UK consulting industry grows by 5% to £9 billion, but faces challenges

02 October 2017 16 min. read
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The UK consulting industry grew by nearly 5% last year to an estimated value of £9 billion. While the large firms dominate the market – the likes of Accenture and Big Four attract 78% of all consulting revenues – it were the medium-sized firms and in particular the niche consultancy specialist firms that saw the fastest growth. Digital transformation is a key driver of growth, but digital too is significantly impacting operations and the broader consulting landscape.

The consulting industry of the UK saw growth of 4.76% growth in fee-income over 2016, according to the ‘Annual Industry Report 2017’ of the Management Consultancies Association (MCA). The MCA is the representative body for management consulting firms in the UK, which currently includes around 60 consultancies.

MCA members, including Big Four consultancies PwC, Deloitte and KPMG* (three of the globe's four largest consulting firms), generated a collective £4.46 billion last year. The body estimates that its members account for around 50% of total fee income of the UK consulting industry. This would take the size of the entire industry to roughly £9 billion, up from £8.5 billion in 2015.

UK consulting market growth

Revenue by service

Aggregate fee income by service line displayed a large disparity between different activities meanwhile. Predictably, perhaps, amid an age of digital disruption that has seen digital transformation consulting become an industry worth $23 billion globally, digital and technology related provisions took 28% of the share, making it the largest segment of fee income, while sales, marketing and communication services brought in just 1%. Against a backdrop of sustained investment in design and marketing agencies from consultancies keen to buy stakes into the lucrative advertising industry, the latter share is expected to rise in the coming years.

Demonstrating the increasingly hefty value of digital and technological services, the second most important service line for fee income in the UK was operations, with 11%, followed by finance at 10%. The strategy and project management service lines both saw their share contract, at 2% and 4% respectively, while human capital was the strongest grower, booking a 2% increase in share of UK consultancy income.

Consulting fee income by service area

Revenue by sector

The financial services sector is, on the back of London's pivotal role in Europe's financial services ecoystem, of huge strategic significance for UK based consultants, retaining the largest share of collective consulting fee income, at 29%. 

Consulting activity in retail and leisure, where the UK is a leading centre of innovation, grew by 24%, to a share of 8%. Retail in particular remains a growing opportunity for consultants in the UK, with London seeing the most brand arrivals in the sector of any European city last year – a boom likely to further drive consulting spend in the area, as new market occupants seek advice on how to best operate in the rapidly changing environment. Consulting also remained strong in energy and resources, and for the second year running the share of private health and life sciences grew.

In 2016, it emerged that government spending on private consultants and temporary staff had risen by between £400 and £600 million since 2013. Regardless, the MCA found that consulting income of its members in the public sector grew modestly over that year, while the aggregate fee income has stabilised at a figure well down on its historic high of the previous decade. Last year MCA members generated £1.1 billion in the public sector, around £700 million lower than in 2009 following the large scale austerity cuts introduced in the aftermath of the financial crisis.

Consulting fee income by sector

Defence is the largest area of consulting activity. Despite headline-grabbing figures such as St Albans Council’s £1.2 million consulting spend, there was likewise only modest growth in local government, while health spending on external advisors fell in real terms.

Different growth rates

Across the board, consulting firms saw varying growth rates. Large firms saw their consulting revenue grow by a slower 4%, while medium-sized firms grew by an average of 6% – in part due to their ability to outmaneuver larger firms. However, making the most of this advantage, niche specialist firms eclipsed both of these figures. These firms grew substantially faster than any other type, at 20%.

Alongside this potential to change tact swiftly as smaller companies, such high growth consultancies were also found by a recent study to be putting more focus on specialisation and more effort into their marketing techniques. While they spent comparatively less, and often dedicated the same number of personnel to that end, the firms were shown to put more strategic thought into how they relayed their message to prospective clients, while larger firms relied too heavily on reputation alone to drum up business.

Growth rates of consulting firms

UK firms abroad

The data shows that 75% of UK consulting revenue was sourced from within the UK, while 25% of the figure arrived from overseas sales, of which around half of that amount stemmed from EU markets. This considerable portion is in-keeping with a pan-European pattern, and is comparable with the split seen in several major markets such as Germany, Spain or France. Spain saw the largest portion come from abroad, with 26% of fees originating from beyond their national borders, according to ACE, MCA's Spanish counterpart.

