RSS feedsThe growth in fee income in the 2004 financial year that marked such a change in the fortunes of the top consulting firms has continued through to the figures for 2005, if not to the extent that many in the industry were expecting.
Link: Management Consultancy Top 75 index, click here
Last year, Management Consultancy’s annual fee income study showed greatly improved growth, following the stagnant 2003 financial year when there was hardly any growth worth speaking of.
The indications back then were that the market would continue to pick up and many firms reckoned that the 2005 financial year would witness full recovery, with fee income growth rates well into double digits.
It did not happen. Total fee income for the top 75 consulting firms grew by £455m for the 2005 financial year, or 9.6%. Not only is this a much lower rate of growth than the previous year, it is also a case of a much lower fee income increase. The 2003/04 gain was 13.9%, which included an extra £574m in total fee income. It is a big disappointment, especially as many firms were projecting the sort of growth that would generate a total fee income improvement in excess of £700m.
Others, though, were not so sure. When we did the study last year, some larger firms were projecting more modest rates of growth. And what happens to the very large firms affects the total market. Last year, 13 firms each had a total fee income above £100m. This year, Detica joined the ranks of the £100m+ players, who together earned a total fee income of nearly £4bn, or 77.6% of the total of all firms on our list.
In last year’s study, those same 14 firms accounted for a total fee income of £3.6bn in the 2004 financial year, or just over 78% of the total of all firms. Together, these firms had a total fee income improvement in this year’s study of £327m, or 8.9% a lot less than expected given that demand for consultancy seemed to be improving.
The same trend appears in the figures of the 10 largest consulting firms, which account for just over two-thirds of the total fee income of all firms on our list.
These 10 firms had a combined fee income gain of £394m for 2004, or nearly 14% up on the previous financial year. For 2005, the figures are significantly lower, with a gain of £256m, just less than 8%. Had the top 10 enjoyed a fee income gain in 2005 equivalent to the previous financial year, the actual combined gain would have been almost £200m more than it actually was.
The figures indicate that the growth rate has fallen. Something that came across time and again when we spoke to firms this year was that not only has consultancy become harder to sell, but the emphasis has also started to turn towards non-advisory revenue streams. Implementation and outsourcing have become much more important because they provide what some call annuity work the firm works for the client for very much longer. Outsourcing revenues also seem to be growing faster than consultancy revenues.
DEFUZZING THE FIGURES
It is always difficult to obtain fee income figures that relate solely to consultancy, which we define as business advice. What we always try to avoid for our survey is having a mismatch of figures that might include anything from tax advice to software to computer hardware.
This is one reason why we use estimates in our tables. Not all the larger firms have the sort of reporting mechanisms that enable them to arrive easily at an exact figure for each of their different activities. Accenture, for example, had a total revenue figure for 2005 of £1.4bn, but not all of that was consultancy, and we estimate the firm earned £835m. The balance was made up from other revenue streams.
We have also estimated income where final figures are not yet available. Public companies, for example, might have a 2005 financial year end of 5 April 2006, but their figures might only be available towards the end of May or early June.
And in some cases, firms make no accounting distinction between consultancy and implementation or outsourcing. Their projects might embrace all these activities. Our challenge each year is to arrive at realistic consultancy fee income figures that are consistent with previous years.
Something else that happens is that where an estimate was provided one year, it might be revised the next, with the benefit of final accounting figures. For example, a year ago we showed a total fee income figure of £4.9bn for the top 75 firms. This year, our revised figure for 2004 is £4.7bn for the top firms, chiefly due to having a figure for Atos Origin last year but a rather more modest figure for Atos Consulting this year.
NEW KIDS AND BIG BOYS
This year’s new names are headed by Diagonal Consulting in 23rd position. Diagonal was acquired by the Morse Group in 2004 and we have estimated pro rata figures because of very different accounting periods before and after the acquisition.
Chaucer Group comes in at 35 with fee income of £17m, and Dbi Consulting comes in at 41 with £13.6m.
Another new name is Xantus Consulting, which recently won various industry awards, including the BCS IT Consultant of the Year, and an MCA award for work with Barclays, Prudential, Boots and National Australia Group. Xantus comes in at 58 with fee income of £3.9m.
