Five factors that determine the size of management consulting markets

09 November 2018 8 min. read
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The global consulting industry is estimated to be worth over $130 billion. A study of both global and local firms shows however that the sector is highly concentrated geographically, and that there is significant cross-national variance in market sizes and maturity. According to a new study by academics at the Universities of Bristol and Cardiff, these differences stem, for a large part, from five interconnected drivers of consulting demand and supply, and how these are linked to different national contexts.

The study explored what drives national variations in consulting usage, highlighting that despite the growing literature on the consulting industry, international variation in management consultancy has yet to be explored thoroughly. In for instance the US, the globe’s largest consulting market by a distance (over $60 billion), fee income from consulting work amount to roughly 0.86% of GDP, in Germany this number is 0.67%, in France 0.39%, while in India and China the percentage is 0.18% and 0.10% respectively.

Drawing on diverse literatures as well as analyst reports and practical studies, researchers Andrew Sturdy (Professor in Organisation & Management at the University of Bristol) and Joe O’Mahoney (Professor in Consulting at the University of Cardiff) found that five themes help considerably in explaining international variation: the economy, state, culture & ideology, education and organisational relationships.

Economy and state

Economic factors are, of course, crucial, not least in determining the consulting spending wallets of clients, but also in terms of patterns of economic growth or change and industrial sector specialisms. “These are the usual focus of accounts of national differences,” says Sturdy, adding “but they by no means fully explain the variety in consulting use. Italy, for example, has a sizable and changing economy and yet makes up less than 5% of the European market. Also, what type of economy is not crucial – Germany and the UK for instance are the two big buyers in Europe and yet represent very different forms of capitalism and economy.”

Size of the global management consulting industry

The role of the state is the second determinant. As a user of external consultancy, the state can drive demand and attract new entrants. State usage of consultants varies hugely, from 10% of the markets in France, Italy and Portugal to 25% in the UK, according to date from FEACO, a pan-European association of management consulting firms. The door which opened in the UK to consulting in the Harold Wilson years has remained open ever since. Greece currently has the highest share, with public sector consulting making up over a third of its national market, although much of this is likely to have been foisted on the government after the Euro crisis.

“The state has also been influential historically in resisting (mostly) the regulation of consulting and in providing and regulating competing sources of external management expertise. The former is less evident today, but as the Big Four are all too well aware, the state can shape who is allowed access to this often lucrative area of work,” says O’Mahoney. In the UK for instance, the Big Four professional services firms are under scrutiny from regulator CMA for their dominance in the large-tier accounting landscape, with in its slipstream the discussion of audit versus consulting independence returning back to the stage sixteen years after the matter reshaped the face of the consulting industry following Enron’s collapse.

O’Mahoney further highlights the role the state can play in consulting spend, pointing at how many of the large American strategy consultancies have either won or lost work through state-influenced connections. In Saudi Arabia, much of the strategic work (related to Vision 2030) is performed by US-giants McKinsey, Boston Consulting Group, Bain & Company and Oliver Wyman. Meanwhile, at the other side of the spectrum, several states have ruled out working with specific consulting firms, with countries imposing recent bans on a group of foreign consultancies including Turkey, China and Russia. “Many economically developed countries which are relative low users of consulting, have strong, state-influenced alternatives,” explains O’Mahoney.

Culture, education and organisation

The economy and the state are linked to other traditional drivers of business activity such as culture and ideology. These are more difficult to disentangle, state the authors, “but it is no coincidence that more than two thirds of consulting spending is based almost exclusively in the northern part of Europe and the US.” Sturdy and O’Mahoney: “It can be linked to individualism, in part, because this has been shown to correlate with openness to outsiders and their knowledge, while collectivists are more likely to source expertise from within trusted groups. Compare Japan with the US and UK for instance, which have around twice the level of consulting use as a percentage of GDP.”

GDP-weighted spending on management consultancy

The contrast between the US and Japan also highlights the role of the management education system. A key factor here is the MBA. “One might expect that consultancy is most commonly used in countries where there are fewest management (MBA) educated managers, but, if anything, the reverse is the case. The paucity of Japanese MBA students mean that there is little affinity or common language between new managers and management consultants,” says Sturdy.

Finally, because consulting is a highly ambiguous business, especially concerning its objectives and outcomes, there is a according to the academics a huge reliance on relationships – trust and/or reputation. Therefore, consulting is most common where it has already become established in countries and their business and elite networks – what scholars call contagion. “This is evident historically and currently, when multinational companies set up in new countries, they act as a bridge for their consulting firms to follow and establish a wider market for themselves.”

The success of contagion depends on who, in that country, was already providing management expertise to organisations and how credible and networked they were. “That explains why it was not until the 1970s that Germany – today Europe’s largest management consulting market – finally opened up to consultancy, and why, in contrast, the consulting firms which arrived in South Korea during the 1990s economic crisis could not establish a foothold when the economy subsequently recovered,” remarks O’Mahoney.

Just part of the mix

Reflecting on the results of their academic venture, the question arises what they key take-away is for executives and partners at consulting firms. Why does it matter that consultancy use varies? “It alerts us to the fact that organisations can be run in different ways, using different sources of knowledge and expertise. External consulting is itself varied and has its place and value – notably for one-off projects needing rare expertise. However, it is just one of the channels which can be tapped to support with change and transformation,” says Sturdy.

Alternative routes client organisations can consider include internal sources such as internal consulting, but also: wider employee-based approaches; think tanks; industry associations and networks of suppliers and competitors; government sponsored organisations; and other professional services.

The full study by Andrew Sturdy and Joe O’Mahoney ‘Explaining National Variation in the use of Management Consulting Knowledge – A Framework’ has been published in Management Learning, a quarterly peer-reviewed academic journal that publishes papers in the field of management.