A polarised consulting market

Back at the start of 2024, we reflected on a question that firms have continued to ask us throughout the year when it comes to assessing their performance: Is it the market or is it us? 

It’s well worth a read, as it explains that while client confidence remains low and consulting growth rates hover around the bottom end of their historic norm (with that norm being growth of 7-8% and our current forecast for 2024 being around 3%), there are still opportunities for firms that can look beyond their old assumptions to really understand the changed services that businesses need today. 

The chart that resonated was one that showed a polarised consulting market. Where growth had slowed, it didn’t do so equally across all service lines. We saw a market where the variation between growth rates was diverging, so that certain markets were growing faster (all things technology and data) while other markets had contracted sharply (including people, HR & change). 

So where are we now? As at the end of 2024, this polarisation has reversed somewhat. We’ve added the Q4 figures to our original chart (above) and can see that while technology-related services are still outperforming the rest of the market, and look set to remain ahead of the pack well into 2025, a level of demand may be set to return for beleaguered people-consulting services (which has jumped from being selected by just 1% of clients as a service they might buy, to 21%).  

What our conversations with clients confirm hasn’t changed is that they will only be buying services that address their specific needs—both in people, HR & change services and more widely. So, rather than pitching existing, ready-made people offerings, firms must speak to the emerging challenges clients are facing around integrating their people and emerging technologies in the workplace, tackling pushback from their workforce on AI, and safeguarding corporate culture in a period of mass change.  

 AI will cost professional services more money than it earns them in 2024: 

In March of 2024, we shared data that delivered a reality check on expectations around clients’ consulting spend on AI. When we’d previously asked clients about their use of generative AI, back in the summer of 2023, they’d been keen, with 85% saying they were already using or experimenting with the technology. Firms were enthusiastic too, with many investing rapidly to make sure they were well placed to deliver on the hotly anticipated client need.  

Fast forward to Q1 2024, and the chart below shows that the proportion of clients saying they were using GenAI tumbled from 85% to just 13%. Beyond the initial buzz, clients were unconvinced by use cases and, in a period of uncertainty with limited budgets, saw that they would need to invest heavily to progress beyond the small productivity wins they had already seen from GenAI. They required access to robust and high-quality data: a challenge that most businesses tell us they struggle with.  

However, one thing they were clear about was that they did want the firms they were working with—on all projects, regardless of scope and service—to use AI in the way they delivered consulting. This investment was and remains costly, and so for some time firms are likely to be investing more in their own capabilities around emerging technologies than they’ll be earning from the AI services they sell. 

So where are we now? 

Clients’ use of GenAI has rebounded faster than we predicted, bouncing back from its low adoption figure of 13% in Q1 2024 to 84% at the close of the year. We expect this to feed into consulting demand in 2025, with our latest Market Trends report on The Technology Consulting Market forecasting sustained growth of 6% for the tech market as a whole in 2024 and 7% in 2025.  

The proportion of this work that will relate to GenAI and other emerging technologies is yet to be determined, but consulting work to provide the strong data & analytics foundations needed to leverage this tech looks set to remain in high demand. Other areas where clients are reaching out for help around AI include fraud prevention, customer service transformation, and (unsurprisingly) productivity initiatives.  

And clients remain insistent that firms use AI in service delivery too, with 74% of businesses saying this is now essential (up from 30% earlier in the year). The great news for firms is that 87% of clients say they would be willing to pay more for this, so while many firms are likely to be investing more in their own AI capabilities than they recoup for a while yet, the balance is certainly starting to tip in a more positive direction.  

 

Stick or twist: Will your clients stay with you through 2024?  

At the start of 2024, we were struck by the number of clients that were considering changing their advisors. Confidence in the macroeconomic environment remained low, and this is traditionally a cue for clients to stay with tried and tested providers that know them well and act as a safe pair of hands. But April 2024’s standout chart showed that 25% of clients actively wanted to work with new firms, and another 35% were looking to mix in some new names to their existing portfolio of consulting partners. 

The reasons for considering a change of firm indicated a need for innovation and a new approach: clients were attracted to firms that had proactively come to them with new ideas for their business. And those clients that did up and move chose to work with new firms that they felt had more innovative technology to support their services, had access to specialist knowledge not available elsewhere, and had sent them useful thought leadership. 

So where are we now? We haven’t revisited this question yet, but plan to do so in 2025, and so it will be interesting to see if clients remain so eager to experiment with new partners.  

However, our survey data in Q4 suggested that clients were looking to prioritise growth and all things technology, and so it is likely that if they are considering working with new firms they will be looking for strengths in these areas. Specifically, they are after consultants with innovative ideas about how to drive up revenue in a tough market, and firms that have strong tech capabilities and a track record of successful implementation in this space.  

 

Be careful how you price a professional service: 

Throughout 2024 there has been significant pressure on consulting fees, with clients eager to invest but lacking the budgets do so. In September 2024, we explored how this trend has led to firms offering larger discounts than they did two years before, with the unintended result being that clients now plan their budgets based on these reduced amounts and expect lower fees to continue into the future.   

However, this widely-read article took a practical angle and suggested three approaches that firms can use to resist price pressure: 

Firstly, they can focus on selling to existing clients: The top reason that businesses are more willing to pay a higher price if the firm has delivered high-quality work in the past. Selling additional projects to people that they have already successfully worked with, or using their reputation within the organisation to reach out to other functions, may prove particularly fruitful. 

Secondly, firms can make judicious use of alternative payment mechanisms: While clients have been unwilling to experiment with how they are charged for consulting during the uncertainty of the pandemic and its aftermath, they are now starting to re-evaluate this. In fact, 27% of clients have incorporated some element of performance-related pricing in a project this year. (However, be warned, currently many clients see this as a means to keeping fees down rather than because they are seeking better solutions).  

And finally, firms should try and move the conversations they have with clients away from being about price and instead home in on value. Currently, clients remain unconvinced about the value that firms deliver above fees paid, but if consultants can better articulate the concrete impact they have had—both financial and other ways they have added value beyond what was agreed as part of the BAU scope—then the level of price pressure may ease. 

So where are we now? Pricing remains under fierce pressure as of Q4 2024, with 58% of clients expecting prices to fall (up markedly from 27% in Q3). However, 87% of those clients say they have paid more for consulting this year versus in 2023, and so may understandably feel they’ve reached their limit. On the positive side, Q4’s data also offered an additional route to protecting fee rates, and this involves incorporating AI into a firm’s ways of working. Eighty-seven percent of clients said they would be prepared to pay more for consulting services if a firm used AI-enabled tools.  

Pricing looks set to remain a critical topic in 2025 and one where firms may be rethinking how to use it as a source of competitive advantage. We’ll be taking a deep dive into this topic in our first Emerging Trends report of the year, so do get in touch if you’d like to be alerted when this goes live.  

Source’s research examines the professional services market from every angle, homing in on clients’ changing needs and signalling new and emerging opportunities in the market. If you’d like to speak directly to one of our experts on a tailored leadership market briefing covering any or all of the topics in this article, we’d be delighted to help. Or if you’d like to explore the market-sizing data and forecasts in our latest Market Trends reports, we can support you there too. Please, reach out.