Market Updates | 7^th August 2020

Cost-cutting: The new tip of the spear

Since our last update, analysis of the COVID crisis from a social and economic perspective has been almost entirely grim. Rising infection rates in developed countries, where the virus was thought to be under control, now overlap with rapidly increasing cases in emerging markets. The fiscal support package agreed by the EU is a precious but rare piece of positive news against a general backdrop of indecision, as governments weigh up the affordability of further financial help.

From a consulting point of view, it’s becoming increasingly obvious that the crisis is morphing from an acute to a chronic state. The downside to this is that the rate of improvement in our forecasts, driven by a combination of economic recovery and supply-side adaptation, is flagging, and our expectation remains that the consulting industry will contract by 15% in 2020, compared to 2019. The upside—and this is the reason why, despite worsening news, our overall forecasts aren’t getting worse—is that clients are starting to prepare for a prolonged crisis. They now have certainty about the uncertainty, at least.

That’s led to improvements at the level of individual sectors. After a brief hiatus, public sector consulting is seeing slightly stronger forecast demand, up one percentage point to -10%, as national and local governments look for external input and support about how best to grapple with a more piecemeal, complex crisis. Demand in the healthcare sector continues to strengthen, although this should be netted off against extreme pressure on fee rates: Our forecast for this sector has improved by one percentage point to -13%. Increased infection rates combined with fears for the winter flu season have increased the urgency around planning, the reconfiguring of service delivery to avoid non-COVID care being overwhelmed, and the adoption of new technology. Meanwhile, the pharma sector continues to be a very active consulting market, and one that we’re now expecting to grow by 5% this year, up by one percentage point on last week’s forecast. While some pharma companies have posted disappointing quarterly results, the challenges the industry faces, not simply in developing an effective vaccine, but also in scaling up delivery and finding new drug delivery mechanisms for non-COVID diseases, mean that investment and the need for specialist capabilities remain high. Elsewhere, while our prediction for the retail sector hasn’t changed, the prognosis for the manufacturing sector, which was much more severely hit in the earlier weeks of the crisis, has improved and now stands at -19%.

All this has resulted in improvements of one percentage point in our forecasts for Europe and the Middle East, while other regions remain unchanged.

From a service line perspective, the chief beneficiaries of the morphing crisis have been strategy and technology, the forecasts for both of which have improved by one percentage point, to -23% and -5% respectively. As we noted in our previous update, there’s plenty of scope for strategy to improve before the end of the year, but this will depend on the conversations around potential M&A work that are currently happening converting into more substantial engagements after the summer.

But as always in this industry, which has been reshaped over the last couple of years by client demand for new, multidisciplinary solutions, the value of traditional service labels—strategy, technology, etc.—is questionable. They may even be damaging for the industry.

The best example of this is digital transformation. Before the crisis, demand for this work was growing at multiples of the market average: Between 2018 and 2019, the overall consulting market grew by 7%, but demand for digital transformation, by then a maturing market, was growing at 16%. According to consulting firms, client interest has continued to be strong, yet research we’ve just carried out with clients in five major consulting markets suggests that digital transformation is no longer a top priority. How can we account for this discrepancy? The answer, we’d argue, has significant implications for consulting firms.

The first point to make is that clients only very rarely “bought” digital transformation in the first place. Typically, these projects started with a small opportunity or issue, and subsequent discussions would uncover more opportunities and more issues. Over time, these accumulated to become the wide-ranging, large-scale projects that have become the economic mainstay of growth in the consulting industry over the last five years. Going to a client to sell them digital transformation never worked well before the crisis, and it works much less well now. Clients associate digital transformation with growth-focused strategies (and many organisations are now operating in low- or negative-growth environments) and huge financial outlay (at a time when purse strings are being tightened).

A second point is that a lot of what was badged as “transformation” was never that in practice. Although new technology certainly created innovative business models and opened up other new opportunities, much of the work delivered by consultants took the form of large-scale strategy, technology, and change programmes. That doesn’t mean the latter weren’t of value to clients—they clearly were, otherwise clients wouldn’t have bought them—it just wasn’t very different from work that had happened before, and it didn’t need to be because while the label and aspiration might have changed, clients’ underlying needs hadn’t.

Finally, there’s a risk that “digital transformation” becomes an outdated tag that suggests to clients that a firm has not moved with the times. The secret of success in selling digital transformation work was what consulting firms call the “tip of the spear”, a precisely focused point of entry that resonated with clients and was a world apart from general and hazy promises around technology and disruption.

Our conclusion is that there is still demand for something we used to call digital transformation—clients still need to effect rapid and material transformation—but the tip of the spear that works here is not transformation, growth, or innovation: It’s cost-cutting. The consulting firms that perform best in this environment will recognise this shift and will go in on an aggressive and ambitious cost reduction agenda, then use this to pave the way into the type of large-scale, technology-enabled projects that will still hold the key to long-term future growth. A rose by another name will still smell as sweet.

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, and the broader evolving market, 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.