Opportunity: Spending on Consulting Forecast to Grow - Global demand for management consulting services is expected to increase about 6% in the next one to two years despite macroeconomic uncertainty and political turmoil, according to new data from Source Global Research. The London-based firm, which provides research and advice about the global management consulting industry, surveyed some 3,000 executives in major markets. It found some 60% will spend more on consulting in the near future, particularly in data and analytics, as well as in digital transformation. Another survey recently cited in Forbes, from management consulting firm Business Talent Group, looked at skills and project demand for independent consultants in 2019. It found that the most in demand projects for independent consultants - some 60% - concern strategy, which includes marketing and sales strategy, growth strategy, and product strategy. The most in demand skills include project management and knowledge of market landscape. More than 80% of large enterprises use independent consultants, particularly in the life sciences, financial services, and insurance industries.
Demand: Driven by corporate profits and outsourcing
Need efficient use of expensive labor and regular flow of work
Risk: Economic health impacts spending on services
Industry Impact - Consultancies will likely need to hire workers with experience in areas such as digital transformation, strategy, and project management to meet the rise in demand for such skills and services.
Corporate Spending Sharply Affects Revenue - Many corporate customers cut outside expenses or delay major projects when profits are low. The revenue of many professional firms dropped during the late 2000s recession; particularly hard-hit were advertising, engineering, and IT services firms. Corporate customers depend on some professional services and view others as discretionary.
Greater Liability for Professional Advice - Because of the greater involvement of professional firms in the operations of corporate customers, firms face greater risk of blame or liability if their advice proves faulty. Customers are quicker to blame advisers, and regulators are more likely to impose penalties. Accountants and lawyers, in particular, are subject to discipline from licensing authorities if professional standards are violated.
Customer Concentration - Many small professional firms get a big percentage of revenue from a few large customers. Despite often having longstanding relationships, customers may cancel or postpone projects for reasons unrelated to the quality of a firm's service. These large customers can demand lower prices, hurting profitability, or may shift business to another firm, severely affecting revenue.
Dependence on Key Employees - Small and midsized firms may depend heavily on a few senior employees to produce a large share of revenue. Professionals with a well-known expertise often take clients with them when they leave a firm. Many smaller firms rely on just a few managers to find new business.
Uneven Workload, Cash Flow - Because much work in the industry is on a project basis, work demands can be very uneven, especially for smaller firms. Cash flow can also be uneven when a firm receives the bulk of a client’s payments upon a project's completion rather than on a regular billing cycle. Small firms can't usually afford to cut their work force when activity is slow.
Revenue (in current dollars) for US professional services is forecast to grow at an annual compounded rate of 4 percent between 2019 and 2023. Data Published: January 2019
Future Business Relies Heavily on Reputation - Name recognition and reputation are important in highly competitive professional services sectors. Just as a good reputation can help a company acquire new business, damage to a reputation can result in the loss of existing and potential clients, and hurt employee recruitment and retention. Any damage to a firm's reputation can be very costly to repair.
Industry Concentration - Many professional firms specialize in providing services to companies in a particular industry, such as real estate, manufacturing, or technology, and are disproportionately hurt if that industry is in a downturn. Large firms often serve a range of industries, but midsized firms have often grown by expanding within an industry and are particularly vulnerable.
Cyber Attacks - Increases in data breaches put professional services firms and their customers at risk. Security challenges such as aging internet infrastructure, widening connectivity, and growing cyber-criminal behavior pose significant threats for lawyers, consultants, accountants, and others. Firms need to ensure that the proper safeguards are in place, such as appropriate technology and employee training, to preserve the security of company and customer data.
Cloud Computing - Professional services firms are increasingly adopting cloud-based technologies to coordinate and communicate with employees and clients. Cloud computing refers to software resources that are delivered over public or private networks, which are typically hosted by third-party providers. Such systems can help firms save money in the long run by reducing the need for expensive data centers and onsite IT departments. Many potential customers in the private and public sectors are also transitioning to cloud-based applications and remote data storage, creating more demand for firms that provide IT consulting and support services.
More Value-Oriented Billing - The basic source of revenue for professional firms remains hourly billing, but some also bill according to the value of the services they provide. Value-oriented billing is easiest to apply for services where the value is explicit, such as tax savings, damage awards, ad placements, or the size of an acquisition or merger. Professional service firms may adopt value-oriented billing policies if they act as general advisers for clients rather than performing work on an hourly basis.
Greater Complexity of Corporate Operations - The operations of corporations (the major customers of most professional service firms) and the regulatory climate have become more complicated in the past decade, leading more corporations to seek outside expert advice. It may be more cost- and time-efficient for a company to hire a professional services firm than to train existing personnel about new technology or regulations. In many cases the hired firm assumes responsibility for knowledge of regulatory changes.
Corporate Outsourcing - The drive for greater efficiency through outsourcing corporate functions will continue to put more work in the hands of professional firms. Instead of maintaining a large internal staff of lawyers, accountants, engineers, and computer specialists, corporations have turned to a management model where in-house staff merely coordinate the work of outside vendors. Although hourly costs for outside professionals are higher, corporations save money because the outsiders are not needed all the time.
More International Business - Greater global trade will provide more opportunities for many professional services firms, as more overseas business is handled according to US business standards. Many professional services are easily transferable to foreign customers. In some cases US professional services firms can expand into markets where labor and operational costs are lower.
Multi-Service Firms - Some larger professional firms offer a range of services that may include related offerings such as advertising and marketing, architecture and engineering, or management and IT consulting. Multi-service firms can bundle services to offer "one-stop shopping" and increase profitability. Such firms sometimes involve entities that are distinct for legal or regulatory reasons whose work is nevertheless closely coordinated.
Government Sector Demand - Increases in state and federal government spending on data security, health care administration, and education technology are creating new opportunities for professional services firms. Agencies are outsourcing more IT and consulting projects as a less-expensive alternative to hiring more full-time employees. Firms that work as government contractors must be able to navigate complex bidding processes and compliance requirements. Although government contracts can be lucrative, they can also be risky, as publicly funded agencies are often forced to cut costs due to budget constraints.
Copyright 2019, Hoover's Inc., All Rights Reserved. This data cannot be copied, sold, or distributed in any manner without the written permission of First Research.
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