Declining budgets trend in management consulting

Large companies will in the coming years continue to reduce their budgets for external management consultants. This concludes boutique firm AAIM based on a risk analysis of the consulting industry.

AAIM asked several dozens of management consultants from various consultancies about the main risks for the companies currently active in the consulting industry. Two risk were mentioned most: The growing market share of freelancers (resulting in increased price competition) and de further decline of budgets of potential clients. This decline goes beyond the impact of the crisis; the effects are, according to the respondents of a structural nature.

Four reasons underlie the declining budgets:

Customers are more critical

Due to the economic crisis, customers have become more critical. Thus consultants are increasingly challenged to demonstrate their added value. In the search for more efficiency customers increasingly build in milestones and go/no-go gates in projects. In addition, clients are imposing consulting firms in linking payment to performance through performance-based compensation schemes and variable fees.

Management maturity within business

Traditionally, consultants are hired by the management because they have a knowledge and expertise benefit feature. The increasing professionalization of large corporations over the past decade has meant that the majority of the managers within the industry itself are now strong and well trained.

Strategic frameworks and assessments are no longer an exclusive playing field for strategy and management consultants, managers are well-equipped to perform similar analyses. The modern management has a much smaller need for quality advisors instead they need 'hands' on the job.

Internal consulting departments

Many organizations have internal departments or divisions for consultancy. This eliminates the need to attract external advisory. In some cases in-house consultancy departments possess the capability to independently manage end-to-end projects. In the cases when external guidance is required, either combined teams are created or external consulting firms are hired as a mentor or coach for internal consultants. After the advisory and first period of the implementation phase consulting firms are usually asked to transfer knowledge and responsibility to internal project members.

Framework contracts

Larger organizations and government increasingly work with shortlists and framework contracts. Through the use of such procurement practices they aim at standardising their procedures and gaining as low possible rates from their external providers. In addition, consulting firms are also often played out against each other via competitive bidding procedures ('RFPbiddings') and framework contracts which stimulate continuous bidding between shortlisted parties. The price aspect has also, especially in the public sector, gained importance as a criterion for gunning.