Cost-weary clients could look to specialised consultancies for best value

09 April 2018 11 min. read

Executives of large and multinational companies expect to spend on management consultants in the coming years. Yet, while doing so, they will put their consulting spend under growing scrutiny. In a bid to get the best value for their money, firms are increasingly eyeing specialised and smaller consultancies for specialist services, according to a new report.

The clients of the global consulting industry have become increasingly insecure about their climbing advisory bill in recent years. Entities across the public and private sectors have made attempts to rein in their spending on external expertise, coming under pressure from shareholders and the general public to provide better value for money. However in an era of digitalisation and the accompanying restructurings of human resources, many of these organisations have actually ended up spending more. A notable example of this came when global brewery Heineken reduced its total consulting expenditure by 21% two years ago, only to reinvest the same percentage in 2017.

Elsewhere, the public healthcare institutions of Britain and Australia, in particular, have come under scrutiny for their outsourcing bills relating to consulting work. Australia’s Federal Government reportedly spent AU$180 million on consultants for a new disability scheme over just 16 months, while the National Health Service Improvement body (NHSI) claims it has reduced the cash-strapped institution’s overall spend on consultants to £263 million a year, a £150 million drop since 2013. In the case of the UK, however, rather than a reduction, this seems to have resulted in a de facto reallocation, as rather than direct engagement, many management consulting firms are now contracted to design Sustainability and Transformation Partnerships (STPs) to the tune of £21 million, nationally, per annum.

What is the size of the global management consulting industry?

Small businesses in the UK, meanwhile, collectively spend around £60 billion per year on professional services, yet feel that more than £12 billion of that figure is wasted on unnecessary or bad advice from larger, less specialised firms. For a while, these concerns have been cited by numerous studies as driving a new interest among clients in independent and boutique consulting firms. Now, a new report from the Economist Intelligence Unit has given fresh credence to such claims.

The paper, commissioned by Globality – a group which works to match leading companies with top small and midsize service firms around the world – found that senior executives remain hungry for advice as they navigate the digital transformation of their industries. However, cost pressures and demand for specialised, technical expertise are causing companies to re-evaluate their consulting partnerships and consider new kinds of advisers. The headline finding from the survey – taking in opinions from 300+ business leaders from multinational companies with annual turnovers of over $1 billion in the US, UK and Europe – suggests that the rising cost of larger consultancy services which are often seen as providing broader, one-size-fits-all solutions, is causing executives to question what they are actually getting for their money, and pushing many toward smaller, specialist firms in pursuit of better value.

Consulting spend on the rise

45% of respondents who primarily work with consultants say cost is the key challenge they face when working with external consultants. Interestingly, this concern is cited more frequently not by smaller to mid-sized enterprises, but by larger firms. This may be as larger firms which have been incumbents in their respective markets for a longer time are more concerned with seeing off new competitors, something they have traditionally done by cutting expenditure, rather than upping investment. To this end, 54% of the largest firms surveyed with more than $10 billion in annual revenue said the cost of consultants was a concern.

The second and third most frequently cited challenges in the survey are lack of familiarity with the business, at 36% and lack of integration with other services, at 31%. This suggests that a sizeable chunk of executives feel that they are paying a premium for advice which they do not see as being relevant to their business. While this would also suggest that executives are not seeing their investments in consulting return maximal value, this does not mean they will lower spending.

In actual fact, many respondents outlined plans to up their spending on consulting, especially in critical business areas. Depending on which source is taken to be most accurate, the global management consulting market is currently estimated as being worth between $150 billion, according to Gartner, and $488 billion, by the reckoning of Plunkett Research. In spite of the fears of clients that they are not receiving the best value for money, this spending is projected to rise further in coming years.

Top three challenges experienced with consultants

This apparently Teflon-coated growth trajectory for the consulting industry, in which no concern seems to stick for long, is likely the result of two main factors. In addition to contending with new disruptive competitors, corporate executives are racing to use data and technology tools to stay ahead. This is backed by the assertion of respondents that the few areas where the majority of respondents expect to increase spending on consultants are technical aspects of their companies.

With the global costs of cybercrime having long surpassed the $280 billion mark, in five years-time, 68% of respondents answered that they will have increased spending on cybersecurity, while 52% stated that they would increase spending on data analytics.

