Consultants benefit from IT cost cutting

A recovery in the fortunes of management consultancies and a boom in demand for IT-related services have sparked fears of an increase in consultancy rates, as services companies get more bullish about the pipeline of work on offer.

Demand for outsourcing consultancy services has led to the fourth consecutive quarter of growth in management consultancies' income, according to the latest survey from the Management Consultancies Association (MCA).

The association, which represents 50 per cent of the UK consultancy market in terms of fee income, says a 6.4 per cent boost in consulting spend in the last quarter signals that the consultancy sector and its clients are back on track for growth.

For the first time since 1997, IT-related work now accounts for more than half of consulting industry revenue.

"Outsourcing has been the big driver," said Sarah Taylor, deputy director of the MCA.

"We're seeing a lot of expansion among our smaller niche members. Clients are much more ready to work with a range of consultancies, including smaller companies."

Pressure to cut costs remains the main preoccupation for private sector managers, and one of the driving forces behind a growth in outsourcing.

But managers in the public sector, top-ranked in terms of future growth, are more concerned with the need to meet delivery targets as the government moves forward with NHS IT and e-government programmes.

"We've been through a major upheaval. The client/consultant relationship has changed quite a bit and there has been a lot of pressure on fees," said Taylor.

"I would hope that downward pressure on fees will ease up and that the focus will be on value."

Taylor also predicted a shift towards more of a risk reward model, where part of the payment for consultancy services is results-based. "Clients are no longer happy to pay for time and materials," she said.

But analyst Ovum Holway last month warned that although outsourcing is the fastest growing part of the UK software and IT services market, consulting and systems integration will remain very depressed until 2005 at the earliest.

"Nothing here contradicts our views on current and future market conditions," said Ovum Holway analyst Georgina O'Toole.

"What's most pleasing to us is the underlying - albeit marginal - growth in IT consultancy revenues, which, after a long period of quarter-on-quarter decline, is most encouraging.

"Things might not be getting any better but this indicates that they aren't getting any worse either."

The MCA represents 40 UK-based consulting firms, which between them employ around 28,000 consultants and generate £4.7bn in annual fee income.

They include Accenture, Atos KPMG, Cap Gemini Ernst & Young, Capita and IBM Business Consulting.