Source's new Quarterly Trends in Consultancy Buying report, released October 2010, has found that public sector expenditure on consulting services has fallen by around 25 per cent in the last six months. However, the report also found that there is good news for consulting firms with demand from the financial services sector leaping by about 15 per cent.

The report, which surveys leading buyers of consultancy services,[1] found that there were worrying signs across the wider consultancy buying community. The Source Index of Consultancy Demand – which measures buyers’ expectation about their expenditure over the next six months - slumped back a further four points to 70, just four points above where it was during the depths of the recession.

Fiona Czerniawska, Director of Source said:

“Many consulting firms will avoid feeling the pinch directly but few will avoid feeling the effects at all. Those which don’t work in the public sector may well find themselves fighting for market share in the sectors they do cover as surplus capacity in the market as a whole increases competition for work. More than ever, this is a time when having a clear – and where possible unique – service offering will serve consulting firms well.”

Strategy firms lose further ground

Strategy firms, who appeared to be eating into the market share of Big Four firms in Q2 of 2010 lost ground in the last few months. The report found a contraction of about 35 per cent in their share of the market, which now means that they account for just 10 per cent of clients’ overall expenditure. Big Four firms now account for about 37 per cent of the market.

Although strategy firms are losing market share, there has been a sudden resurgence in strategy consulting in financial services, which has more than doubled its share since Q2 of 2010. This suggests that:

·         Without the financial services sector, strategy consulting would be in serious trouble.

·         Strategy work isn’t being given to strategy firms.

·         The financial services sector is one step ahead of the rest of the market (where demand looks set to grow again) and is already preparing itself for a new phase in the economic cycle. 

Uplift in global M&A boosts financing work…

Financing work, which includes due diligence and valuation, M&A deal structuring and transaction continues to perform extremely well in the financial services sector. 

How buyers are paying for consulting services

After a brief resurgence, risk and reward contracts appear to have fallen away again, making way for a growth in fixed-price work. The report says that this isn’t entirely surprising: clients’ interest in risk-reward tends to grow as times get tougher and then cools quickly when they realise how tricky these types of arrangements can be in practice.

Fiona Czerniawska concluded:

“Whilst consulting firms may have been buoyed by the upturn in financial services, when analysing what clients are saying, we would estimate growth of about 50 per cent in this sector is required to offset the future decline in public sector work.”