Market Updates | 14th May 2021
The pandemic is accelerating the pace of change right across the professional services sector, amplifying pre-crisis trends as well as triggering entirely new ones. We’ll be keeping tabs on these over the coming months: We’ll be reporting back on what clients are telling us and how we see different segments of the professional services sector perform, as well as highlighting emerging opportunities and challenges. As always, we’ll be taking a fact-based approach. Our market sizing data comes from our unique model of the professional services sector, with more than $1tn of revenues broken down by sector, geography, and capability. Our forecasts are constantly updated to reflect the latest market data we have available from firms and their clients. Client data comes from our rolling programme of quantitative research and interviews.
Strong performance in the consulting industry in Q1 2021
Anecdotal evidence over the last couple of months has pointed to a strong start to the year for the global consulting industry—and that’s now reinforced by a survey we’ve just conducted with around 80 consulting firms1.
Eight out of 10 firms have seen an improvement in their businesses in Q1 2021 compared to Q4 2020. This is on top of a recovery in the second half of last year, when the proportion of firms who’d outperformed against the same quarter in the previous year rose from 25% in Q2, to 39% in Q3 and to 62% in Q4. Only around 20% of firms said their performance was flat in Q1 2021, and just 1% said it was worse.
The wide geographic distribution of respondents makes it hard to draw definitive conclusions on a regional basis, but it appears that the US, UK, and Nordic markets performed best, while continental European markets such as France and Germany were relatively weak. Asian markets were somewhere between the two.
Clearer, though, are the differences between types of consulting firms. Perhaps because they had a strong end to 2020, the improvement in performance among the Big Four is slightly lower than the average. The same explanation may also underpin the 55% of operations firms who said their performance in Q1 was the same as Q4 last year. Boutique specialists generally said they’d performed slightly better but were the least likely to say it was much better, a testimony to how difficult the last 15 months have been for this segment. By contrast, no reader of our updates will be surprised to hear that technology firms performed relatively well, building on strong results in 2020: Forty-five percent described their results as much better than the previous quarter, compared to 38% of our sample as a whole. However, the strongest performers of all appear to have been strategy firms, the vast majority of whom rated their performance as much better.
Such positive feedback from strategy firms is important for several reasons. Strategy firms traditionally suffer worst at the start of any crisis, as clients cut back on longer-term planning to concentrate on the here-and-now. But they also tend to be the first to recover, so the fact that we see them ahead now suggests that, so far as the consulting industry is concerned, the crisis is in its final stages. However, digging a little deeper into our data yields two other possible explanations for strategy firms’ strong performance.
The first is that strategy firms appear to have been less dependent on existing clients when it came to winning new work in the first quarter. On average, only 50% of respondents from strategy firms said that at least 70% of work won in Q1 came from existing clients, compared to 77% among those from Big Four firms and among those from technology firms it was 73%. While a high proportion of work from existing clients suggests effective account management and cross-selling, it may also create a risk of too great a dependency on established clients. That could be a problem because the final stretches of past crises in consulting have always had a period when clients, who rely heavily on firms they know during times of uncertainty, change tack and actively seek out new suppliers. The Big Four and technology firms will need to ensure that success with existing clients doesn’t distract them from the imperative of developing new ones. It’s also possible that, when these firms do start to engage more with prospects, they may find strategy firms are there ahead of them and have used the tail-end of the crisis to further diversify into new services.
A second explanation may lie with fee rates—or, more precisely, on how consulting firms are responding to the pressure on rates. Increasing push-back from clients on fees is a hallmark of every crisis, including this one. That pressure abates towards the end of the crisis, although history also teaches us that prices very rarely return to their previous norms: Each crisis represents, in effect, a step down in average rates. That plays out in our data: Although 58% of the firms we questioned said that price pressure in Q1 2021 was similar to that of Q4 last year, almost a quarter said that it was less intense. However, strategy firms’ views were the most polarised: They were more likely to say that price pressure had both increased and substantially decreased. These mixed messages suggest that discounting may be a factor here. Strategy firms, of course, have the highest price point, and clients have quickly accustomed themselves to last year’s lower rates. Strategy firms are trying to reverse the latter, but the lower rates may also be proving useful when it comes to winning new work, especially with new clients.
If that turns out to be the case—if strategy firms’ success in Q1 is in part attributable to their willingness to discount, that has important implications for other firms. As the recovery takes on increased momentum, consulting firms may still find that the cost of winning work with new clients is keeping their fee rates low. A booming market, even one where specialist talent is in scarce supply, won’t necessarily translate into a more profitable one.
