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What Are We Seeing?
Last month we analyzed the demand side of consulting layoffs, pointing out the downshift in consulting spending by large client organizations as they cut expenses and shift spending to data and analytics (DnA) players. But softening demand driving layoffs isn’t the whole story. There is a larger supply side trend of changes in consulting offerings and service delivery that connects to recent layoffs.
Consulting providers started rolling out productized offerings in the mid-2010s, pitching faster, more efficient delivery of repeatable and verifiable outcomes. The promises of consulting "productization” were threefold: 1) finally close the strategy-to-execution gap for clients; 2) access more predictable and consistent revenue streams from managed services and as-a-service offerings; 3) solve providers’ age-old quandary of scarce talent impeding sustainable growth. The shift to a more productized business was also intended to reduce consulting’s over-reliance on people.
Statistics for the broader professional services sector appear to bear out that the sector has been reducing its reliance on talent to generate revenue. After averaging less than 1% after the 2008 global financial crisis, annual productivity growth (output per worker) turned a corner in 2017. That’s when Total Factor Productivity innovation and capital intensity began making consistent contributions that eventually spiked during Covid.
What's Behind It?
We compiled revenue-per-employee benchmarks (a proxy for productivity) for 50 consulting providers across six competitor groups. These indices show that productivity gains were already diminishing pre-Covid for some competitor groups. While Covid did unleash a productivity boom, by 2023 productivity for most competitor groups is back to its 2017 starting point (or worse).
The penetration of productized offerings is still very limited, even in a relatively advanced consulting firm. Instead, the Covid boost in productivity was really an artefact of higher employee utilization – working harder not smarter.
Why Does It Matter?
The combination of softening demand and unprecedented employee cost inflation is pressuring operating margins for most competitor groups. Absent the sort of productivity gains deeper productization would deliver, layoffs are necessary to protect margins.
The global consulting firms are embarking on a massive internal investment boom around generative AI solutions. Layoffs alone won’t be enough to sustain those investments. If the consulting bulge bracket wants to escape the old binge-purge cycle, it should fully embrace the more productized business model and the corresponding productivity gains it promises. But to accomplish that requires a whole-firm commitment.
Our next installment examines how consultants are restructuring management organizations and balance sheets to drive productivity gains.
(c) 2023 Kennedy Research Reports LLC