News focus: Spend on management consultancy rising rapidly

Will Green is news editor of Supply Management
6 July 2015

Spend on management consultancy is rising, but do buyers need a different approach? Will Green takes a look at how business needs are changing

Demand for management consultancy is growing. According to figures from the Management Consultancies Association (MCA) the level of spend with its members grew 8.4 per cent to £5.2 billion in 2014.

The MCA says challenges posed by the nature of economic growth in the post-crash world, and the need for businesses to digitise their operations have fuelled the increase in spend. Advising on digital makes up 27 per cent of consultants’ work, way ahead of other service lines, reflecting the importance for brands of developing “digital channels” where customers can browse and shop.

The work includes developing social media presence and “communities of interest”. “There are far more people who follow and link into the activities of Ferrari than there are owners of Ferraris,” says Paul Connolly, director of the MCA Think Tank. He says organisations see the importance of digital but are not clear about what it means for them, which creates “a gap in which consultants thrive”.

Challenges also exist around growth, which Connolly says may prove harder than the cost cutting of the recession years “because no one really knows what the new normal in business looks like”.

“We’ve seen immense changes in consumer expectations through digital,” he says. “A shift in power towards consumers and a lot of questions about what companies should be doing, what corporations are for, what differentiates good decision makers from bad ones.

“How do you assess the viability of a business proposition in a context where barriers between industries are coming down, barriers to entry are much lower, where the business cycle is incredibly fast? Businesses are asking management consultants: how do we respond?”

For Rachael Mauler, group category leader at G4S with responsibility for buying professional services, it is necessary to specify goals at the beginning when employing consultants and link these to the business.

“It’s sometimes difficult to quantify what the outputs and outcomes will be,” she says. “Monitoring success can also be challenging as there are often joint responsibilities between client and consultant.

“Where possible we specify what the outcomes are and if appropriate link these to business-related outcomes. We also use a balanced scorecard approach to evaluate the softer aspects such as relationship and knowledge transfer.”

Go with your gut

The first step is to find a consultant to work with and this process is less about logic and more about gut instinct, according to William Johnson, managing director of Psychological Skills for Professional Services, who says the brain goes through a process of  “feel, think, feel” when making decisions.

He says buyers should test the experience of consultants by asking for examples of previous work and ignoring unsupported assertions in sales pitches.

“Clients don’t want to be sold to: they want to buy,” he says. Johnson says it is up to the consultant to “create a case for why you should buy”.

“Get them to explain how your situation is similar to others, but different,” he advises. “Get them to tell you what they have learned from previous similar projects.”

Something else to bear in mind is the type of technology potential consultants implement, according to Michelle Hovanetz, procurement research analyst at IBISWorld.

“When purchasing management consulting services, procurement professionals should research and evaluate suppliers extensively,” she says. “Buyers should diligently check references and look for suppliers with a proven track record of success when navigating challenges similar to those of the buyer.

“Buyers should also look into the systems and solutions management consultants implement. Do their recommendations often include proprietary software or technology? If so, switching costs are going to be much higher if a buyer decides to change suppliers in the future.”

Buyers may be assisted by understanding the fundamental challenge for management consultancies: keeping a “bench” of consultants as busy as possible.

Pat Newberry, a former commercial managing partner at PwC’s consulting business, says firms typically generate around £180,000 to £200,000 of annual revenue per head of staff. Senior people will earn around £80,000 to £90,000 while the margin on more junior staff is higher, but of course while staff sit on the bench they are simply a cost.

“There are things you can give to the consulting firm that mean you can ask for something back,” says Newberry.

This includes indicating up front the amount of work that might be on offer, suggesting areas of future work and educating the consultancy about your business. “All of this is very useful when you are running a consultancy and trying to build up a pot of work,” says Newberry.

‘Tread carefully’

Another potential source of vexation is how you pay for advice.

Traditionally, a time and materials approach has been taken but consultancy is “genuinely different to any other spend category because requirements are discretionary, not always predictable and can often be highly politicised”, according to Paul Vincent, chairman of the Consultancy Buyers Forum.

“Value is almost never the same as price, and the only way an organisation can genuinely maximise value is if they centre their buying approach on the outcomes they require,” he says.

Vincent says it is critical buyers put in place the right success measures, think end-to-end about the process and understand the internal dynamics that have led to the need for consultancy services.

“Internal clients need to be as clear as possible about what they are seeking to achieve and be wary of being potentially blindsided by the urgency of their business needs,” he says. “Procurement professionals need to tread carefully when considering the most appropriate commercial model, contract structure and negotiating strategies.”

Newberry says both sides would benefit from profit sharing and value-add pricing structures. “I think there are deals to be done that would benefit both buyers and sellers by moving away from time-based charging,” he says.

Hovanetz warns that prices for consultancy services are expected to rise over the next few years, while a “fairly high” level of specialisation in the market “hinders the ability of buyers to compare suppliers against one another, making supplier selection complicated”.

“Buyers of management consulting services have to contend with consistently rising prices, which reduce buyer leverage,” she says. “The big four international professional service firms have significant pricing power thanks to their reputation, which makes negotiating even more difficult.”

Connolly says prices are “starting to come back” but recommends buyers do more work at the pre-contract stage, with better specification of projects and collaboration in the identification of outcomes. “Involving consultants and saying: ‘What might you be able to do in this area?’ is often a sound move because it allows consultants to say: ‘No, we don’t think you’ll achieve that’, or ‘that’s probably not what you want’,” he says. “There is a long way to go. The default setting right across industry and government is time and materials, but that’s counter-productive. I think it creates an obsession with things like day rates and we’re starting to see the first moves away from that.”

Mauler says it’s important to look at the whole picture. “Focus if possible on the overall value or return on investment the consultancy will bring rather than simply looking at the cost,” she says. “To achieve this of course the buying organisation needs to be clear about what this is.”

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