Warning signs ahead as UK consultancy growth slows
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The new year has started with economic warning lights flashing. Companies are facing inflation, labour shortages, stressed supply chains, an energy crisis, and a likely UK recession — all against an unpredictable geopolitical backdrop.
The uncertainty faced by companies is like riding a “rollercoaster in the dark”, says James Hadley, UK managing partner at the consultancy Bain & Company. “What’s going to happen next?” he asks. “Is it going up? Is it going down? Are you going to come off the rails?”
But while the UK’s economic downturn presents opportunities to sell advice to clients as they shore up their operations, consultants themselves are not immune to the prospect of a shrinking economy. They have had to hand big pay rises to staff, and their clients’ budgets have been squeezed.
Growth in the UK consulting market is set to slow from 12 per cent in each of the past two years to 9.8 per cent in 2023, according to estimates by Source Global Research, a consulting sector analyst.
A survey of consultants by the Management Consultancies Association (MCA) backs up the forecast of slowing growth. It predicts a 13 per cent increase in activity in 2023 after an eye-watering expansion in 2022, estimated at 25 per cent.
Despite predictions that the consulting sector will prove resilient, Hadley is cautious: “What we’re seeing at the moment is slower growth rather than the industry shrinking . . . but the history of every downturn would suggest that the industry overall will see a decline.”
Overall growth figures are only part of the story, though. “For individual consulting firms, the range of outcomes in a downturn can be quite wide,” says Hadley, adding that Bain is aiming to grow this year.
The firm is advertising a “recession playbook”, to persuade executives that now is the time to pay for advice because “companies make more dramatic gains or losses during downturns than during stable periods”.
Consultants are naturally hedged against the worst effects of a recession, advising clients on expansion in the good times as well as helping them navigate choppier waters.
However, it is a “myth” that consultants thrive “in any circumstances”, says Fiona Czerniawska, chief executive at Source Global. “It’s not that straightforward,” she explains. “A firm that is specialising in one area could really lose out if it doesn’t change, or is in the wrong place at the wrong time.”
Advisers working on large digital transformation projects — a significant driver of the sector’s exceptional growth in the past two years — can be more confident in 2023, she says: “Clients really don’t want to cancel those unless they absolutely have to.”
In particular, consultants focused on data analytics, cyber security, technology and strategy can expect significant demand, she suggests.
Cost reduction projects and implementing sustainability or net zero pledges have also become business imperatives, according to the MCA.
Consultants who could suffer include those in areas where the benefits to clients may seem less direct or immediate, such as HR and change management, says Czerniawska.
The booming deals market has also stalled, which is likely to have a ripple effect through the advisory sector.
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In recent years, some firms had “three or four teams” working for different parties on the same deal, says Mark Veldon, UK co-head of advisory group AlixPartners. “If you take all that demand out of the system, then they’ve got a lot of people sitting on the beach.”
Veldon is bullish on the prospects of AlixPartners’ business, which has a heavy focus on restructuring advice. But he says consultancies with large deal advisory practices are likely to pivot to other areas, which could in turn create pressure to reduce prices.
Adrian Bettridge, managing partner at consultancy Baringa, says the advantage of being a private partnership rather than a publicly listed business with quarterly profit disclosures is that he can take “long term bets”, forgoing price rises now in the hope that good work will be rewarded with further work in future. “We don’t go in and negotiate and try and push every nickel and dime,” he says.
At the same time, consulting bosses are hoping the huge pay rises handed out in 2022 will not have to be repeated in 2023. Soaring staff turnover rates experienced in the past couple of years have slowed and inflation, while still high, has begun to ease.
Veldon predicts the hiring market will “calm down” somewhat, helped by trouble in the tech sector, where there have been job cuts.
“When people were leaving, they were leaving to go to start-ups or tech-type funds — entrepreneurial stuff,” he says. “Let’s face it, that market is gone for the time being — so that eases things.”
Still, price competition and higher salaries are a threat to consultancies being able to repeat record partner payouts from last year. In an effort to protect profits — average partner pay at Deloitte and PwC passed £1mn last year — firms have begun cutting costs: clamping down on travel, marketing spend and office space.
People at two large consultancies say they have seen back-office roles being squeezed, with departing staff not always replaced. This is “good housekeeping”, says one senior consultant, adding that he expects many firms are taking similar steps.
But Bettridge at Baringa, a veteran of several economic downturns, says he has learned from seeing consultancies “overreact” on cost-cutting.
“I saw organisations . . . hit the brakes too hard then try and hit the accelerator really hard as soon as they thought it was coming back.”