However, it is important to keep in mind that these numbers should be interpreted with caution. Many UK firms which also have international operations are not members of the MCA. Baringa Partners, for instance, has offices in Germany and North America, while London headquartered OC&C also hosts offices across globe – and were such firms members of the Association, they would likely be a heavy factor in the proportions contained in the subsequent industry analysis. Meanwhile, many smaller, rapidly growing consultancies are branching out too, with the likes of Elixirr, a UK-originating firm which now operates in US and South Africa, similarly to Brickendon, and Bovill, which arrived in Chicago this year. While Ergemont Group, which is an MCA member, also expanded to the US, there are clearly many more firms amid the UK industry which have not added to the data assessed.

Geographic breakdown of fee income

Digital disruption

Clients across industries are having to deal with major digital disruption, turning to consultants to help them navigate through change, and as a result digital services are now by far the largest service segment in the industry. This success relates chiefly to the fact that consulting firms, including strategy firms – who were once expected to suffer from digitalisation – are placed at the centre of the digital value chain.

Consultants are providing clients with advice on digital strategies, the implementation of AI, automation and robotics as a cost-saving exercise, data analytics, adoption of the Internet of Things and the implementation of disruptive techniques in order to fend off new market competitors, across all sectors. Indeed, the data shows that consultants even provide a great deal of advisory and support services to digital and technology companies – as their outsider perspective coupled with intelligent insights are seen as cutting edge, even by industry experts. 

The emphasis on digital is linked to growth in other consulting disciplines – rather than being purely an independent trend. Having also grown substantially in recent times, operations consulting is now the second largest area of consulting advice. This reflects the desire of clients to transform their operating models in order to make better use of technology, in response to the aforementioned challenges of a digital economy. This trend likewise impacts the sustained levels of high demand for human capital advisory, as the growth of digital changes firms’ skills needs – with a greater focus on skilled labour, digitally aware and tech-savvy employees.

However, consulting firms are not only external actors, but to the same extent participants in the digitalisation of the workplace. Firms are themselves digitising, in order to improve their offerings, amid a now-thriving independent consulting scene, giving rise to online disruption and increased competition in their own industry, as well as in the trades of their clients.

Digital consulting by sector

In order to meet evolving client needs, consultants must now have a more complex and multi-dimensional approach – resulting in a number of innovative, rapidly growing firms emerging in order to cater to those needs. This means that long-term market incumbents need to create new services and reimagine their own commercial models in order to avoid losing market share to these new disruptors – as is the case with every industry where consultants' clients operate. In the last year, as part of a longer trend, more consulting firms have been deploying holistic solutions, automation in their analytics, bespoke cloud-based consulting services, and leveraging new techniques, including crowdsourcing, at the heart of their offers.

Meanwhile, consultancies have also turned to automation in order to improve efficiency in their own operations and further boost margins. Firms are increasingly looking to technology to improve the way they record time, improve communications flows with clients, improve hand-over procedures, and share information and knowledge among teams. In turn, with the industry’s top names responding to increased competition in this way, there has been a knock-on impact on consulting productivity – with fees per consultant rising by an average of £10,000 among MCA members in 2016. 

Beyond digital transformation consulting, this period of change and expansion within the industry can also be seen in the growing interest in areas like design, marketing and the creative sector too. While, typically, some of the consultancies most actively pursuing this strategy are the Big Four, the large American strategy consultancies such as McKinsey & Company and The Boston Consulting Group (BCG) have also been prominent players. Accenture are another major combatant in the design arms race, and the firm set itself the target of spending a total of $1.8 billion on acquisitions in the months to come – much of which so far has been spent on design and marketing agencies – to double down on their previous campaigns of aggressive expansion.

Commenting on the changing focus of management consulting offerings, MCA Chief Executive, Alan Leaman, said, “Consulting firms are reinventing themselves in order to help their clients reinvent and rise to the challenge of the disrupted digital economy.”

