Market Updates | 23rd July 2021

The consulting market in H1 2021: Outperforming expectations

It was obvious in the first quarter of this year that the rapid recovery in consulting demand, which began the previous autumn, was accelerating. Now, half-way through the year, it’s equally clear that that early momentum has continued to build.

This is evident in our latest forecasts for the global consulting industry, which we think will grow by 11% in 2021 and only fractionally less in 2022.

We expect the strongest growth to be in the retail, services, and—to a slightly lesser extent—manufacturing sectors. All experienced mixed fortunes during the pandemic, reflecting clients’ own experiences. Even within a single company, we’d speak to business unit leaders of essential goods and/or online services whose performance was exceeding all expectations, and to those heading up discretionary goods and/or traditional access models whose business had almost disappeared. This meant that some parts of these sectors saw very high demand for consulting support, while others cut swathes from their budgets. That polarisation is less apparent this year: The first category of clients is keen to exploit the continuing opportunities, while the second group are now making the necessary changes to their business models that furlough schemes allowed them to defer.

Consulting growth this year is also expected to be high in the pharma sector, and just under the market average in the high-tech and telecoms sub-sectors, but the back—and front—story here is different. All three areas performed exceptionally well as consulting markets in 2020, so there’s less ground to catch up on. Moreover, the primary drivers of consulting demand—investment, new business models, and huge pressure to innovate—are unlikely to change or disappear in the next 2-3 years.

This leaves us with sectors where the picture is far more complex. The energy & resources consulting market (which in our definition includes utilities) was one of the worst-performing in 2020; the result of both the pandemic and the fall in commodity prices it initially triggered. With oil prices forecast to be roughly twice as high as they were during the peak of the pandemic, a world-wide shortage of key metals and other materials, and the pressure to change as a result of the climate emergency, the economic picture is now very different. However, our analysis suggests that this will trigger only a modest recovery in consulting revenues over the course of this year, after an initial surge of activity in Q1. As a result, we expect this market to end the year still smaller than it was in 2019. Deals-related activity may change this, but our research suggests that clients in this sector are keen to use in-house staff where they can.

The energy & resources market represents 8% of the global total market in 2021—not an insignificant proportion—but less pivotal than financial services, which accounts for 31%. What happens in the latter has implications right across the consulting industry: The size and scale of banking and insurance clients means that they can, if they choose, absorb huge amounts of resources, leaving other sectors short of scarce skills. Our estimate is that growth here will be slightly under the market average. As noted previously in these updates, the pandemic hasn’t given rise to a wave of new regulation in the way that the financial crisis of 2007-8 did, and most financial institutions have little money to spare for discretionary investment right now.

This leaves us with two sectors that are likely to be important in 2021-22, but not because of their size. We think that healthcare (which covers providers, not insurance payers, in our definitions) will be the third fastest growing consulting market, after the services and retail sectors. This is a relatively small and specialised market, worth only around US$13bn in 2021. It’s also been a highly fragmented and price-sensitive market historically, but the pandemic is resulting in a mass reconfiguring of how healthcare is funded, delivered, and regulated, and that in turn may result in consolidation. We’ve reserved the lowest growth rates for the public sector consulting market, reflecting underlying concerns about the long-term profitability of this market, the tendency of many public sector organisations to use consultants in a staff augmentation/project management capacity, and the potential for a public backlash against large-scale consulting projects let at the height of the crisis. This will, we think, be a market that suits large-scale established players, who bring their brand and reputation to manage and monitor contentious projects, and niche consulting firms specialising in the public sector market. For firms that are not already present in either the healthcare or public sector consulting markets, the barriers to entry will be higher than in the past.

With consulting growth across all sectors—albeit stronger in some than others—the concern now is on the supply side. Do consulting firms have enough high-quality people with specialist-but-scarce skills to cope?