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1、Equity ResearchGlobal Services | ConsultingFebruary 12, 2019Consulting10 Key Topics That Consulting Firm Executives Are Focused onAs a follow-up to our September 2018 report titled “Five Noteworthy Changes Occurring in the Consulting Industry,” we have engaged with a number of executives within the

2、consulting industry to discuss these trends. Based on feedback received during those conversations, some new developments (U.K. audit rule changes), and the collection of additional data (revenue trends for several privately held strategy consulting firms), we have broadened our list of significant

3、changes to include 10 topics, which are listed below. This report includes the presentation slides that we created to discuss these trends at meetings with consulting firms. While opinions about each topic vary as we talk to consulting firm executives, we think this presentation provides a reasonabl

4、e overview for some of the key changes and trends that consulting firm executives are thinking about as they assess future growth opportunities and their internal operations. Our hope is that this provides some useful context for investors as they assess various decisions and strategies at consultin

5、g firms.Digital TransformationLines of Delineation Between Specialties Are DecreasingAlternative Staffing ModelsManaged Services and OutsourcingEra of Mega Consulting FirmsMarket Share Changes are Happening QuicklyAudit Rule Changes in the U.K. Could Drive Significant ChangesTechnology is Changing I

6、nternal OperationsLeveraging AI, Automation, and Emerging TechnologyPrivate Equity Investment in Consulting Is IncreasingTimothy McHugh, CFA +1 312 364 8229 HYPERLINK mailto:tmchugh tmchughTrevor Romeo, CFA +1 312 801 7854 HYPERLINK mailto:tromeo tromeoPlease refer to important disclosures on pages

7、21 22. Analyst certification is on page 21.William Blair or an affiliate does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. This report is

8、 not intended to provide personal investment advice. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments, or strategies to particular clients. Th

9、e recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein.Ten Changes/Trends Occurring in the IndustryDigital Transformation Lines of Delineation Between Specialties Are Decreasing Alternative Staffing ModelsManaged Services

10、 and OutsourcingEra of Mega Consulting FirmsMarket Share Changes Are Happening QuicklyAudit Rules in the U.K. Could Drive Significant ChangesTechnology is Changing Internal Operations Leveraging AI, Automation, and Emerging Technology Private Equity Investment in Consulting is Increasing1Digital Tra

11、nsformationNearly every one of our conversations with a consulting firm CEO includes a discussion of digital transformationThe term digital is used differently by different firms, but we see three main areas of focusCombining creative/advertising capabilities with technology consultingAccenture, Per

12、ficient, and ICF are examplesFocus is on the CMOHelping companies leverage technology to improve their operations/performanceStrategy and operational consulting firms are taking this approachMcKinsey has a separately branded unit called Digital McKinsey and BCG has a business unit called DigitalBCGT

13、hese services are sold to CEO and boardMany IT consulting companies use the term “digital” to broadly describe their capabilities related to cloud technology, analytics, robotics process automation, and other newer areas of technologyClient focus here is on the CTODigital transformation is one of th

14、e most powerful trends impact consulting firms right now2Lines of Delineation Between Specialties Are DecreasingSome of the delineations that we would have made several years ago between different types of consulting firms have dissipated:McKinsey moving into restructuring and leadership consulting

15、sectorsHuron adding IT and strategy expertiseExecutive search firms adding leadership consultingGovernment consulting firms are expandingin commercial sectors (and vice versa)Big Four expanding their legal services capabilitiesWe believe this trend is being driven by multiple factors:Increasingly co

16、mplex challenges at clients (which require broader perspective and a wider range of skills)The pursuit of ancillary areas of growthEfforts to differentiate through the breadth of servicesClient demand for consultants to share some risk around outcomes from consulting engagementsConsulting firms are

17、broadening their solutions and capabilities in new ways, and increasingly do not fit into some of the traditional descriptions/views of the companiesKorn/Ferry Is No Longer Just an Executive Search Firm; Booz Allen Is Quickly Growing With Commercial ClientsKorn/Ferry International Advisory (Leadersh

