COVID-19 | Update for 17th July 2020

We're all facing unprecedented challenges in the next few weeks and months, in our daily lives, in our communities, and in our businesses. But we're already seeing evidence of how, if we work together, we can make a difference.

It's in that spirit of collaboration that Source has put together an estimate of the impact we think COVID-19 will have on the global consulting industry during the course of 2020. We're very grateful for the input of a wide range of firms from around the world who've helped us do this, providing up-to-the-minute information on how we should adjust our existing model of the industry.

Our forecasts are constantly updated to reflect the latest market data we have available from consulting firms and clients. They’re not intended to be a one-off, static roadmap, but a guide to the rapidly changing conditions and unprecedented challenges of this crisis. Like satnav or a GPS navigator, we’re constantly monitoring the route ahead and that’s why, month to month, and even week to week, our numbers change. We think that the speed with which consulting firms adapt their services to the current crisis will be critical, and that this is the best way to help them do so.

Summary: 17th  July

The incremental changes of the last 4-5 weeks have finally resulted in our model tipping, from forecasting a contraction in the global consulting industry of 16% to one of 15%. This should, however, be no cause for complacency among consulting firms. What our underlying numbers reveal is the inconsistency of this crisis, with improving demand for some consulting services being countered by deteriorating situations in specific countries. This creates a situation in which, while there’s underlying demand for consulting support from clients, budgets are being very tightly controlled. Success will depend on being able to focus efforts on where there is opportunity.

Hope isn’t a strategy: Choice is

Three competing and sometimes conflicting trends are shaping our forecast numbers.

The first is uncertainty. Although our headline numbers at a regional level are unchanged from last week, there’s plenty of reason to suppose that clients in some individual countries, which had started to think they could put the pandemic behind them, may put some of their investment decisions on hold. With virus surges occurring and selective lockdowns being reintroduced, our forecast for Australia stands at -12%. Our predictions for India have worsened from -21% last week to -22% this week. The forecast for China (-10%) is under pressure from increasingly tense US-Sino relations. Elsewhere, we think the situation in Mexico is deteriorating, going from -18% to -19%. But the geography that matters the most, so far as the consulting industry is concerned, is the US. Our forecast here has held steady at -15%, but with so many states struggling to contain the rate of infection, economic uncertainty seems likely to grow. While we haven’t adjusted our numbers yet, we anticipate having to do so in the relatively near future.

These numbers could have been worse, but for the impact of the second factor shaping our forecasts: client need. Corporations don’t like to admit it, but most can’t function without some support from external consultants. In normal times, around 45% of all consulting projects are bought primarily because client organisations don’t have enough people—it’s a capacity rather than a capability issue. Thirty percent are bought for the opposite reason: Clients don’t have the specialist skills required. The other major drivers of demand for consulting are regulatory or similarly non-discretionary change; and the need for independent input on, and/or validation of, complex decisions. During the crisis, this pattern has changed, with less emphasis on the latter—enforced change and independent input—and more on expertise.

To complicate the picture, those underlying needs are being expressed in new ways. That’s resulted this week in improvements in our forecasts for risk & regulatory (up one percentage point to -12%), strategy (up to -25%), and HR & change management (up to -33%).

  Services 2020 forecast
% change
Financial management (26%) -
HR & change management (33%)
Operational improvement (18%)-
Risk & regulatory (12%)
Strategy (25%)
Technology (6%)-
  Total (15%)

Our forecast for the impact of the crisis on HR & change management consulting has been consistently dire. Projects in this area are more likely to be cancelled, partly because clients can’t conceive of doing HR & change management projects in a remote working environment, and partly because this type of work is often regarded by clients as a nice-to-have, a luxury that you’d cut back on when times are tough. After the initial shock of the coronavirus, the prognosis has remained bad, but at least relatively stable. In the last two weeks, we’ve detected a change, with firms reporting an increase in requests for help around cultural change and even training workforces to operate effectively in a remote environment, presumably prompted by a growing recognition that the latter is going to continue through the autumn and into early 2021. This creates a new and potentially significant market for consulting firms—but one for which they’ll have to move quickly to create new offerings.

Another old service taking on a new guise is restructuring. Unsurprisingly, our model predicts substantial growth here but so far the impact on specialised restructuring firms appears to have been patchy. Looking beyond the label, there’s evidence that the nature of restructuring work may be shifting. Organisations wanting to conserve cash are looking at simple cost-cutting, taking out the non-value-adding activities they’ve accumulated over the last few, economically buoyant years. They’ll also want to drop unprofitable products and services—the results of overambitious plans to expand and poor decision-making. The cost-cutting work appears to be going to the Big Four firms, with strategy firms playing more of a role where decisions about the cost base overlap with more fundamental course corrections. The drive for more automation of office work and a surge in interest in outsourcing give technology a way into what might, in previous crises, have been deemed restructuring work. Legal practices in consulting firms are thriving on the back of more litigious clients.

