Five reasons why the financial services sector hires consultants
Banks, insurance companies, asset managers and other financial services institutions spend over £2.4 billion on external consultants. Around £2 billion of that goes to consulting firms, while the booming gig economy sees independent consultants rake in £400 million.
In a survey conducted by Odgers Connect in collaboration with Source Global Research, the researchers looked into the key factors that drive demand for consultants. They surveyed 250 board-level executives across large enterprises in the UK, Germany, the Netherlands and Switzerland.
Of the UK’s annual estimated £9.75 billion consulting spend, the financial services sector accounts for the largest portion. £2.4 billion goes toward external experts to help firms strategise and execute projects which can make the difference between growth and stagnation for the industry’s top brands. According to the results, there are five major reasons why the financial services sector is willing to spend such a large sum on consultancies.
At 57%, financial services clients were more likely than other industries to tap consultants to aid with the staffing of projects due to a shortage of capacity. In comparison, only 37% of respondents in other industries told Odgers Connect that they believed they “have the skills we need internally but are short of capacity.” With global businesses facing a talent shortage amid changes to the cross-border flow of labour, an ageing population, and high levels of employment, the financial services sector in particular is having to take measures to compensate for an undersized workforce, leading to higher numbers of engagements in either HR consulting, or interim appointments from the consulting industry.
Surprisingly, however, the reverse is true in regards to regulations. Regulatory shifts have impacted heavily on the way banks and financial services firms do business after the global recession of 2008. Even though new regulations are still emerging, however, just 31% of financial services respondents told pollsters that they sought consultants for responding to regulation, while at the same time, 36% of those in other industries did so. This could in part be due to the financial services sector’s embracing of RegTechs, which allow them to navigate new regulations more seamlessly.
Similarly, fewer financial services executives said they contacted consultants for transformation needs than the rest of the market. While this is still a top four criteria for asking consulting firms to work with the sector, 26% tapped consultants as they are going through a business transformation project, 1% below the general result. Still, as the majority of CFOs are now spearheading the drive for digital transformation in their firms, more than a quarter of financial services respondents engage consultants on these grounds.
Relatedly, this sees technology as a key reason why consultants are asked to work with financial services firms. 29% of firms in the sector said consultants helped them to exploit new, digital technologies, while a further 23% said that they need to improve their existing technology with the help of consultants. Digital transformation accounts for a global consulting market of its own worth some $44 billion, thanks in large part to the demand from the consulting industry’s largest client-base.
Finally, financial services firms engage consultants to tap specialist skill sets. This is distinct from the use of consultants to improve headcount via interim appointments. Rather than supplementing internal talent, this sees financial services companies admit that they do not have the skills necessary for a particular project, and engage consultants in order to access them. This is a particularly strong aspect of gig economy consulting.
Hire a consulting firm? Or an independent consultant?
To that end, independent consultants are becoming ever more popular, thanks to their propensity to drive down pricing, and provide quality, specialist work at short notice. While around £2 billion of financial services spending still goes to consulting firms, then, the thriving gig economy sees independent consultants take £400 million and rising. According to the research from Odgers Connect, 43% of financial services firms are now turning to independent consultants over traditional management consultancies for more flexible consulting services.
Unsurprisingly, the need for flexibility was the chief driving force for this new popularity, with 62% saying the preference for independent consultants over large firms is a result of the growing trend towards flexibility in business models. At the same time, the second most important factor was price, at 38%. This was closely followed by the higher quality of consulting work, at 35%, completing the usual trinity of factors which are cited when tapping freelancers.
At the same time, though, when it comes to larger-scale staffing projects, financial services firms still see a traditional management consultancy as the best way forward. 57% of businesses in the sector even said this was the primary reason for working with a traditional consulting firm, while a meagre 21% said they would use an independent consultant for this purpose. Among the reasons why clients in financial services still held off from hiring independents in such capacities were an assumed lack of quality control, with 38% of responses, and a lack of global coverage at 30%.