UK consulting industry facing a resourcing crunch

Finding, developing and retaining professional resources is the biggest strategic challenge facing the consulting industry currently.

Top-Consultant.Com, the leading e-journal for Management Consultancy in the UK, discusses the implications of this "resourcing crunch" on profitability in its September 2007 editorial. Based on analysis of data in the MCA's UK Consulting Industry 2006/7 report, the article draws attention to the squeeze on operating margins in the sector, down from 18% in 2003 to 9% in 2006. The article blames downward pressure on fees and upward pressure on salaries for this squeeze. It also points out that attracting staff, and so growth, are becoming increasingly difficult as competition for skilled resources heats up.

These trends have existed for many years in our industry. David Maister warned of this precise danger in his ground breaking 1993 book, Managing the Professional Services Firm. What is new, as pointed out by the article, is that margins are too slim (9%) and staff costs are too high (66%) for firms to buy themselves out of trouble by hiking salaries to attract more staff. Instead it is suggested that firms must raise fee rates in order to rebuild margins and attract the staff they need to grow.

But there is a challenge here. Competition makes it difficult to raise fee rates unless we can offer additional value that isn't readily available elsewhere. Also high fee rates makes it more attractive for clients to build their own capability. A few very experienced hires, coupled with sourcing direct from the contract market, can provide solutions of the same quality and timeliness as Consulting firms offer in many service areas. Often this will be at considerably less cost, although the client will assume additional risk in the event of over-runs.

The analysis raises another question. In 2003 when margins were 18%, staff costs as a proportion of the total were 5% higher at 71%, as the report shows. Also, 2003 was arguably the nadir of the recent downturn in the consulting market, so one might expect margins to be squeezed particularly hard at that point as firms discounted deeply just to keep afloat.

What is different now is growth. Our analysis for our clients shows that growth in revenues typically lags growth in staff numbers (and associated acquisition and payroll costs) by around one financial year. As long as firms maintain current high rates of growth, margins will remain proportionately lower.

However, slowing growth is not likely to be the solution either because of the downward pressure on fees noted earlier. Also, growth is needed to create rewarding career paths for staff, financially and professionally. This leads us back to increasing fee rates. As we have already argued, this strategy is unlikely to work, unless firms can convince clients they are getting greater value as a result.

What we have found with our clients is that the maintaining and improving profitability come from ongoing productivity improvements. Professional services inevitably mature and so are valued less by clients. Given increasing competition for skilled staff, they inevitably will be more expensive to retain. We must look for more cost effective ways to leverage skills and deliver greater value for money. This will come from assessing services, clients, staff and business partners and looking for new ways to deliver the same or better value at less cost - both to our clients and to ourselves.

We'd be very interested to hear of your experiences and views (Directors@Aoxomoxoa).

©Aoxomoxoa Limited 2007