Market Updates | 30th October 2020

Actions consulting firms should take in the face of the second wave

In our last update, we discussed the extent to which re-surging infection rates in many of the world’s largest and most mature consulting markets would bring a repeat of the conditions in April to June of this year, when the first wave of the virus, combined with unprecedented economic lockdowns designed to contain it, resulted in many existing consulting projects being cancelled and new ones deferred.

Our conclusion was that, this time around, the impact on the consulting industry would be different. From a business point of view, client organisations know what to expect: Even if they can’t predict the severity of government restrictions or the duration of the “second wave”, they’re now familiar with the adjustments they’ll need to make. Unlike the spring, businesses are under no illusion that the crisis might be resolved soon—even the most positive forecasts around the roll-out of a vaccine recognise the complexity and scale of what will be involved. Sitting alongside the tapering-off of many government support programmes, this means that businesses will be forced to confront difficult decisions about their future that they were postponing earlier in the year.

Adjusting our model this week has resulted in our headline forecast for 2020, compared to 2019, improving from -14%, where it’s been since August 21st, to -13%.

In reality, the actual change is very small—a movement of just 0.17 percentage points on a number that’s been teetering on the brink of change in our last two updates, and the accumulation of many marginal gains at the sector level. Those gains take different forms depending on the part of the economy you’re looking at. The energy and primary resources industries, where we’re forecasting that the consulting market will contract by around a quarter this year compared to last, are seeing a growing number of large-scale cost reduction programmes. Chevron, for example, is making its employees reapply for their jobs as part of efforts to reduce its headcount by 10-15% globally. By contrast, in the less badly impacted utilities industry, innovative new investment projects—around high-tech pipelines, for instance—will create opportunities for consultants. The pandemic has accelerated the push for branchless banking in many parts of the world with contactless payments on the rise even in underbanked markets. Banks in Latin America—which we think will be the worst-affected regional market this year and likely to shrink by 22%—are seeing a boom in digital customer services and are capitalising on the shift in banking behaviour to acquire new clients, all of which is likely to convert into improving demand for consulting support. There’s evidence, too, of large businesses looking for growth in new markets: German insurer Allianz has recently signed a strategic partnership to expand into East Africa. Activity in European manufacturing has picked up as a result of rising exports, particularly to China.

Where all this does show in our numbers is in improvements at the service line level. Strategy consulting continues its broadly consistent upward trajectory, although with little time left for M&A activity to have an impact in this calendar year, we think this area of consulting will end up being down by almost a fifth on 2019. Increasing cost-cutting work has also pushed the prognosis for operational improvement consulting upwards, to -17%, returning back to where it was from late August to early October. As much as anything else, recent slight ups and downs reflect less clients’ underlying need to change—which our client research indicates remains as strong as ever—but more the extent to which those needs will, or won’t, translate into paid consulting work. Cost-cutting could be a very large market for consultants in the coming months, but many clients believe they’re best placed to take out costs and are reluctant to pay consultants to help them.

All this brings us to a wider point: The extent to which the second wave resembles the first wave doesn’t just come down to infection rates, government restrictions, and overall client activity, but also the ability of consulting firms to respond. The early summer saw frenetic activity by consulting firms to stay in touch with, and offer support to, their key clients, but recent research we’ve carried out highlights concerns clients have about the effectiveness of these interventions.

This means that consulting firms will need to adopt a different strategy this time around. They’ll need to focus on the relatively strong markets, whether that’s on a geographic basis (Asia Pacific) or from an industry perspective (pharma, telecoms, high-tech, and logistics companies have been the best performers this year, but defence, consumer products, and insurance have also fared comparatively well). They shouldn’t assume that the services they have will meet clients’ rapidly changing needs but will need to adapt existing offerings and develop new ones that very precisely map to clients’ needs. And they’ll have to demonstrate that they can deliver concrete outcomes from those services at speed.

Nothing is guaranteed in the current market, but these factors will improve the probability of success.

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.