In the balance

If we look for a moment at the UK consulting industry (every country is a bit different), we can divide it into three parts. On one side of the scales is the market in financial services; on the other is that in the public sector. Each of these markets is similar in size: in the middle and a little bigger than both is everything else: telecoms, utilities, manufacturing, media companies, etc.

Although simplistic, this picture highlights the strengths and weaknesses of the UK consulting industry. Historically, the consulting industry here has avoided recession because the two sides of the scale are counter-cyclical: one goes up as the other falls. Indeed, at the moment, demand for consultants in financial services is clearly recovering just at a point when that in the public sector is likely to fall. The sectors in the middle act as ballast, absorbing some of the surplus capacity, releasing it when required. If both sides of the scales fall at once or if the increase in one is not sufficient to compensate for the fall in the other, then we (or rather than UK consulting industry) run into trouble.

Most consulting firms recognise that much. What they may not have noticed is what happens when one side of the scales gets significantly bigger than the other.

The actual figures for this are quite simple (2 + 3 + 4 is how I tend to think of them). Extrapolating up from the MCA’s statistics to the UK as a whole, financial services consulting was worth around £2 billion in 2008 (the last year for which detailed data is available), the public sector around £3 billion, and everything else about £4 billion. Let’s suppose for the sake of argument that demand for consulting in the financial services sector fell by a quarter in 2009. To absorb this, the public sector only needs to have grown by 16%, something that is well within the bounds of possibility, based on trends over the last few years. However, my sense from talking to consulting firms is that it hasn’t done that. Although strong compared to the financial services sector, demand here is weaker than it used to be: the scales aren’t working quite as smoothly as they did in the past. Let’s also assume that our ballast was stable, as ballast should be.

In this scenario, a decline of 25% in financial services consulting translates into a drop in the total market of only 5%. And that probably explains why, although 2009 felt like a difficult year, it wasn’t catastrophic. The picture isn’t quite so nice if we put things the other way around (which is how they’ll be in 2010). Because the size of the public sector consulting market is now twice that in financial services, a 15% fall in public sector demand can only be absorbed if demand in all areas of financial services grows by around a third, something it has never done in the past. Even if it were to do so, it would still only mean that the market stayed still. For the UK industry as a whole to return to growth, demand in financial services would have to grow faster still. Do we really think that will be the case?

I mention this only because so many consulting firms seem to think that the current upswing in financial services heralds the end of the recession for consultants....