SME consulting firms book solid growth but face challenges

Small and mid-tier consulting firms have managed to see positive developments in their businesses in the past twelve months – with more than half seeing average revenues grow. A number of notable challenges lie in wait for the sector, however, with a shortage of talent and late payments from clients coinciding with a spike in costs.

The UK consulting sector is determined to present itself as optimistic for the future, come what may. In recent months, a number of industry-wide reports have found that more than 80% of professional services firms expect revenue growth in the coming year, while also stating they are determined to keep on hiring to meet growing demand.

A new report from Sonovate has echoed these findings. Examining a cross section of UK consultancies of all sizes, locations, disciplines and industries, the research found that 51% of consultancies had seen an average monthly revenue increase over the three years to March 2023.

Among small and mid-sized enterprises (SMEs) this growth seemed even granter – with 69% of small firms (those with 10 to 49 people) and 82% of medium-sized consultancies (50 to 249 people) seeing an increase in the scope of work over the last 12 months.

As positive as this might seem, however, there are a number of factors which look set to impact this growth in the coming year – for firms of all size. To help consultancies adapt to new headwinds over the coming year, Sonovate also identified three top challenges which SME consultancies will face.

Late payments

The traditional business model of consulting firms sees clients invoiced for their projects after they are delivered. Most firms do not ask for money up front – and will pay staff working on such projects on a monthly basis. If they send an invoice, but the client pays late, this can therefore have a massive impact on the working capital and cash flow of the entire firm.

Worse, this seems to be becoming more common, as many other businesses encounter cash flow problems in the wake of the Covid-19 pandemic and the cost of living crisis. While some of the world’s larger firms can at least temporarily absorb those losses, small and medium firms are more vulnerable to being wounded by this in the short-term. To that end, Sonovate found that 18% of SME consultancies have been unable to invest in their business growth, due to the issues caused by late payments.

Competition

Failing to invest in the expansion of business operations can leave firms vulnerable to another growing challenge, too. A 62% portion of small consultancies and 64% of medium-sized firms believe competition is now greater than before the pandemic. Chasing debts from clients is impacting how those firms are able to respond to that change, too.

Again, size is a factor. An 85% majority of small consultancies told Sonovate they had competitors who were offering prices they could not match – whereas only 50% of medium firms said as much. Either way, though, a large number of firms are feeling they cannot compete effectively with new firms – and it is starting to show on the balance sheet.

A 46% chunk of all firms polled told the researchers they had always been profitable, without change in the last three years – but this fell to only 15% of small firms. In contrast, 62% of small firms said they saw drops in profitability in the pandemic that they have not recovered from.

Talent

Besides matching the price of competitors, another major area of development which is set to impact the outlook of SME consultancies is the search for talent. Even though major firms like McKinsey & Company and KPMG are presently downsizing, they are shedding staff from back office functions. There is still an ongoing war for top talent, as they each look to bring in new staff who have the digital skills that can help them cater to the changing needs of clients.

With the other pressures SME consultancies face, they are struggling to accrue the right talent, and to keep pace with larger firms. An 85% majority of small consultancies said they needed to hire more specialists to grow their businesses at the moment, but only 15% actually planned to hire in the coming year. This is partially because of the capital it requires to find and retain specialist labour – especially when there is a shortage of it. Most small and medium consultancies are specialists rather than generalists, so the wages of the experts they need is higher – and more easily surpassed by larger firms.

Commenting on the research, Damon Chapple, co-founder and co-CEO of Sonovate, said, “Sourcing, securing and holding onto specialist talent is a double-edged sword. Without it, a firm will fail to maintain a competitive advantage over the long-term, but acquiring it takes resource, effort and time that smaller scale consultancies can often ill afford to waste. A specialism, however taxing it makes a business’s growth strategy, is key to commercial success over rivals. Learning to navigate this complexity is paramount.”