The consulting industry, having successfully navigated one crisis, is now facing another.
Throughout most of last week my local petrol (gas) station has had long queues of vehicles waiting to fill up. While factors like Brexit and COVID have certainly contributed to the UK’s current shortage, it’s clear that the underlying problem here is the fact that fuel supply chains, in the interests of keeping prices as low as possible, have evolved to become overly dependent on a finely calibrated balance of supply and demand. Historically, this hasn’t been a problem; demand for petrol is relatively stable and predictable, so there has never been much need for stations to carry excess supply. However, it only takes a small drop in supply or increase in demand to create a crisis that can rapidly spiral out of control.
Consulting firms, like petrol stations, are businesses that tend to be acutely calibrated around issues of supply and demand; the profitability of firms is dependent on their ability to maintain carefully calculated utilisation rates. Consequently, the consulting industry is one that is uniquely exposed to a risk of talent shortages when client demand surges unexpectedly—and that seems to be precisely the situation playing itself out at the moment. Our analysis suggests that the global consulting industry will grow by 11% in 2021—around three percentage points higher than a typical pre-pandemic year. Firms simply don’t have enough consultants to meet that demand. Many put recruitment on hold last year, so started this year with lower “inventory”; and some of their senior, more experienced consultants have re-evaluated their lives during the pandemic and left the industry to pursue other opportunities. In total, one in five firms now report that they’re having to turn down work because they don’t have the resources to deliver it.
But there’s another way in which the situation in the consulting sector parallels the UK’s current fuel shortage. In the latter case, it was the wave of panic-buying—not the initial supply problems—that turned a shortage into a full-blown crisis. Similarly, the way that firms have reacted to the shortage of talent in the market may end up doing more damage to the industry than the shortage itself. Anxious not to lose out on the current boom, jittery firms are offering unsustainably high salaries to potential recruits, creating a vicious cycle that is likely to undermine profit margins for the next two to three years—just as it did in 1999, when adoption of early internet-based business models combined with fears of the millennium bug to push up demand suddenly and sharply.
Of course, there are also some important differences between consultants and petrol. Most notably, consultants aren’t fungible; a firm’s access to specific skillsets matters just as much as their access to a raw volume of resources. Indeed, many clients have told us that they’re cancelling projects because they can’t find suppliers with the right skills and/or the right skills at a reasonable price point. Most of those clients, however, haven’t yet joined the dots together and started to see this as anything more than a localised issue. We know this, partly because we spend a lot of time talking to clients, and partly because clients are roughly seven times more likely than they were before the crisis to predict that consulting fee rates will fall in the next 12-18 months. Yes, you did read that right: Despite the fall in prices during the pandemic itself, around 35% of clients think that rates will fall further. “Talent crisis? What talent crisis?”, clients are saying.
What happens next? Probably three things. First, the situation is likely to get worse before it gets better. History shows that breaking out of cycle when you’re in the middle of it is hard. Collectively, the consulting industry could mitigate the long-term damage of the crisis by offering only modest salary rises; individually, every firm has an incentive to outbid their competitors. Second, at some point firms will have no choice but to put their fee rates up. Clients will react by cutting demand, resulting in an economic bump consulting firms will be prepared to withstand because they’ll have reached a point where salary rises have become unsustainable and a market correction is needed. And lastly, both in the short and long term, there’s going to be a lot more discussion about alternative delivery models. Firms, like petrol stations, have started to recognise that a just-in-time system that’s predicated on reasonably predictable customer needs can’t cope with even small changes on either the demand or supply side, and fails catastrophically when changes happen on both sides simultaneously.