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By our estimate, 2020 saw the consulting market shrink by an unprecedented amount—a contraction of 13% compared to 2019, far greater than the industry has suffered in any previous crisis. Against this backdrop, the consulting industry has demonstrated an extraordinary ability to adapt. But the year has also exposed structural weaknesses that firms have shied away from addressing in the past and which, we think, now demand urgent attention.
Business mythology has it that consultants will thrive in any circumstances, but this crisis has shown that’s not true (the Global Financial Crisis did as well, a point many firms had forgotten by the start of this year). In April to July, the pandemic wreaked havoc, especially in Europe, the world’s second-largest consulting market, as many client organisations had to make changes in weeks that would, in normal times, have taken years. There was neither the time nor management capacity to involve consultants; moreover, the decisions being made, while immense, were also simple: Cut this; close that; furlough those. Overwhelming uncertainty made more complex, long-term decisions impossible: Having reacted fast, many organisations found themselves in a period of stasis, unable to go back, but unwilling to go forward.
Some of the opportunities consulting firms might have expected, based on past crises, haven’t materialised. Government support programmes have allowed many client organisations to kick the corporate can down the road and avoid the difficult decisions that would, in a “normal” crisis, have resulted in restructuring and deals. Regulation, the saviour of the consulting industry in the later stages of the Global Financial Crisis, hasn’t been a feature of this one—although we are now seeing increasing demand for compliance work.
Without question, consulting firms’ ability to carry on delivering their services remotely, rather than in their clients’ offices, saved the industry from catastrophe. It allowed projects, which might otherwise have been summarily cancelled, to continue. That in turn meant that many large firms, with long-term contracts, didn’t feel the full impact of the crisis until the late summer. If MS Teams, Zoom, etc., hadn’t been so easy to implement and scale, the numbers we’ve been writing about throughout this year would have been much worse. Our rough calculation, looking at the small number of consulting services that couldn’t be adapted to remote working, suggests that the industry would have shrunk by a further 15%, equivalent to US$24bn.
By demonstrating their ability to hit the virtual ground running, consulting firms were well placed to pick up many lucrative government contracts, helping public sector managers around the world to gauge the scale of what was required, to plan, and then to implement. Although some of this work was pro bono and a very large proportion was done at rock-bottom rates, it provided a bedrock of stability for many firms. In the same way that some governments have turned to logistical support from their armed services, they looked to consulting firms to field teams of analysts, process designers, and technologists, all of whom were able to start work on specific problems almost instantly, and provide organisational flexibility at a critical time. Responsiveness & flexibility, alongside speed of implementation and the ability to deliver results, have all become more important to clients when they think about which firm to hire, our research shows.
The crisis also stripped away unhelpful consulting stereotypes. Airports are no longer full of suits with laptops; grandstanding is much harder on Zoom. Instead, what’s shone through is the value of expertise and objectivity. As a consequence, there’s been a surge in what can be best described as expert staff augmentation, with clients looking for individuals or very small teams of highly experienced people who they can trust not only to work quickly and effectively without direct supervision and direction, but to apply their judgement—a word rarely used in consulting in recent years.
Still, big challenges remain. In particular, doubts about the concrete value consultants deliver, which have been bubbling in the back of clients’ minds for years (our research has consistently suggested that clients are almost twice as likely to have a positive view about the quality of work consultants do as they are to have a positive view about the value they add), now represent a worryingly large barrier standing between consulting firms and the full realisation of their own potential for growth. Inevitably, as in any period of cost-cutting, consulting budgets are under pressure—and will continue to be so through 2021 and into 2022—and concerns about value play unhelpfully into that situation.
In fact, clients’ unease goes far beyond greater scrutiny of any dollar spent. During the Global Financial Crisis, concerns about the value of consulting work translated into a spike in risk-reward work, but that’s not happened this time around. Performance-related payment mechanisms are inherently uncertain (you’ll pay X if we achieve Y), and in a highly uncertain environment, clients prefer to know what they’ll get for their money. Instead, the pandemic has seen a surge of interest in outsourcing: With no time to make complex changes, clients in the worst-hit sectors have chosen to jettison functions that were designed for different times and bigger businesses, while retaining the ability to scale up again as their business recovers. Every bit as worrying for consulting firms as the pressure to reduce consulting expenditure, is the door this opens to a new wave of competitors.