18、ip and Talent Consulting) Segment Annual Revenue($ in millions)$785$836$882$724$471$255$267$168$99$115$1,000$800$600$400$200$0201120122013201420152016E201720182019E2020ESource: Company documentsBooz Allen Hamilton Holding Corporation Global Commercial Revenue($ in millions)$301$251$197$151$12421%31%

19、27%20%$350$300$250$200$150$100$50$02016201720182019E2020ERevenueYoY GrowthSources: Company documents and William Blair estimates50%40%30%20%10%0%3Alternative Staffing ModelsMost consulting firms operate with a traditional pyramid model, but there are a few companies using alternative operating model

20、s to compete within the consulting sectorRobert Halfs Protiviti consulting unit, which generates $1 billion of revenue, actively leverages the temporary staffing capabilities of its parent company to add resources for certain projects. This allows them to provide services at a lower price point and

21、add specific skills to projects when neededSome of the larger IT staffing companies, such as Insight Global, Allegis Group, and ASGN Incorporated, are adding project management expertise to compete for projects that historically went to consulting firmsFreelancer marketplaces are making it feasible

22、for corporations to engage individual practitioners to perform small projectsWe see elements of this in legal as wellThere are some inherent challengesassociated with using these alternatives Consulting firms train and develop junior consultants into senior consultants through the experiences that t

23、hey gain in the job; narrower full-time staffing pyramids thus require that consulting firms acquire senior-level talent on a lateral basis or have a higher success rate at growing junior consultants into senior producersWe believe corporations are gradually getting better visibility into the cost o

24、f different professional services (partly due to vendor management systems and other procurement tools) and are becoming more sophisticated in how they purchase professional services, so the lower-cost and flexible nature of these delivery models is getting some tractionSome consulting firms are usi

25、ng on- demand labor models as part of their delivery capabilities; at the same time, staffing firms are using on-demand labor to compete for work that previously went to consulting firmsProtiviti Is Growing QuicklyProtiviti Annual Revenue($ in millions)$0.96$0.80$0.82$0.74$0.62$0.54$0.55$0.55$0.53$0

26、.45$0.38$0.39$0.42$1.20$1.00$0.80$0.60$0.40$0.20$0.002006200720082009201020112012201320142015201620172018Source: Company documents4Managed Services and OutsourcingSome consulting firms are embracing outsourcing and managed services arrangements with clientsNavigant has aggressively expanded itsreven

27、ue cycle outsourcing businessHealthcare IT consulting companies are growing their managed services offeringsICF International has meaningfully grown its energy efficiency outsourcing businessInvestment consulting firms provide outsourced asset allocation to pensionsBig Four are aggressively pushing

28、managed services across many service lines We believe the legal industry is in the early stages of embracing these contracts The challenge is that operating an outsourcing or managed services business is very different from operating a consulting firm; consulting firms often struggle with the profit

29、ability of these operations Firms are attracted though to the recurring nature of these services, the potential to deepen customer relationships, and the potential to broaden their addressable opportunity at clientsNavigant Consulting Technology, Data, and Processing Revenue($ in millions)$211$158$1

30、27$250$200$150$100$50$020172018E2019ESources: Company documents and William Blair estimatesICF International Commercial Energy Revenue($ in millions)$218$235$253$173$86$102$106$125$140$300$250$200$150$100$50$02012201320142015201620172018E 2019E 2020ESources: Company documents and William Blair estim

31、ates5Era of Mega Consulting Firms Accenture, the Big Four, BCG, Bain, and McKinsey generate $200 billion of revenue Average growth was 7% in 2017; All of these firms want to keep growing If these companies grow 5%-10%, they need to generate an incremental $10 billion-$20 billion of revenue each year

32、 These companies are expanding into a variety of new areas to support their growth Some growth initiatives are facing headwinds (PWC/Strategy&), but they are generally performing wellLarge Consulting Firms Annual Revenue GrowthWhile the law of large numbers makes it difficult for these firms to grow

33、, it gives them significant resources to invest in new solutions, technology tools, innovation centers, and brandingMany executives at consulting firms now tell us that they feel subscale with $500 million-$1 billion of revenue, which we might haveconsidered to be a “scaled” firm in the pastA lot of

