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Consulting industry facing double whammy
Tough times lie ahead for those in the consulting industry, make no
mistake. Based on my soundings of both leading global brands and niche
consultancies, employees have had enough – and are choosing to show this
by walking out the door. All the while, lop-sided client demand means
firms can do little to sweeten the pill. I can see only one outcome from
the double whammy currently facing the consulting industry – and that’s
stagnation in consultants’ earnings coupled with an industry-wide push
For consultants employed in our industry, the coming years will see you presented with a stark choice. Staying loyal to your
employer is likely to result in only meager gains in salary. For those
wanting to achieve a hike in rewards, looking elsewhere and securing a
job offer represents the only plausible route.
For those running
consulting firms meanwhile, greater scale will be needed if acceptable
margins are to be achieved – which would explain the dramatic pushes for
growth and the M&A courting activity we’ve seen of late.
Consulting: an industry that can no longer pay its way
So what are the key components of this malaise in the consulting industry? I would highlight the following:
- As an industry, consulting is tough on the employee and continuous
career progression / gains in reward are needed to retain talent.
- Employee costs typically represent two-thirds of the cost base of your
average consulting firm. Universal pay rises therefore have major
implications for the cost base of a consultancy.
- Advances in
employee reward across the industry are therefore contingent on profit
margins being fattened, or shareholders accepting a reduction in the
returns they enjoy. The latter is unlikely for any sustained period, so
pay gains become contingent on finding ways of enhancing the
profitability of the consulting industry.
Herein lies the rub.
Profitability gains through offshoring have been largely exploited.
Downward pressure on fee rates remains intense. Public sector consulting
demand has collapsed. Even the rebound in private sector work can only
partly compensate. So we find ourselves faced with an industry where
staff are restless but employers cannot afford to do anything about it.
Readers of our consultants’ forum will have seen this play out over the
last months in a series of disappointing pay rounds.
situation for employers is made all the more acute by the resurgence of
the financial services / banking sector and the changes to remuneration
that have taken place there. The shift to higher basic salaries and
lower bonuses means that compensation at every level looks far more
attractive in the City. Consultancies are fighting a losing battle to
retain their stars in the face of this remuneration gulf.
upshot of this all is that firms are adopting a two-tiered approach to
rewards. For the general consulting population meagre pay awards and
slow or "virtual” career progression are the order of the day (and by
"virtual” I mean firms offering progression in job title but with the
corresponding remuneration gain postponed or phased in so that a period
of higher margin can be achieved). By contrast, new hires can be enticed
with more favorable pay offers as these are small incremental costs
rather than awards that must be applied to the firms’ whole cost base. A
similar story is unfolding for those able to secure a counter-offer.
Put bluntly, firms can afford to buy off incremental hires and counter
offerees; but they cannot afford to buy off the whole workforce.
course across a whole industry a surge in staff churn is costly to
address. One of the majors this month announced that employee churn had
risen from 8% of staff a year ago to 17% today. That’s a lot of
additional hiring that needs to be undertaken just for firms to stand
still – and correspondingly a very hefty rise in recruiting costs for
any business to swallow, which explains why firms have been making as
much noise as they possibly can about their intentions to increasingly
hire via social media. The latter of course is low cost and so reduces
the financial impact of greater staff churn. But as all seasoned
recruiters know, attempts at direct hiring only ever get a firm so far
and inevitably significant additional hiring costs will be incurred as
staff churn worsens.
All of which leaves individual firms with a
narrow set of options. Try to carve out a niche or unique approach that
allows some premium to be achieved on fee rates: unlikely. Try to tap
into new markets: if only a new fad would present itself. Try to gain
share and scale the business so that employee remuneration gains can
beat those of the overall market: possible, but mostly at the expense of
others in the industry.
The major players in consulting are all
making a play to gain share and scale their businesses. Look at the
lofty growth aspirations that have been published this last year and
it’s clear to all that they can’t all be achieved simultaneously. Pick
the employer that wins this battle and you’re likely to be at the upper
end of the remuneration curve. But for the industry as a whole, only
when client demand surges to the extent that fee rates can truly recover
will we see sizable remuneration gains across the industry. Until then
you’re in the realms of either "picking the winner” or of changing
employer to secure a rise in earnings. I know which option I would have
more confidence in.
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