Overall, we think demand for consulting will recover most, if not all, of what was lost in 2020. That will make the year feel very different, especially as it will be buoyed by vaccination programmes. But consulting growth won’t be evenly distributed. Consulting firms will need to make careful choices about where they invest.
Seventy-seven percent of consulting demand comes from the large and mature markets of North America and Europe. Looking simply at infection rates, the news is not good. And in Europe, the virus is surging in some countries and barely under control in others. Restrictions on social activity, and the direct and indirect impact they have on economic activity, look set to continue through the darkest period of the year. But the availability of effective vaccines means that, for the first time since the crisis took hold almost a year ago, we can say with certainty there will be an end to the crisis in its current form. COVID may be with us forever, but its ability to wreak havoc will fast diminish.
Given that context, it seems plausible that consulting firms should expect a superficially bumpy start to the year. Decision making is likely to be slow and inconsistent in some quarters: Furlough and other government schemes will continue to allow businesses that will need to restructure and innovate to defer difficult choices for longer, and keeping consulting spend under tight control will be the order of the day. But underneath this, the underlying need for consulting support remains strong, our research indicates. Back in January, we found that 81% of clients expected to spend more on consulting services in the next 18 months; the equivalent number in September was 71%—lower, certainly, but still very positive. The challenge for consulting firms, however, is how to translate that need into revenue. Just because clients need help, doesn’t mean they will or can pay for it.
Where, then, are the opportunities for growth likely to be?
Sector-wise, we expect the parts of the market that have performed comparatively well in 2020 to continue to do so in 2021. For reasons discussed in our updates over the past months, pharma, high-tech, and telecoms will all grow at above-average rates, fuelled by a combination of high demand, investment, and innovation. Private equity has been a very active market since the summer and that’s likely to intensify. Anyone whose several different parcels arrive from the same retailer on the same day will understand why logistics has needed consulting support this year. Continued streamlining plus increased attention to carbon footprints means that support will persist in 2021. Demand in financial services, which has been weaker than many firms expected, has already started to recover, especially in compliance areas, as clients find that this is not work that they have the capacity or capability to do. As for many other service industries, the pandemic has raised important questions around operations, workforces, and physical space that will also need to be answered in the coming months. In a more structural shift for the industry, we think that the healthcare sector will become a much more important market for consultants globally (it’s long been an important feature of the US market). Innovations delivered during the crisis may hold the key to how the world supports an ageing population, so technology will be a key focus of activity. The challenge in this sector remains typically lower-than-average fee rates and—depending on the country—an often-fragmented buyer base. After many years of slow growth, the public sector will also be a more active market, but also one that experiences intense price pressure as governments seek to reduce their overall spend on consulting services.
Switching to look at 2021 from a service line perspective, we expect to see the emergence of more multidisciplinary combinations of capabilities that resonate with clients. “Workforce planning”—a term that had fallen into disuse decades ago—perfectly captured the combination of technology, operations, people, and risk capabilities required to enable a large organisation to completely rethink the deployment of their employees. Expect to see other multifaceted offerings to appear in the areas of sustainability, business resilience, and strategic operations. Data and analytics will become even more important to clients: The crisis has highlighted the failings of many organisations’ management information systems. The success of new, more flexible processes will depend on real-time performance feedback, and new sources of data will be needed to forecast consumer behaviour and spending. Strategy consulting, already well into recovery mode, will continue to pick up strongly as clients start to plan and prepare for the permanent changes the pandemic will leave in its wake. Technology-related consulting will also take a larger share of the overall market, but its focus will change—indeed, it already has. The term “digital transformation” doesn’t resonate well with clients who think that their top priority is improving their infrastructure. And “disruption” will be a less meaningful concept in a world that has been disrupted beyond anything futurologists imagined. Ironically, though, much of the work done by technology consultants won’t be that different, it will just be directed at a different goal—cost reduction, not growth.
But there will be challenges for firms, as well as opportunities. Central to these, we think, will be the long-term impact of the crisis on the consulting business model. Clients have become accustomed to almost instant access to experts anywhere in the world—it’s extremely hard to see how consulting firms can step back from that way of working. Similarly, both firms and their clients have saved millions of dollars on travel expenses. Although some level of face-to-face working needs to—and will—return, expect to see a lot more consideration given to what the purpose and value is in doing so. Young people have long been attracted to the industry because of the promise of working side-by-side with smart people, solving interesting problems for the world’s iconic companies—and have been prepared to work exceptionally hard to do so. Burning the candle at both ends feels a lot less attractive when you’re working at home by yourself.