Commenting on the results, Yuval Atsmon, Senior Vice President of Advisory Services at Globality said, “Big companies are always on the lookout for better value for money when it comes to working with consultants, but their need for external support continues to expand.”

Scrutiny on costs

While the management consulting industry looks set for a sustained period of growth as a whole, this does not mean that the types of consultancies that get hired will remain the same. Facing new digital challenges, senior executives are looking for cost-effective consultancies. According to the most recent data available, high growth consulting firms, which see average yearly growth of at least 20%, are most likely to be found in the technology consulting and management consulting segments – suggesting that specialisation across strategy and client offerings, coupled with such firms’ heavier investment in marketing, could well see them eat into the market share of the likes of the Big Four in the future.

As with other industries, most infamously including the retail sector, the growth of the internet has played a large role in this rise of popularity for smaller, more agile specialist firms. Online platforms and global networking tools have made it easier for large companies to find smaller firms and consultants who can deliver personalised services at a lower rate. This is exemplified by the sustained growth of platforms like Comatch, which, having already obtained 300 projects and 2,000 professionals for its matchmaking database since 2015, this year entered the UK market.

The heightened focus on more specialised consultancies often sees firms court boutiques or SME consulting firms, which have more focus on a certain industry or functional service. 83% of respondents to Globality and the Economist Intelligence Unit’s survey said service providers with specialised expertise will be more valuable to their company, than providers who boast a broader, more multifaceted range of offerings, five years from now. This is particularly interesting, as the majority of the world’s largest firms seem to be banking on the opposite being the case.

The growing relevance of SME consulting firms

KPMG, Deloitte, PwC and EY have hard earned their moniker of the Big Four. Through years of targeted acquisitions, the gang of four have become firmly established in most major industries and sectors, and while such exploits have also attracted scrutiny from those who believe this results in a conflict of interest by the auditing giants, the likes of Accenture have also got in on the act as of late. Last year the firm spent over $1 billion in order to bolster its new Interactive services line, aiming to offer broad, multifaceted and holistic services in the design sector. 

While the benefits of such wide-ranging services, not to mention inflated headcounts, can indeed attract clients en masse, for lower costs and a more bespoke service, companies are expected by industry experts to increasingly turn to SME providers. At present, of those surveyed, only around 19% of business leaders hiring management consultants will spend more than a quarter of their budget on SMEs. This is less than their colleagues working with law firms, at 26%, and marketing agencies at 24%.

However, suggesting that this may soon change drastically, 75% of respondents who work with management consultants believe that in five years-time, SME service providers with fewer than 500 employees will have an important role in their firm. In terms of what may see interest in the sector grow, the three most frequently cited reasons why business leaders might choose an SME over a large consulting firm in the next year were a stronger value proposition (59%), lower costs (48%) and similar corporate culture (43%).

This potential growth may still be hamstrung by the reputational clout of top firms, however. If a client is looking for major credibility for a new corporate strategy or an economic document to prepare for political reform, they are much more likely to plump for the likes of McKinsey & Company or BCG, especially if the project is high risk or has a global impact. This is illustrated by the recent contract awarded to McKinsey to assist in the implementation of Brexit, or the new disruptive AI consortium backed by the Canadian Federal Government, which is supported by BCG.

Annual spending plans for consulting services five years from now

However, for smaller or lower risk projects, as they continue to wonder whether they are obtaining value for, money, clients may be more inclined to take a chance on working with SMEs, which can deliver quality work at a better price and are eager to prove themselves. According to one executive polled, this is because, “Small guys are motivated to try harder.”

One trend illustrating this challenge is how larger companies are expanding their network of external consulting firm suppliers. While they are not giving up on their traditional consulting relationships, they are bringing in additional, often smaller firms, with expertise in digital technology, cyber-security, analytics and other highly technical skills to fill these gaps. They are also changing the way to partner with these firms, and instead of just hiring on hourly bills basis, they launch joint ventures and adopt risk-sharing consulting models instead.

For example, in the UK, Elixirr launched a partnership with Thomas Cook Money to disrupt the holiday financial services sector, while in Germany, BMW Group formed joint partnerships with h&z Unternehmensberatung, a German consulting firm, to develop custom solutions for optimising retail and sales functions. In the five years since it was launched, h&z’s workforce has grown from seven to 300 employees. Meanwhile, in Dubai, award-winning luxury retailer Chalhoub recently launched a joint consulting venture with Belgian consultancy Duval.