey of the top consulting firms, it is amusing to find that there were some who confidently expected that IT might one-day account for as much as a quarter of all fee income, while there were others who thought this projection to be quite absurd.
What is not well understood, however, is just how important a driver IT is in terms of selling other services. What we do not know and can only speculate on is how much HR or project management or even strategy work is sold on the back of IT projects, rather than the other way around.
Because most projects involve such a mix of services, it is quite possible that in many cases what starts out as a purely IT project soon involves a whole raft of other consultancy skills.
Moving on from IT, another change made this year was to group business process re-engineering and change management fee income together. The reason is simple. Few firms can actually distinguish between the two.
In the past, different firms have defined and redefined what it is that they understand each to be and this has simply confused the issue. There have been situations where a firm has reported large change management fees one year, and no BPR worth mentioning, and the following year has provided figures for BPR but not change management.
Grouping these services together makes little difference to the running order. PwC was in second place to KPMG last year in terms of BPR, and led the field in change management. This time around, PwC simply heads the list.
The one consultancy service that does stand apart from most others is, of course, strategy. Not only are the charge-out rates among the highest in the industry, it is also a field where some very large international firms hold a significant share. This year, once again, McKinsey tops the list. The figure given for the firm is an estimate which shows a modest gain of just over 18% which may, in fact, err on the conservative side.
Running second this year we have PwC and in third place CGE&Y, followed by Bain. The CGE&Y position has largely been brought about by combining the fee income of the legacy firms. Last year, for example, Gemini ranked sixth largest in terms of strategy fee income. This has moved other firms down the list. KPMG, for example, last year ranked third largest, but this time rank seventh largest due not only to the Cap Gemini merger but also to much lower reported strategy fee income.
While many firms have difficulty in trying to work out their fee income by type of consultancy service, when it comes to which markets they sell to, it is an entirely different story. After all, it is not too difficult to decide what comes from the City, or local government, or manufacturing industry.
The financial services sector remains the largest and most lucrative market for consultancy, last year providing some #1.6bn in fee income to the top firms, or very nearly one third of their combined #5.2bn fee income. Spending on consultancy by this sector has increased at a far faster rate than any other. The actual year-on-year increase works out at about #360m which in turn is a significant slice of the total gain.
What is interesting here is that the increased spending by the financial services sector made all the difference to consulting firms’ figures.
There are few similar gains in other commercial sectors. Manufacturing, for example, is the second largest consultancy market, but the increase in spending was a very modest 7.6%, or Pounds 35m in total.
Central government, however, spent more on consultancy. This follows a trend begun three years ago. Between 1998 and 1999, central government spent nearly 25% more on consultancy, and in the last financial year this momentum continued. Response to our survey this year shows that while fewer firms sold consultancy to central government, the fee income gain was in the region of 50%. In the previous financial year, total fees from the sector amounted to just over pounds 360m. This time, the figure is over Pounds 550m.
If anything, this illustrates just how dynamic the market is at present.
Go back two or three years and it would have been difficult, if not impossible to find anyone anticipating an increase in spending of that magnitude from the state, which has traditionally been one of the slowest growing sectors. Finally, we asked the firms to indicate what sort of growth or change they anticipated in the current financial year. Reaction was very mixed.
The smaller firms were very much more optimistic and even confident of their future. Many are looking for growth of between 15% and 40% and are taking on staff as fast as they can. They are, of course, starting from a relatively low base.
The larger firms who dominate so much of the industry are less optimistic.
There does not seem to be very much confidence that the financial sector will continue to spend more on consultancy and if this happened it would be a major blow. Anticipated growth rates for most commercial sectors range between zero and 5% and the projected fee income from both central and local government is at about the same level as in the last financial year.
It is possible that, after so many years of growth, demand for consultancy has finally peaked and that the industry can only look forward to far tougher market conditions.