Yes, all of the traditional profitability benchmarks are trending in the wrong direction: Compensation is up; Pricing pressure remains intense; Utilization is down; And a coming spike in voluntary attrition threatens to undermine the foundation of firms' leverage models.
But still, there is reason for at least a little optimism. For the first time since we began writing about the Great Recession, the majority of consultants are now seeing signs that the average project size is increasing. According to new research by Consulting magazine, more than 53 percent of consultants anticipate that their average engagement will be larger in 2011 than in 2010. In comparison, about 40 percent of consultants saw increases from the prior year.
Larger project sizes are important for a number of reasons. First, it's a good indication that clients are spending again. What we've seen in recent years is not that clients' problems have gotten smaller—in fact, the opposite is probably true—but instead clients were reluctant to bite off big projects. They were taking large engagements and breaking them up into smaller, more budget-friendly, and, therefore less risky, pieces.
At any point, if they weren't seeing value/ROI, or, if their quarterly budget numbers worsened, they could kill future phases of the engagement without issue. These survey numbers suggest that an increasing number of consultants are starting to see a little less hedging.
An uptick in project size should also help improve utilization rates. For those below the partner level, most of the unbilled time occurs between projects. The more, smaller projects one works on it a year, the more likely there is to be beach time between gigs. If your average consultants are assigned, say, three large projects a year instead of six smaller ones, a greater share of their total hours should be billed to clients.
Of course utilization rates are also dependant on demand, which is showing little growth—outside of counter-cyclical and regulatory opportunities in the Financial Consulting market. Which means, at least for 2011, there is a crucial need to sell larger projects.
Third, large projects also lower the cost per sale, which is important because sales cycles continue to get longer. The result is that firms are spending more and more resources on pitching, repitching, and (hopefully) closing deals. When projects were getting smaller, this posed a double whammy: it was costing more to win less. For 2011, it would appear that at least half of that equation is getting better.
In case you weren't counting, there were at least four attempts above to temper the optimism. Yes, more consultants are reporting better news. But given how small average projects had gotten, it was hard to imagine them getting smaller. And yet, almost half—47 percent—of consultants are anticipating no improvement in project sizes next year. And while there are more consultants anticipating their average projects will get larger in 2011, few are anticipating big improvements. The share of consultants anticipating materially larger engagements in 2011—projects that are more than 10 percent larger their typical project in 2010—is about the same as this year.
More than 43 percent of consultants anticipate no more than a single-digit percentage improvement in project sizes. That share is way up from prior years, but it's hardly a big enough improvement to offset all of the other negatively trending profitability levers.
—Jess Scheer
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