Companies shearing consulting spend amid concerns about economic outlook
A poor economic outlook is nudging companies to cancel consulting projects and push for lower fees, according to Source Global Research’s annual report on the consulting market.
The Source survey, which was released yesterday, found that three-quarters of professional services clients have cancelled at least some of their existing or prospective projects, while two-thirds have paused most existing project work.
Businesses are worried about a worsening economy, with the New York Fed giving a 68.2% chance of a recession in the next 12 months. Budget strings are being pulled tighter, with consulting spend coming under pressure as companies seek out savings.
Demand for M&A consulting has decreased dramatically as the cost of capital has increased and companies wait for the other economic shoe to drop. Cybersecurity and HR consulting have also seen a marked drop in demand, according to Source, though spending on IT consulting has remained healthy.
Clients are also questioning the value of their consulting spend. According to Source’s research, clients are now five times more likely to expect fee rates to decrease than they were before the Covid-19 pandemic, while only about half think consultancies add value above the fees they charge.
“This is a longstanding gap, and it comes back to haunt the industry every time there is even a sense of economic uncertainty,” Fiona Czerniawska, CEO of Source, told the Financial Times.
A former Silicon Valley Bank official recently disclosed that regulators questioned if the bank was getting value-for-money from its McKinsey consulting contracts.
The overall consulting market is projected to remain flat, at 11% revenue growth in 2023. Firms, however, have been trimming headcount to preserve profits amid softening demand.
After a rush of hiring in the pandemic era to meet government and private sector demand for strategy and digital transformation work, companies were left overstaffed in many areas. Many firms this year have instituted layoffs of 2%-5% of their workforce, including KPMG, McKinsey, Accenture, and EY.
