There was a time when the public sector market was regarded by the majority of consulting firms as one of the most important. In terms of annual spending on consultancy, it was second only to the financial sector. Other markets, like manufacturing industry and the utilities were considered much less important. Central government was then the biggest spending part of the public sector, but local government (including the county councils, metropolitan councils and town councils) was also considered critically important; there were, after all, a lot of different parts to it that required consultancy services. Among central government bodies too, a wide variety of them purchased consultancy, ranging from the DTi to the Welsh Office and on to the police. Because of this, firms could sell consultancy to such a wide range of departments and bodies that competition was actually rather thin. The strange thing is, competition is still rather thin. Although roughly half the top consulting firms listed in the July/August issue of Management Consultancy reported fee income from central government, of these, a group of only seven shared over half the total 1998 fee income. In the local government market, competition is even thinner. Only a quarter of the top firms reported fee income in 1998, and of these, four had over 60 percent of the total. Part of the reason for this is that the number of firms selling consultancy to local government has been steadily declining. There was a blip seven or eight years ago when everyone realised just how few firms had a presence in local government and, as a result, dozens of firms began to jostle for a share of the action. But it did not take very long for the majority to discover that day rates were much lower in local government than in other sectors, profitability was much reduced and restrictions such as competitive tendering raised the suspicion that some projects were already stitched up before the beauty parades and bids in sealed envelopes had been handed in. Since then, many of the firms that have had a crack at the local government market have found it unexciting, and moved on to other areas. If one compares a list of firms selling to local government five years ago with the current list, it is immediately clear that those remaining have long experience of the market and that most are specialists in one way or another. The central government market is a little different. Last year, nine percent of the total fee income of the top firms came from central government; so it is still an important market. However, growth expectations for 1999 mean that despite some extra anticipated spending on consultancy (around £45 million) not very many firms regard this market as being a key contributor of fee income, as they did only a few years ago. Our survey this month showed some optimism, but not very much. It has actually been quite some time since we asked firms to report on the public sector market, and the results produced the sort of response that immediately rang a bell when we looked back. We found that there are more projects now, for example, but that the average value of those projects has not increased. Also, small firms have sold more services than before, but charge-out rates are still surprisingly low. Looking back to the surveys we did in 1995 and 1996, it became clear that, overall, little has changed. Back then, we found that some small firms reported average project values of below £40,000. The picture is much the same now. In 1994, the average daily charge-out rate for a partner worked out at £1,175/day. There has been an improvement, but it has not been anything spectacular. Rather a lot depends on what type of consultancy service is being offered and the size of firm involved, but it would seem that the general rule of thumb is that public sector charge-out rates are about 15 percent below those in other markets, with the exception of the financial sector, which is about 15 percent above most markets. Fee income from the central government market is expected to increase this year by about 16 percent, as shown in Table 1. However, the overall growth, including local government, is projected to be around 13 percent this year, which does not compare particularly well against the industry average of 20 percent growth in 1999 fee income over 1998 levels. We started by asking firms to indicate the number of public sector consultancy projects they had been awarded in the past year, together with the total fee income from these projects. This provided the information on average project value, which is shown in Table 2. It is important to note that the data refers to both central and local government projects, and the suspicion must be that the average project values for local government projects are somewhat lower than those in central government. What the table shows, however, is that there is a huge difference in the average value of projects, depending on the size of the firm involved. True, smaller firms may not have the human resources to cope with large projects, but what the figures tend to indicate is that the larger firms are not taking on small projects, where a few years ago, they did. Next, we asked the firms to indicate which major central and local government markets they had done projects for in the past year. The result of this question is shown in Table 3, which shows some quite remarkable changes in the market. In 1984, for example, the majority of firms said that they worked for the NHS and MoD, but that proportion has steadily shrunk. In fact, the proportion of firms saying they have worked for one or other public sector market in the last year is much lower than was the case just two years ago. There are two aspects to this. Firstly, the number of firms selling to the public sector has declined but, in addition, those that are in the market are selling to fewer public sector markets. Next, we asked the firms to indicate what proportion of their public sector fee income came from a range of different consultancy services. This question provoked a very mixed response. None of the firms could say with absolute certainty how much was derived from IT or strategy or even HR. This was made very clear by the fact that virtually all the responding firms gave rounded numbers, and that most of these figures had been rounded up or down to the nearest ten. We also asked the firms to try and separate IT consultancy work from software, systems integration and outsourcing, but in the event, none did so. Just one figure was given for IT as a whole, and as a result a fairly large slice of that will be what we have in previous years defined as IT-related services. Strictly speaking, these are not consultancy services at all, despite the fact that the systems/consultancy distinction has become increasingly blurred over recent years. Five years ago, firms were able to say exactly what proportion of IT was consultancy; but it seems that since information technology has come to dominate consultancy activity, the willingness to differentiate has disappeared. Because of this, the slice of fee income attributed to IT appears to have grown at the expense of other services. The notable exception to this is project management, which currently accounts for 15 percent of total public sector revenues, or roughly £60m in 1998. This is indicative of the overall growth of project management as a consultancy service. In 1996, for example, which is the last year for which figures are available, project management accounted for some £26m of total public sector fee income. Finally, we asked about daily charge-out rates. Table 5 shows that there has been an improvement in the time since our last public sector survey, but that improvement is nothing to get excited about; the rates are significantly below those currently achieved by firms working in other market sectors. Also, it is important to note that the figure of £658 for junior consultants is almost entirely the result of large firms reporting – few small firms have junior consultants anyway. There are, inevitably, some firms charging more than the average shown here, but there are not many charging significantly more. Another aspect of this is that a few small firms reported rates for partners that were only marginally over the £1,000/day mark. At first glance, this does not appear to be much to charge for senior people, but the reality is that there are firms out there that see £1,000 per day as the major charge-out threshold, beyond which they are reluctant to go. The overall impression we gained from this survey was that few firms are particularly optimistic about consultancy prospects in the public sector market. On the one hand, they anticipate growth in fee income terms this year, but the downside is that with a lower average charge-out rate than other markets, coupled with relatively small projects, there are other consultancy markets which are very much more attractive and much more profitable. At a time when the consultancy industry is growing at an unprecedented rate, one would have thought that, like other markets, more and more firms would be trying to sell to the public sector. Not so. Markets such as the financial services sector and manufacturing industry, which used to be the third largest market for consultancy, but which have now usurped the public sector to become the second largest market, are very much more interesting to the majority of firms. It is in these markets that one sees increasing numbers of firms trying to sell their services. Not in the public sector market. Philip Abbott is a director at IRG. Fee income from central government spending on consultancy has grown at a modest rate over the past few years, while the increase in spending by local government bodies has been very slight. This is perhaps one reason why only one quarter of the top firms work in local government, yet one half work for central government. Some small firms report average project values of around £30,000, although this is unusual. However, no matter how large the firm, reported average values are not as great as in some other markets for consultancy. Since small projects are not profitable for large firms, the gap between average values for large and small firms is widening. There has been something of a shake-out in this market in recent years. Not long ago, health and the MoD attracted a large proportion of consulting firms, but this is no longer the case. The number of firms working for public sector bodies is slowly falling. The only services that appear to be increasing market share are IT and project management. Outsourcing consultancy has been reported for the first time. The project management increase is in line with the overall growth of this service, but the apparent growth of IT is confused by the fact that most firms do not differentiate between consultancy and other IT-related services. Even the highest reported rates this year were not much higher than the average, and while there has been an improvement in daily rates, the overall average is not nearly as attractive as that currently obtained in the majority of other markets. This probably explains why so few firms are active in public sector consultancy.