Consulting firms need to adapt to survive in the public sector

 

A new report published today (10 February 2012) by Sourceforconsulting.com predicts that public sector consulting work will remain flat for the foreseeable future. The report found that 2011 turned out to be another difficult year for public sector consultants, with UK work falling a further 15-20 per cent on top of more drastic cutbacks in 2010.

Small and mid-sized consulting firms, despite their relatively low profile, have been suffering disproportionately from the cutbacks. They’re falling victim, like all consulting firms, to a continuing squeeze on rates, but are often unable to match the aggressive discounts (and even free services) being offered by their bigger competitors.

The report also found that more fragmented markets and smaller projects are two reasons why volumes of consulting in the public sector are continuing to shrink, but there are a number of other factors that have had a role to play. Government frugality is now prioritising a reduction in expenditure on external services above attempts to increase quality. Added to which, severe reduction in private sector investment has removed one source of funding for consulting projects.

 

Fiona Czerniawska, Joint Managing Director of Sourceforconsulting.com said:

“The combined impact of all of these pressures – pushing consulting up, down and sideways – is to create a fragmented market. In the foreseeable future, only a small minority of public sector clients will be prepared to use consultants to design and execute more radical, even imaginative changes, while the majority remain focused on straight-forward cost reduction.”

 

New opportunities for consultants

The picture in local government and in the health and education sectors looks different and the report says that there are now opportunities for firms to market themselves directly to new free schools and academies instead of going through local authorities.

Investment is also still being made within technology, security and international aid, but the majority of advisory work is now bundled into ‘build’ activity, such as systems integration.

 

Changes may help SMEs

A problem for smaller consultancies is often finding opportunities, but a new government framework for bigger consulting projects (ConsultancyONE) and an e-marketplace for smaller ones, developed by the Efficiency Reform Group, should allow smaller consultancies to have access to public sector work.

The report also found that the majority of public sector consultants believe that their industry will look very different in the future. Partnering relationships between firms or joint ventures that allow them to pool specialist resources will be one way to defray the costs of remaining in the public sector consulting market. However, the report says that faced with a smaller, lower-margin industry, it will be the consultancies that are innovative and can offer to do more for less that will find the opportunities.

 

Fiona Czerniawska concluded:

“Unfortunately, no amount of rebalancing or partnering will resolve or even completely mask the problem of shrinking margins. As a result, there will be the emergence of two distinct consulting markets: a private sector one which mirrors the lacklustre performance of 2011; and a public sector one, where consultants are charged out for less and paid less as a consequence. This will be a tale of two industries and consulting firms will have to adapt.” 

 
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