A week ago I met my ex-boss at the firm, I used to work with. Over the couple of hours of chit-chat we reminisced about close to 18 months we spent together at the firm. We worked upon a single consulting project for a UK Utilities major, who wanted to know the reasons of doubling of the customer call volume (a major cost center) within a year.

The project which started in 2007 continued through my 22 months of work experience and is still continuing (information from my ex-colleagues). In 2007 when the project started the billing per FTE (full time equivalent) was close to £100/hour. The rate was fixed initially with subject to revision every year. Till 2009 rates continued to be the same. There wasn’t even any discussion with the client about any increase, as told by my boss. We were blessed to have angel-like clients and during the downturn, probably our company didn’t want to get them offended by even a mention of consulting fee increase.



At the same time, upon compensation benchmarking our company fell through the ranks. However they had to provide increase to middle and higher level management, fearing their attrition. By 2009, they finally did benchmarking for lower levels too, though a bit unwillingly, my ex-colleagues said. But even then they didn’t increase the fee for their old clients. So, even though inflation was bleeding everyone in India to death (owing to execution of recommendations by 6th pay commission), they continued to receive same fee rate between 2007 and 2010.
The case mentioned above reflects some important malaises of consulting industry.
The first, Compensation costs usually cover 2/3rd of the cost base of an average consulting firm. Universal pay increases therefore have worst impact on cost base of a consultancy firm. A manufacturing firm on the other hand wouldn’t be affected to that extent as the primary cost centers are material procurement and production processes.
Secondly, profitability gains through outsourcing/off-shoring have already been exploited to near maturity levels. Thus revenues and bottomlines can be enhanced only by scaling up the business, which of course is a tough task as market optimism is still to reach the heights it enjoyed earlier. Businesses tend to procrastinate the costs incurred in professional consulting. With lesser scope of new business, companies are not in a desirable position to charge higher fees from their current clients, at least for some time.



Thirdly, the industry is striving hard to retain talent. From my personal experience, people leave their jobs even if they receive salary increment (if they get a better work opportunity). In such case their increased compensation packages increase their bargaining power in the firm they apply for. Moreover continuous increase in employee salaries, without corresponding increase in revenue and profit (as explained in second point), would be impossible without shareholders agreeing upon taking a cut in their returns on investment. Thus companies often opt of “Virtual career progression”. This means employees receive progressions/promotions in their designation but corresponding compensation increases are either postponed or phased-in gradually over the course of some time.

Higher attrition rate further presses the pedal of need to increase the moolah. All these factors leave very limited choice with consulting firms. Either to develop niche capabilities to charge premium fees or look to diverse. In either case the growth desired requires to disturb the Pareto optimality of the industry. i.e. gain of one firm would be achieved at the cost of another. So while economy revives from the downturn, the consulting firms might have to wait a bit longer for demand for consulting services to rise.
In Indian context, firms have still not been very receptive of employing consulting services. But the change of mindset and better recovery of Indian market compared to west, the consulting industry is also pinning hopes on the rising awareness among Indian firms about benefits of professional consulting. The market may not be very attractive in terms of margins initially but the firms might expect to gain a lot on scales.