Risk & regulatory, which notched up a further improvement of one percentage point this week, is benefiting from strong positive growth in cybersecurity, plus a growing need for help in ensuring regulatory compliance at a time when clients have reduced capacity—an expert version of staff augmentation, with consulting firms supplying expertise on a flexible basis.

All this is a reminder of the fact that clients’ desire for multidisciplinary work—a major source of growth prior to the crisis—hasn’t abated. Consulting firms will, however, need to develop demonstrably new, more focused offerings if they’re to exploit this particular aspect of the zeitgeist.

It also takes us to the third and final factor driving our forecasts. Underlying client need may be offsetting localised deterioration, but the extent to which clients can act on that need is determined by a simple fact: money. Past research we’ve carried out has shown that organisations that experience a sudden drop in profitability are more likely to hire consultants (it’s the trigger for traditional restructuring), but those that have seen a long-term erosion of margins are less likely to do so: Consultants will be cut alongside other costs, at least until the company runs out of options and long-term decline becomes a crisis.

In the current environment, the best predictor of the ability to spend is sector. We expect demand in in pharma, high-tech, telecoms, consumer packaged goods, and insurance to hold up comparatively well. Public sector and healthcare will be highly active markets, but their revenue growth potential will be limited by extreme price pressure. The need for consulting may be strong in the energy, services, and industrial manufacturing sectors, but the budgets won’t be.

All this points to one overriding lesson: the critical importance of choice. It’s perfectly possible in this crisis for one consulting firm to have had a better-than-expected first half of the calendar year and a healthy-looking pipeline, and another to have experienced a catastrophic slump in demand—all as a result of the difference in their mix of geographies, services, and sectors. Now, as many firms start to plan into 2021, they’ll need to be very precise about which opportunities they want to focus on.

Further questions

We've included details of our model and forecasting methodology below. If you'd like to know more about how we've created our forecasts or want to understand how the year is likely to play out at a more granular level for your firm, please contact charis.buckingham@sourceglobalresearch.com.

Methodology

In order to calculate this forecast, we've taken the most recent forecast from our model of the consulting industry, which was prepared pre-crisis, in early January 2020. This unique model is built bottom-up, by estimating the number of people employed by several thousand major and mid-sized firms across 84 countries, 29 industries, and a range of services. We then apply a series of metrics and adjustments around the revenue per consultant. Where possible we validate this data against published sources and interviews with senior people in the firms concerned. Although some of our 10 million individual data points and assumptions may be wrong, when aggregated, they provide a robust view of consulting markets around the world. Moreover, because of the way this model has been built, we can adapt it to take account of new scenarios—as we have done here. In order to understand the likely impact of COVID-19 on the consulting industry, we've developed forecasts at the level of individual service lines, quarter by quarter, then modified these depending on industry and country. Please note that all the data in this bulletin is for the calendar year 2020 and is in US dollars. We've calibrated our assumptions with a number of major and mid-sized firms.

Definitions

One of the greatest challenges with sizing any part of the consulting industry is that "consulting" means different things to different people. Over the last 12 years, Source has adopted a consistent definition, and this underpins all our published material about the consulting industry. It includes traditional management consulting services (strategy, HR & change, operational improvement, risk & regulatory work, and technology consulting), but does not include systems development and integration, and outsourcing services.

Scope

Our model also focuses on what we call "big consulting", work done by consulting firms with more than 50 consultants typically for clients with a turnover in excess of $500m.

About Source Global Research

Source Global Research is the leading provider of research about the professional services market. Founded in 2007, we serve the world's leading professional services firms and their clients with expert analysis, data, and insights. Firms come to us because they know we offer transparency in a notoriously opaque market. We provide direction and evidence about changes in the marketplace, helping firms cut through what can sometimes be intractable discussions around future direction by being objective and honest.

Data sits at the heart of what we do, and our model of the professional services market is the largest and most sophisticated in the world. Data in the model comes from extensive desk research, and interviews with over a thousand senior partners from around the world. It feeds into our customers' business strategies and helps them prepare for the future. We also place a strong emphasis on the views of clients of professional services firms (we conduct some of the largest interviews on this sector in the world) and listen to what clients need, and how their views are changing in the marketplace.

Please note that, because we work with such a wide range of firms, we take confidentiality very seriously. Our ongoing research programme, including interviews, and customised project work with individual firms, gives us an extensive foundation of knowledge and allows us to work on some of the most confidential issues these firms have.

Our independence and knowledge of the professional services industry means that we're trusted to set our work within the wider market context, helping firms make the most of the opportunities on offer. Our customers would tell you that we have a strong commitment to doing the very best for every firm we work with, and are thoughtful, friendly, and easy to work with.