34、 firms debating the right path for growth from $1 billion to $2 billion15%10%5%0%-5%14%5%1%10%12%13%4%4%2%6%6%3%7%7%-3%5%5%3%6%4%3%4%4%-2%McKinseyBCGBainAccenturePwCDeloitteEYKPMG201520162017Sources: FactSet, Statista, various internet sourcesBig Four Accounting Firms Continue to Deliver Strong Grow

35、thTop 7 Accounting Firms Annual Revenue($ in billions)$20.0$15.0$10.0$5.0$0.0$18.6$15.6$13.0$9.0$2.0$1.8$1.4DeloittePwCErnst & YoungKPMGRSM USGrant ThorntonBDO USA 20102011201220132014201520162017Sources: FactSet, Statista, various internet sourcesRevenue CAGR, 2010-201713%10%9%9%8%7%5%16%14%12%10%8

36、%6%4%2%0%DeloittePwCErnst & YoungKPMGRSM USGrant ThorntonBDO USASources: FactSet, Statista, various internet sourcesMcKinsey and BCG Continue to Gain Scale;HR and Benefits Consulting Firms Continue to Steadily GrowStrategy Consulting Firms Annual Revenue($ in billions)$10$6$5$3$12$10$8$6$4$2$0McKins

37、eyBCG20102011201220132014201520162017Sources: FactSet, Statista, various internet sourcesOliver Wyman Annual Revenue($ in billions)$1.92$2.05$1.71$1.75$1.79$1.48$1.47$1.46$1.28$1.36$2.50$2.00$1.50$1.00$0.50$0.002009201020112012201320142015201620172018Sources: Company documentsOther Firms Have Seen S

38、lower Growth ThoughPA Consulting Group Annual Revenue($ in billions)$0.78$0.82$0.82$0.67$0.70$0.66$0.58$0.58$0.57$0.51$0.54$0.57$0.90$0.80$0.70$0.60$0.50$0.40$0.30$0.20$0.10$0.00200620072008200920102011201220132014201520162017Source: Companies House registryA.T. Kearney Annual Revenue($ in billions)

39、$0.91$0.97 $0.98 $1.02$1.13 $1.11 $1.07 $1.14$0.88$0.73 $0.79$0.79$1.20$1.00$0.80$0.60$0.40$0.20$0.002006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Strategy Consulting Annual Revenue($ in billions)$2.4$2.020102017$0.5$0.7$0.7$0.6$3.0$2.5$2.0$1.5$1.0$0.5$0.0BearingpointRoland BergerBainSo

40、urce: Companies House registrySources: FactSet and various internet sources6Market Share Changes Are Happening QuicklyNew entrants are gaining market share at a faster pace than we have seen in the pastAnkura went from $0 to $500 million in three yearsBRG went from $0 to $400 million-plus in a short

41、 periodSlalom Consulting has surpassed $1 billion of revenueSimon-Kucher has tripled in size since 2010IT consulting firms focused on new technologies and faster growth markets are gaining market shareInfosys, Cognizant, and Accenture are growing mid- to high single digitsGlobant and EPAM are growin

42、g more than 20% annuallyGlobant now has over $500 million of revenueEPAM now has $1.8 billion of revenueNew entrants and smaller firms have been able to grow quicklySlalom Has Grown Very Quickly in the Last 10 years($ in billions)Slalom Consulting Annual Revenue$1.60$1.40$1.20$1.00$0.80$0.60$0.40$0.

