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Australia / Analyst Insights
The Outlook for Management Consulting

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by IBISWorld
Oct 28 2020

The Management Consulting industry has been severely disrupted by the outbreak of COVID-19, with revenue expected to contract by 2.8% in 2020-21. This decline follows a contraction of 15.5% in 2019-20. The sharp decline in business confidence in 2020 has been particularly damaging to consulting firms, as major clients have cut non-core operating expenditure, including consulting expenses. Many major projects that required external consulting advice have been postponed or downsized. Capital expenditure by the private sector is expected to decline by 9.8% in 2020-21, following a 3.9% decline in 2019-20. In addition, many employees across major downstream industries have become independent consultants following job losses, increasing competition for consulting firms.

Operators in the Management Consulting industry are forecast to partially rebound in 2021-22, although revenue is likely to remain below the high of 2018-19. The industry is expected to achieve a new revenue high in 2022-23.

Cost-cutting and industry participation

The market for consulting services has shifted significantly as a result of the COVID-19 outbreak. Clients across the retail, wholesale and manufacturing sectors have shifted from investment-driven growth, focusing instead on cashflow sustainability, risk management and efficiency. As a result, consultants have had to remain relevant to their clients by providing cost-cutting advice, rather than input on new business projects.

Amid this focus on cost-cutting, consulting firms have needed to cut fees in order to retain business. Downward pressure on fees has intensified as consulting firms have had to compete for a shrinking pool of total demand. Profit is expected to account for 11.6% of industry revenue in 2020-21, down from 22.3% of revenue in 2018-19. Major industry players have downsized their staff numbers, lowered wage payments, and reduced partner profit share to preserve business viability.

Employment across the Management Consulting industry declined by 6.2% in 2019-20, but is only expected to decline by 1.3% in 2020-21. While larger firms have reduced their labour forces, many of these employees have created their own small-scale firms, thereby remaining in the industry. As a result, the number of enterprises across the industry is only expected to decline by 1.2% in 2020-21. Furthermore, low barriers to entry have allowed over 48,900 single-employee firms to operate in the industry.

Over the five years through 2020-21, consolidation and acquisition have been frequent occurrences in the Management Consulting industry. Larger firms often acquired small specialist service providers to expand the range of their consulting services to grow economies of scale and scope. To attract and retain large-scale clients, consulting firms would often acquire small and successful operators in target consulting markets, rather than grow organically. While large firms have downsized their labour forces in 2020-21, acquisitions of smaller consulting enterprises are likely to continue, particularly if they can be secured at favourable pricing amid difficult operating conditions for small players.

Not all consulting is equal

Different service segments within the Management Consulting industry have performed in starkly different ways amid the COVID-19 outbreak. Digital transformation has been in strong demand, as a range of downstream clients have had to quickly adapt to working from home, and as consumers have increasingly preferred doing business online. As a result, operations consulting has increased as a share of overall consulting revenue, accounting for approximately 27.5% of revenue in 2020-21.

In contrast, non-core consulting services, such as change management, have declined in demand. Change management involves preparing individuals in organisations as changes are made to the way they operate. Human resources consulting, which includes change management, is expected to account for 10.3% of total Management Consulting revenue in 2020-21.

While private sector demand for consulting has faltered, consulting firms have been supported by ongoing growth in public sector expenditure. Capital expenditure by the public sector increased by 2.7% in 2019-20, and is expected to surge by 11.0% in 2020-21. Following the 2019 election, the Federal Government has ramped up spending to modernise the Australian public service, which has created major growth opportunities for consulting firms. Despite the disruption associated with the COVID-19 outbreak, this modernisation has continued, providing support for the Management Consulting  industry. In addition, the COVID-19 outbreak has created some demand for consulting, such KPMG’s contracts with the Victorian Government’s Department of Health and Human Services to implement COVID-19 management strategies. The public sector is the second largest market for management consulting firms, accounting for 17.7% of industry revenue in 2020-21.

Outlook for consulting

Revenue for the Management Consulting industry is projected to grow by 12.8% in 2021-22, while employment is forecast to increase by 3.9%. Business confidence is likely to return to positive territory in 2021-22, while consumer sentiment is also anticipated to improve. As a result, capital expenditure by the private sector is forecast to increase by 2.2% in 2021-22, and grow by a further 6.4% in 2022-23. Loosened taxation policies announced in the October 2020 Federal Budget are projected to drive business investment, and support demand for consulting services.

The Australian consulting market is forecast to rebound from the effects of COVID-19 stronger than other developed nations, due to Australia’s near-elimination of the pandemic. As COVID-19 restrictions continue to be eased, businesses are likely to return to investment-driven growth and relax cost-cutting measures. This is likely to boost demand for the industry, particularly for strategy consulting services.

Overall, Management Consulting revenue is anticipated to grow at an annualised 6.0% over the five years through 2025-26, to $35.6 billion. Profit margins are forecast to recover over the next five years, particularly as firms focus on providing high-margin and specialised services. The average wage is anticipated to increase, but is likely to remain below the levels exhibited in the lead-up to the COVID-19 pandemic.

IBISWorld reports used to develop this release:

For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647