The Impact of Digital on IT Consulting. Has it reached Terminal Velocity?

With signs of both a growing demand for consulting services and a corresponding talent crunch as companies fight to bring on the professionals needed to meet demand, we could rationally expect a particular economic outcome—an increase in the cost of services. But, if anything, day rates and hourly fees have remained static.

What happens when supply doesn’t meet demand?

First of all, let’s take the two major factors in action: supply and demand. Our research shows us that demand for consultancy services is going to increase considerably, driven by the increased need to drive business outcomes using digital technologies. If we take a look at Exhibit 1, we can see this market growth in action, with considerable increases in global revenues predicted off the back of increased enterprise demand for digital services, even with a projected downturn in legacy IT.

Exhibit 1: Estimated Decline of Traditional IT Professional Services and Increase in Digital OneOffice Professional Services Revenues

Source: HfS Research, 2018. Based on an estimate of the IT professional services revenues for the leading providers from publicly stated financial statements.

It’s this predicted growth that is pushing current talent pools to their limit, not only because of the increasing volume of work but also because digital professional services, and changes in the provider market in general, are changing the skills necessary to succeed. While the jury is still out about what skills make the ideal digital professional, HfS research is already showing a shift from the traditional IT right-brain skills of logic, process, and mathematics to the left-brain skill sets such as design, imagination, and creativity, which are needed when reimagining digital solutions and identifying opportunities.

Already we’re seeing the large providers pivot their acquisition activity away from being technology driven—in which they procure the IP and tooling needed to open up offerings—to building out capability-driven investment roadmaps that focus on bringing in valuable skillsets in digital and design, supplementing the all-important talent pools. Of course, this process and the overall trend are nothing new; we’ve been talking about them at HfS for some time, including in a recent report addressing the impending talent war in IT Services. But, the point is that the growing demand for professional services talent combined with the challenges that come with the size of the current talent pool would indicate that we’re likely to see an increase in the price of IT and digital professional services.

However, when we take a look at some recently published data on the average hourly and daily rates of major global consulting firms, the outlook is very different. In fact, it shows signs of relatively static hourly rates that barely scratch annual inflation.

Management consulting day rates remain flat, but for how long?

If we dig into a few recently published data sets to see if this demand is already playing out, the results are, well, unspectacular. One UK market-focused source reveals a small increase in the average IT consultant day rate in late 2017 to £475, from a consistent £450 since 2016. Growth rates have remained relatively flat, bobbing around the £450 mark for the last few years, with inflation-rate increases pushing the average up slightly.[2]

Another source contextualises this data by pooling results from across Europe, which confirms that growth of day rates has remained relatively flat in this region. Average rates vary considerably from nation to nation, but as a rule of thumb, day rates in Northern Europe tend to be much higher than those around the Mediterranean. Also, we can dig into the data from the European Federation of Management Consultancies Association and extrapolate from revenue increases and headcount growth to build a picture of overall growth by revenue per head. This supports the view that day rates are remaining static; however, revenues for consultancies grew by an average of 6.4% CAGR between 2013 and 2017 and headcount increased over a similar period by 6.2%. [3]

So, while revenues may be growing, they are largely growing with headcount when accounting for inflation and currency fluctuations.

This begs the question: Have consultancy rates reached terminal velocity or will we see a surge in pricing as the predicted pressure on resources starts to take its toll? Somewhere in the middle sits the truth. Undoubtedly, consulting will play a bigger role in the technology space and help enterprises make sense of the role new digital tools can play in their complex business environments. While this increased demand would normally lead to inflated prices, delivery models, too, are changing.

During the HfS Digital Technology Strategy and Consulting Blueprint process, we began to get an understanding of how the consulting market was beginning to shift and flex as new expectations and approaches impacted delivery. Several providers, for example, pushed an as-a-service model for a pre-paid consultancy that enabled them to build out value-for-money offerings where normal time and resources models would have failed. Others began to draw on outcome-focused contracts, placing emphasis on the provider to keep costs as low as possible. This model is still far rarer in practice than in marketing hype.

So, it seems that while consulting pricing hasn’t reached terminal velocity, it has started to slow as it approaches a fork in the road. Some consultancies will push down the outcome-focused and as-a-service routes to keep up with shifting client expectations and demands, while others will continue to build out traditional offerings that rely on FTE models. While for the latter it is unlikely to be immediately harmful, if this trend continues to play out, the focus on delivering headcount even when it becomes more expensive has the potential to crush margins in a price-war or push them way beyond enterprise clients’ willingness to pay.

Bottom Line: IT and digital consulting will be in high demand for a long time yet, but shifting delivery models should keep accessing top-talent affordable—for now.

Trying to leverage the most value out of consultants’ time has been a preoccupation of the consulting industry for decades. Talk in the 2000s focused on playbooks and making sure consulting firms multiplied the impact of time spent on completed work by using it to guide new work, shifting consulting engagements from the endless stream of one-to-one engagements to one-to-few, with the ultimate but seldom-realized nirvana of one-to-many, as methods and resources were reused across engagements. The good news for consulting firms is that the tools to help extend the length of the consultants’ time lever are expanding outside of better business intelligence software. It includes better, more integrated software platforms underpinning some business processes—which means the realization of strategic changes can happen more quickly as IT is enabling the change instead of getting in the way. Better data exploitation tools allow the teams to understand customer issues more quickly—with firms working on IP to add AI and automation for even faster time to insight and time to impact. The focus has shifted to the use of more automation to fast-track some of the implementation elements of consulting engagement and help bring strategic changes to bear more quickly.

The day-rate element of the consulting bill is what is most likely to shift, with most engagements having at least some pricing link to consultants’ time. As the value shifts toward methods and platforms, it is how these are charged that will have the biggest impact on the size of the bill. The quality of a consulting firm’s professional staff will continue to be a differentiator, but its ability to deliver value to clients will depend more on the platforms it creates and uses to help bring strategic thought to life.

[1] A Talent War Is Looming, and IT Services May Just Be the Super Weapon, HfS Research

[2] Itjobswatch.co.uk provides a wealth of data on a variety of IT roles, including IT consulting day rates

[3] The European Federation of Management Consultancies Associations