UK consultancies cut numbers amid market slowdown

After a post-pandemic boom in demand for Britain’s consultants, 2023 was the year in which the hangover hit, as a gloomy economic environment dealt the sector a reality check.

Higher inflation, the end of low borrowing costs for clients, and a prolonged slump in deal activity led to slower growth across the industry, forcing some firms to freeze pay and most large employers to cut jobs.

“There was a readjustment [in 2023],” says Tamzen Isacsson, chief executive of the Management Consultancies Association (MCA). “We are now seeing the consulting market performing at a more normal drumbeat.”

A survey of consultants published by the MCA in January estimated that activity in the UK consulting market increased by 11 per cent last year, but this was a sharp decline on the record 23 per cent growth in 2022. The outlook for the next 12 months does not look much brighter.

Fiona Czerniawska, chief executive at Source Global, a consulting sector analyst, says the industry is currently “bumping along the bottom”. She predicts overall demand will slow further over the next six months before picking up slightly in the second half of the year: “We end up with 2024 being slightly worse than 2023.”

This forecast is backed up by the MCA’s latest research, which estimates activity will increase by 9 per cent this year, outperforming other sectors in the UK but still representing a market slowdown. The industry group expects activity to bounce back with 11 per cent growth in 2025.

Czerniawska cites real estate and deals advisory as two areas that continue to face headwinds, as a combination of higher interest rates and geopolitical tension keeps the transactions market subdued. “Both are still extremely weak,” she says. “And most of the work in real estate is really about leasing and financing . . . Most firms are going into 2024 not really expecting [the deals] market to pick up very quickly.”

The MCA also predicts that sustainability advisory — an area in which consulting firms have invested heavily in recent years — will grow at a slower rate as economic challenges force clients to prioritise resources elsewhere.

However, demand for technology advice is expected to remain robust in 2024, notably in subsectors such as digital transformation, artificial intelligence and cyber security, according to Isacsson.

And, despite the subdued deals market, Lisa Quest, head of UK and Ireland at consultancy Oliver Wyman, says financial services clients are seeking guidance on how to adjust to an era when interest rates are no longer near zero.

“We see strong demand continuing for [things like] risk compliance strategy work, particularly as the interest rate environment remains high,” says Quest. Oliver Wyman expects, like last year, to post double-digit growth in its European arm in 2024, she adds.

After a hiring boom in the wake of the pandemic to keep pace with pent-up demand, consulting firms moved quickly last year to cut roles in areas where activity slowed. As a result, for some, the second half of 2023 was dominated by fears of job losses, stagnating wages, and measly bonuses. All of the Big Four accountancy firms — Deloitte, EY, KPMG and PwC — axed hundreds of roles each, while KPMG also froze pay for about 12,000 of its UK staff.

The cuts continued into the new year, with EY shedding dozens of roles in January in its customer consulting and legal advisory divisions. James O’Dowd, founder and managing partner of Patrick Morgan, a recruitment firm, says consultancies are “still in a bit of a sticky situation” and there will be more redundancies to come during the first half of 2024.

“We’re probably 75 per cent way through that [redundancy] cycle,” he says. “It won’t be as dramatic as last year, but there’s still a little bit to come.” O’Dowd adds that hiring activity in the UK consulting market remains “quite slow”, but he anticipates it will pick up later in the year.

Bosses appear to be preparing for a future rebound. “Firms won’t want to lay off too many staff, because whatever upturn there will be is going to be quite sharp,” says Source Global’s Czerniawska.

Firms won’t want to lay off too many staff . . . any upturn there is will be quite sharp

To get around the problem of keeping more staff “on the bench” with no projects to work on, firms are getting creative. EY recently launched an “employee time out initiative” in its financial services consulting arm, allowing staff not on assignment to take four to 12 weeks of unpaid leave over the summer months.

The spectre of elections looming on the horizon, which could bring changes in the UK government, is also set to affect the market in 2024.

“Business leaders and our clients don’t react well to instability,” says Isacsson of the MCA. “As you come up to an election, the natural pattern is that consulting activity does slow during purdah” — the period immediately before an election when there are restrictions placed on the machinery of government. But there is still high demand for public sector work, she adds, particularly advising councils that are seeking to cut costs through digital transformation.

As in past economic downturns, winners and losers are likely to emerge across the sector. Czerniawska predicts that larger consulting firms will outperform their smaller rivals: “Companies that buy consulting and other services tend to be very large and need scale. Midsize and smaller firms simply aren’t going to have that scale.”

Clients usually turn to more established firms in harder times, she says. “During these moments, you wouldn’t want to say ‘we’re going to hire Joe Bloggs Associates that nobody’s ever heard of’. You’d want to say ‘we’re going to hire this big firm because everybody knows about them’. So I think the big firms will definitely be the winners from this.”