Challenges lie ahead

Across the landscape, the outlook remains bright for the consulting industry according to the MCA’s latest data. However, the market still faces a number of key challenges over the coming period if it is to sustain growth. The first and most concrete of these is that growth has visibly slowed in recent years. According to report author and MCA Deputy CEO Paul Connolly, “consulting growth is substantially down on the 8% of 2014 and 2015. This suggests that businesses are becoming more bearish.”

Size of the UK consulting market

The 4.76% headline figure for consulting is closer to the trend of growth for the economy as a whole – unlike the latest figures for many other mature consulting markets, where the industry is growing more rapidly than the national economies as a whole. Consulting has historically been seen to both lag behind economic patterns and to anticipate new trends, with economic recession and growth both being outlined by growth patterns in consulting. When output falls, firms need consultants to help them restructure and cut costs. This means consulting firms might initially be hit less hard than the broader economy by a recession, as they are often the first port of call for companies looking to turn their fortunes around.

However, if the point comes when these clients can no longer afford this expense, with no reversal of negative growth in sight, consulting firms will see business drop away. This was clearly visible in the aftermath of the financial crisis, when the global economy went into deep and protracted recession. The consulting industry’s own recession was delayed, with the reverse being true of the industry’s recovery. Before the wider economy returned to consistent growth, in the earliest stages of recovery, companies started to hire consultants to help them gear up for that growth once more. As the economy began to expand consistently once again, the consulting industry outpaced that growth.

The MCA’s report indicates that the sector’s current slowdown is a troubling sign in this regard, as it suggests that businesses are broadly experiencing a slowing of headline growth, and are deferring growth-supporting projects and cutting back on discretionary spend as a precautionary measure. Consult'in France, MCA’s equivalent for France, expects 11% growth this year, while AEC in Spain expects over 6% growth in the country. The German association, BDU, expects growth of 8.3% this year, while growth rates in Italy are expected to hit 5%, the strongest since the crisis. The globe’s largest market, the United States, meanwhile anticipates around 8% growth. In this case, the UK bucks a global trend, suggesting that the economic turbulence clients are anticipating is unique to Britain. While it would be dangerously easy to draw broad conclusions from this pattern, with such a plethora of reports and sustained data suggesting that businesses are increasingly worried regarding the UK’s position within the European economy, the matter of Britain’s withdrawal from Europe is most likely at the heart of this.

The divorce from the EU is presently offering a glut of work to some consultants, with the UK government contracting firms in order to bolster an understaffed Civil Service which is struggling to cope with Brexit’s logistical commands. However, while it offers work for consultants in the short-term, uncertainty is bad for the entire sector in the broader picture. According to Leaman, “The referendum vote to leave the EU in June 2016 has created additional and material economic uncertainty for businesses, mirrored in the political instability we have experienced since 2015, and prompted a devaluation of sterling. Key decisions – on airport policy, for instance – have been delayed.”

Growth rates of selected consulting markets

Leaman also contended that the success of consulting and the wider economy are linked to a smooth Brexit, which clearly defines its end game early on. “Management consultants are at the heart of value and supply chains in everything from automotive and infrastructure to energy and digital. They integrate them and provide specialised advice and support on everything from digital to the management of complex infrastructure projects to many firms working in the global contexts that are vital to the UK’s export success. Our industry needs open markets to continue to provide this value.”

Should negotiations between the government and Brussels be fruitful, though, consulting will continue to play an important role in the UK’s post-Brexit future. Throughout this past decade, UK management consulting firms have played a vital role in improving the UK economy and the performance of their clients. Cost cutting, efficiency plans, growth preparation, innovation implementation and business transformation services at the core of consulting activity mean it remains integral to the success of many UK clients, in the private and public sector. Summarising this, Leaman concluded, “Provided the UK can avoid recession and achieve a smooth transition to the post-Brexit industrial and trading model, then consulting firms will continue to be at the heart of the UK’s success.”

Earlier this year in a pre-election analysis, the MCA recommended a comprehensive overhaul of the education system. With rival parties then vying for control of Parliament, the Association suggested that whoever formed the next government should prioritise education in STEM subjects in order to best prepare the UK for life outside the EU, with a skilled workforce capable of operating at the forefront of innovative business techniques.

Related: Trends and challenges in the management consulting industry.

* Other well-known members of the MCA include IBM, BDO, Capita, Arcadis, BAE Systems and Bearingpoint.