43、20$0.00$1.40$0.142009201020112012201320142015201620172018Sources: Company documents, various internet sourcesSimon-Kucher Annual Revenue($ in billions)$0.36$0.30$0.27$0.23$0.23$0.20$0.17$0.19$0.14$0.40$0.35$0.30$0.25$0.20$0.15$0.10$0.05$0.00201020112012201320142015201620172018Sources: Company docume

44、nts and CAnkura and BRG Became Large Firms Quickly, Partly by Aggressively Recruiting from CompetitorsFormer Employer for SMD and MD New Hire Announcements at Ankura, 2015-October 2018(chart shows firms that showed up more than once)6842732280706050403020100FTIDeloitteDuff & Phelps/KrollCDGNavigantA

45、ll othersSource: Company press releasesSenior-Level New Hires Announced at Ankura, AlixPartners, Duff & Phelps, Alvarez & Masal, and BRG ThatCame From FTI Consulting, 2015-October 20183697740353025201510502015201620172018 YTDSource: Company press releases7Audit Rules in the U.K. Could Drive Signific

46、ant ChangesThe Competition and Markets Authority has proposed a series of reforms to the audit industry:the Big Four separate their audit and nonaudit businesses into separate operating entities (with separate boards, management, and compensation)audits for companies in the FTSE 350 are conducted by

47、 two firms, one of which is not one of the Big Four firmsa new, stricter regulator replaces the existing regulatory body (the FRC)The Labour Party also released a report calling for a full structural breakup of the audit and nonaudit parts of the Big Four firms, a market share cap for audits of larg

48、e companies at 50% for the Big Four firms, a five-year audit rotation rule (versus the current 10-year rule), the creation of an independent body to appoint auditors for large companies, and the creation of a government agency to audit banks.PWC and E&Y have said they will voluntarily stop providing

49、 “non-essential” consulting services to audit clients, but they still expect to maintain large consulting businessesWhile the Big Four are precluded from selling consulting services to their audit clients, they still have 75% of the market that they can address, and their brands, scale, and breadth

50、of services provide competitive advantages.The Big Four firms are prohibited from providing specific services (tax, valuation) to their audit clients, and their nonaudit fees cannot exceed 70% of their audit fees at audit clients, so they already have some restrictions. The audit portions of the Big

51、 Four are lower margin than the nonaudit businesses, so separating these two businesses could be positive for the margins of the nonaudit businesses.The biggest beneficiaries of these changes are Grant Thornton, BDO RSM, and Mazars. One of the main goals of the CMA proposal is to help these firms ga

52、in market share.Audit conflicts are challenging to manage when there are multiple parties involved, i.e., litigation and restructuring. The Big Four accounting firms still maintain practices in these areas, but they run into conflicts more often, so professionals in those areas could move to nonBig

53、Four firms.Of the 9 billion in revenue generated by the Big Four in the U.K., 79% comes from nonaudit services. The consulting portions of the Big Four are proportionately a little bigger in the U.K. than in the U.S., and the Big Four firms compete more broadly in the restructuring, litigation, econ

54、omics, legal services, and other consulting sectors in theU.K. than in the U.S.Overall, the recommendations introduce uncertainty, will create a lot of changes, and are generally intended to reduce the market share in audits of the Big Four firms. We thus believe that these changes could create oppo

55、rtunities for other firms to recruit consultants out of the Big Four during the next few years.8Technology is Changing Internal OperationsAccess to information about customers from internal resources (CRM) and external sources (LinkedIn, other social media) makes it easier to perform due diligence o

56、n customersCustomers expect vendors to walk in the door with a higher level of understanding about their business than in the past thoughConsulting firms vary significantly in how well they capture data about clients and leverage that across their firmsThe way customers seek out potential vendors is

57、 changing too customers do a lot of their diligence online before or without talking to potential vendors. Consulting firms need to actively manage their online brand and develop content that potential clients can access before they even talk to the companyRemote work is seamless, which broadens the

58、 pool of potential talent and reduces rent expenses. Use of remote work arrangements is shifting faster than the office footprint of consulting firms though every consulting firm we meet with wants less real estateTechnology changes are making some aspects of running a consulting firm easier, but th

59、ey also are introducing new challenges9Investments in AI, Automation, and Emerging TechnologySome consulting firms have developed capabilities to implement AI and automation tools at clients, which is part of the digital transformation trend we mentioned earlierOne of the questions that we often get

60、 asked by consulting firm executives is how are other consulting firms leveraging AI, automation, and other emerging technologies as part of their delivery model?We do not think these tools are being used by most consulting firms, but many consulting executives are focused on figuring out how they c