Is it the market?

Annual consulting market growth fell from 13% in 2022 to 4% in 2023

In 2021 and 2022, economic tailwinds, accelerated technology change, and leadership teams who’d been buoyed by what they’d achieved during the pandemic combined to create the highest levels of growth experienced in the consulting and professional services sector in the last 20 years. This period of ambitious growth also coincided with the departure of many people from the workforce globally, leaving clients starved of internal expertise and adding more fuel to the demand-for-professional services fire (although firms were also facing their own intense competition for people at this time).

In the short term, confidence was high, and new challenges—such as the reconfiguration of businesses as a result of sanctions against Russia, in the aftermath of its invasion of Ukraine—were seen as things that organisations could rise to. Over time, however, the constant attrition of high inflation, political instability, and economic uncertainty wore down business confidence. Indeed, our research suggests that clients’ biggest worry in 2023 was that the world would become an even more dangerous place.

Global growth rates for the consulting industry have historically averaged between 7% and 8% since the financial crisis of 2007-08. But 2021-22 saw soaring annual growth of around 13%, which then fell sharply to 4% last year. This year will be better, but probably still at the bottom end of the historic norm.

However, the problem here is not that growth has slowed, but that it’s slowed unequally: We’ve gone from a period in which every consulting market grew, to one today in which only some markets are growing. Moreover, the variation between growth rates is diverging so that rising markets will grow faster while other markets contract.

If we look, for example, at the consulting services clients say they’re most likely to use in the next 18 months, and compare Q4 last year with Q1 this year, we see a significant jump in four out of the top-five services. The proportion of clients set to seek out support with technology strategy and technology implementation has almost doubled. There’s good news here for strategy consultants too: After a fairly dismal market last year, especially in the US, the proportion of clients saying this is one of the areas where they’re most likely to look for external help has increased. In the top-five services, only cybersecurity has seen a fall, although more than a quarter of clients continue to say this is one of the areas where they’re most likely to use external support.

By contrast, demand for people, HR, and change services has collapsed: Just 1% of clients anticipate this being an area where they’re most likely to seek external support, compared to 22% at the end of last year. It’s common in a slowdown for clients to cut back on this type of work—they assume it’s something they can either do themselves or do without—but this is extreme by any standards.

So far this is all a tale of the market shaping demand, but what about how firms respond?

Is it us?

In a market where growth isn’t simply patchy but polarised, a firm’s portfolio of services, the sectors it focuses on, and the countries it’s based in can result in performance that’s significantly above or below the average. (Consulting, one feels, has become a bit like politics—it’s all about extremes.)

And while the fact that client demand shifts in line with the economic environment is nothing new, the pandemic appears to have accelerated the speed with which clients react. In 2020, it took clients 3-4 months to work out where they were going to need outside help (with workforce planning, for instance) and it was twice as long as that before most firms even started to reflect this shift in their offerings. This is a reminder that, while consultants and clients talk daily, they’re not always listening to each other.

The analogy here is with the dress meme that appeared in 2015. Some people thought the dress was blue/black, others that it was white/gold. Explanations for these different views vary, but one plausible explanation is that they stemmed from people’s experience. The picture was poor quality, so our brains disambiguated it by drawing on what they thought should be the colours. People who saw a blue/black dress had spent more time in natural light; those who saw a white/gold one had spent more time in artificial light.

Almost every decision about hiring consulting firms is the equivalent of that fuzzy picture: Clients aren’t always clear about what they want or need; consultants aren’t always clear about what they can do. Both sides fall back on what they think is right, based on their prior experience. What should be happening—and is especially urgent during periods of economic uncertainty—is more negotiation between both sides to match clients’ needs with firms’ capabilities.

Reframing existing services via more effective marketing will help consulting firms adapt to this new environment, but it’s the simple stuff that will matter most: Listening and adapting.

The answer to the question: “Is it the market or is it us?” Obviously, it’s both.