Expertise from the outside

The appeal of management consultants to the corporate world has been steadily increasing for some time. The cost-saving benefits of bringing in outside expertise to advise on and oversee change in a company are widely known, and are now widely recognised. The success of many of the industry’s biggest names has only added to an already impressive reputation.

However, the ongoing turmoil on global financial markets and the prospect of global recession is causing trauma for many industries, and consultancies are not immune. Major professional organisations are shying away from large investments, as they attempt to limit the damage they may face as the world economy slows.

The industry’s greatest strength is its in-built stability. When the economy is booming, customers are flush with profit and are looking to invest in advisory services to increase margins further. When things take a turn for the worse, many clients look for help in minimising any potential damage.

Certainly, in the Australian market, consultants have performed better than their international counterparts, as the financial sector – the industry’s largest client – experienced a catastrophic decline. Early hesitancy led to sluggish growth, but the recovery is expected to be characterised by a sharp increase in outsourcing. The challenge for management consultants is to capitalise on this.

As such, management consultants are expected to post average revenue growth of 2.0% per year for the five years through 2010-11. This includes growth in 2009-10 of 1.2%, bucking an adverse trend being experienced in other white-collar industries. This comes, however, hard on the heels of a contraction of 0.2% in 2008-09, as business spending on non-core services contracted. That the contraction was not more severe is testimony to the resilience of consultants during a downturn, and the corporate world’s increased reliance on them for advice.

Smaller consultancies with a focus on niche service provision are more likely to suffer over the short term than are the industry’s biggest players. More common consultancy practices are expected to continue, while highly specialised services are expected to be deferred until more optimistic economic times. During this time, the bigger firms are expected to consolidate aggressively, buying out smaller competitors who were unable to weather the economic storm.

After this period of uncertainty, the industry is set to rebound strongly, as clients attempt to put procedures and systems in place to prevent their exposure to future downturns of this nature. Growth is set to be 4.8% per year to 2015-16, as a surge in outsourced advising from 2011 to 2013 drives the industry even further forward.

Industry outlook

The reliance on outsourced consultants that the business world has developed over the past decade is unlikely to abate due to the brief economic downturn. Companies are expected to embrace consultants with renewed vigour after the Australian economy begins to recover, with growth reaching a high of 6.7% in 2012-13. Over the five years through 2015-16, real industry revenue is expected to increase at an average annual rate of 4.8%, to $8.96 billion and the primary driver of this will be a resurgent economy and its associated boost in business confidence and outsourcing. As key economic indicators begin to recover, consumer spending grows and company profits rebound, firms will once again be inclined to invest in expansionary activities. Management consultants thrive in this environment as they can offer highly differentiated services, priced at a premium rate.

Industry performance

• Capital Expenditure – Private Sector: When capital expenditure by the private sector is considered a proxy for the general level of confidence among businesses, it serves as a key indicator of the performance of management consultants. As business confidence and profits rise, the capacity and desire to bring in external experts to advise on expansion or restructuring plans become greater.
• Pervasive Outsourcing – Financial Functions: Attempts by governments and businesses to concentrate on their core strengths and functions, and lower staff and associated overheads, has had them move towards outsourcing (or buying in) expertise from specialist firms. This can either replace or supplement some of the in-house resources and functions.
• Business Outsourcing – Public Sector: Government is an increasingly common user of outsourced services – any sporadic work conducted by government offices can be limited by bringing in contracted staff. In the case of management consultants, government policy- and decision-making is made easier if relevant research has been conducted by an impartial third party. Also, internal reviews of operations and procedures are regularly outsourced to consultants, as their impartiality is aimed at ensuring greater efficiency.
• Industry Globalisation – Business Management Services: Global operation of major corporations has led to a demand for globally linked companies in this industry.

Key success factors

• Provision of development programs for personnel: A key component of being part of a skill and knowledge intensive industry is the ability to devote considerable resources to on-going staff training.
• Use of production techniques that add value to base product(s): Companies must be able to develop specialist and value added services at higher charge out for rates that are highly valued by clients.
• Willingness to outsource when appropriate: Companies should have access to consultants with specialist skills to offer a broader range of services to clients and assist in containing overhead costs.
• Possession of accurate information: It is important that companies have access to a national and international information data base, or reports and data, with ease of access and transfer.
• Access to the latest available and most efficient technology and techniques: Access to the latest and appropriate computer software and hardware, maximum labour productivity and to have support as a key success factor is needed to be successful in this industry.
• Ability to effectively communicate and negotiate: To have strong presentation skills in relation to client report presentations and for tenders is a key success factor for companies in this industry.

Barriers to entry

Barriers to entry in this industry are low and are steady. The prominence of small one- or two-person operations (particularly in the US) is evidence of the ability of new industry entrants to access the requisite capital to establish a new company. Capital costs are minimal, as basic computing equipment is all that is required, and business may still be conducted without this, while regulations governing the industry are minimal. Some industries require licensing, or membership of a particular industry group. Without this type of official ratification, business can be difficult to obtain.

Robert Bryant is the general manager of business information firm IBISWorld.