In 57th place is Aspiren with fee income of £4.0m. Aspiren had the highest growth rate of all the top firms, the fastest growth of all small firms, and the highest growth rate of all firms for each of the last two years.
Looking at growth, it is no surprise that Accenture again tops the list, with an estimated fee income gain of £82m, or nearly 11%, as Table 2 shows. IBM Business Consulting Services comes second with an estimated £50m gain, up nearly 9%. In third place is Deloitte with an estimated gain of £36m, or 11.4% up.
Both Detica and LogicaCMG had fee income growth of £31m, with Detica recording a meteoric rise in the second half of the financial year.
Our estimated fee income for Xansa, the third largest firm, shows a lower figure for 2005 than 2004. The estimate is based on half-year results and the lower figure is because the company is increasingly using an integrated offshore delivery capability, which has a revenue deflationary effect.
Typically, the largest firms have the highest fee income growth figures in cash terms in a booming market. This year, though, some of the medium-sized firms rank alongside them for revenue gain. The estimated figures for Hedra and Methods Consulting show gains little different from firms several times their size. Hedra’s estimated fee income was up 31% and Methods Consulting provided an actual figure up by just over 26%.
SMALLER FISH
Smaller firms, starting from a smaller base, invariably show the largest percentage fee income gains. It is difficult and very rare for one of the top 10 players to add an extra 30% or 40% in a single year.
Table 3 shows the firms with the highest percentage fee income growth rate in the 2005 financial year. Aspiren, E-A and Xantus top the list. Mantix, a slightly larger small firm, is in fourth place, followed by Berkshire and Strategem.
Acquired by Enterprise in April last year, Strategem still operates as an autonomous company. It pointed out to us this time that while its fee income is normally shown in our public sector and local government tables, much of its work is on government-funded business support projects for SMEs, a market category we do not specifically identify in the annual study. Strategem’s fee income figures show it made a 57% gain last year.
In all, 18 firms had fee income growth of 25% or more, and five had growth of over 50%. The Consultancy Company was the smallest of the 18. Just over a year ago it sold off part of its business, so its 2004 figure was down on the previous year.
Hedra and Methods Consulting both feature in Table 3 and at the top of Table 4, which shows the changing fortunes of the medium-sized firms. We define medium as all those firms with total fee income of more than £25m in the last financial year, but less than £100m. There are 14 medium-sized firms in our top firms list this year with a combined fee income of £759m. This is £67.7m above the figure for the same firms in the previous financial year, a change of 9.8%.
While this sort of growth is not to be sniffed at, it is lower than expected. On average, these firms put on an extra £4.8m in fee income each; only two, Methods and Hedra, had fee income growth in double figures.
It is often said that competition on all sides makes growth difficult for medium-sized firms. They face competition from much larger firms with larger resources and increasing competition from slightly smaller firms.
Management Consultancy defines small/medium-size firms as having fee income above £10m but less than £25m. There are 16 on our list this year with combined fee income of £258m £36m more than the previous financial year, a growth rate of 16.4%. In the last financial year, these 16 firms added £71m in fee income, an improvement of over 11%.
Small firms those with fee income of less than £10m did well. Table 6 lists the fastest-growing small firms, ranked by percentage growth rate. The 20 small firms listed had fee income growth of 12.5% or more. Of all the small firms, Mantix had the highest gain: £3.4m, or nearly 62%.
Considering the relatively low overall fee income growth rate of the top firms, the burning question is whether the industry is in for a period of slow rather than rapid growth.
It does seem unlikely that there will be a return to the days of 20% annual overall growth, and with low economic and GDP forecasts it is possible that future growth may be on a more modest scale.
Consultancy may also now constitute a mature market, so future growth will have to come from other non-advisory services provided by the consulting firms.
But consultancy is by no means dead. A glance at the list of firms with above-average growth for both of the past two financial years shows that 25 firms, some large but many in the medium to small band, have consistently grown at rates far above the industry norm. The only seed of doubt here is that 13 of these firms had a lower growth rate in the last financial year than in the previous one, although optimists will be quick to point out that 12 of the 25 had a higher growth rate than in the previous year.
