Things to think about for 2013: (4) Engineering consulting firms

This is the fourth in my series of blogs looking at the prospects for different segments within the consulting industry.

Engineering consultancies are the new kids on the block where management consulting is concerned, certainly still new enough for some consultants to be surprised when we include them in our analysis.

Their ignorance is understandable.  We estimate that, in 2011, the management consulting practices of engineering firms accounted for less than 2% of the consulting market across Europe, the Middle East and India.  They’re most successful in northwest Europe – the UK, Scandinavia and, increasingly, Germany (these geographies account for more than half the revenues of this segment) – where they’ve been buoyed by a combination of high government or infrastructure spending.

But what does the future hold, particularly in an age of austerity where government spending and investment programmes are subject to intense debate?  At face value, growth in this segment has been reasonably strong, but the boost of acquisitions and new entrants mask an underlying slow-down and most firms expect low growth at least over the next 12 months.  The inevitable result of a weakened market is increased competition and lower prices –  what could have been an opportunity for engineering consultancies is rapidly morphing into a problem.  Coming out of the cost-conscious construction sector, these firms have typically charged comparatively low rates for highly-skilled engineers, but their advantage is being eroded by niche firms and the Big Four, both of which have been prepared to drop their prices to unprecedented levels.  Being even more ruthless with costs and re-organising themselves to achieve greater economies of scale may be part of the answer but it won’t be easy (precisely because these firms already have a lower cost base than traditional management consultancies).  Moreover, there’s irony to contend with: one of the reasons engineering firms moved into management consulting in the first place was to secure higher fee rates.

That leaves growth.  Infrastructure projects in emerging markets may provide some new opportunities and are probably easier than taking a larger share of the mature consulting markets, even those where engineering firms are currently under-represented.  It would also be helpful to have a clearer, more distinctive value proposition, both for the segment as a whole (‘engineering firms are better at management consulting because…’) and for the individual players within it (‘and our engineers are better at management consulting than other firms’ engineers because… ‘).   A significant proportion of growth will have to come from acquisition.  Precisely because the differences between the management consulting practices of engineering firms haven’t been clearly articulated, consolidation is not only possible but relatively easy.

But perhaps the biggest opportunity, which is really only just starting to emerge, focuses on public sector consulting.  Our recent report, which looks at the attitudes of public sector managers about consulting, highlights the differences between the UK, France and Germany (Germans are by far the most positive about the involvement of consultants) but also the similarities (fee rates are low and falling).  Patchy demand and rock-bottom prices are forcing many firms to at least contemplate the idea of separating their public and private sector consulting practices, so they can bring the costs of the former down sharply.  The management consulting practices of engineering firms, because so much of their work is driven directly or indirectly by the public sector, are already there and perhaps may form the nucleus of a new type of public sector-only consulting firm.