One market or two?

By Fiona Czerniawska, Director, Source Global Research

Early indications are that 2015 was a good year for the consulting industry, and for some firms it was very good indeed. While at times the global economy seemed fragile, none of the problems that did occur were sufficient to derail investment in most sectors and most geographies. Even those parts of Europe that had been excessively slow to recover from the financial crisis seemed at long last to have turned the economic corner. And conditions in 2016 look as though they’ll continue to be reasonably benign: when we asked clients at the start of this year how whether they expected their expenditure on consultants to increase, two thirds said yes.

But beneath the surface, forces are at work that are likely to re-shape the consulting industry.

The first and most current of these is the demand for transformation work. We’ve calculated that about half of all new work won by consulting firms at the moment relates to transformation (it depends, of course, on your definition).  Although 60% of this work originates outside the IT function, much is still influenced by the increasingly rapid adoption of digital technologies.  As a result, three quarters of clients think that any consulting work will inevitably include a technology component, and many will now put a strategy firm on their short-list alongside a technology firm.  What have traditionally been the extreme ends of the consulting spectrum are now converging, creating a new competitive landscape.

Where we’re not seeing convergence is between quality and value. Most clients think that most consultants are at least reasonably good at what they do, but they’re not always so sure about the value that’s being added. In some sectors and geographies, the gap between the two is considerable – and it’s only a matter of time before that comes back to bite the consulting industry, putting pressure on fee rates that have barely recovered from the global financial crisis.

Put all of these factors together, and you begin to understand what we keep hearing from clients, that consulting work is increasingly polarised into two area: low cost, efficient and semi-industrialised services; and high-value, ‘craft work’, the type of cerebral activity associated with traditional management consulting. Polarisation is, in fact, nothing new: what is new, is the extent to which clients see these two types of service as mutually exclusive markets.  Moreover, consulting services don’t always fall into the low-cost / high-value categories in the way we’d expect: some types of technology consulting will continue to be commodity services, but others will sit in the high-value space.

In clients’ hearts, high-value and low-cost consulting involve different approaches, different sets of skills, and – ultimately – different business models. A firm that’s good at one, clients tell us, isn’t going to be good at the other.  In other words, most consulting firms have to choose which space they want to play in, as one consulting market becomes two.

And that’s going to re-shape the industry…

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