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The UK’s decision to leave the European Union has seen companies call on consultants to help them prepare for the change.
From car manufacturers to defence system designers to widget makers, consultants are helping companies examine the impact withdrawal from the single market might have on supply chains, where, for example, components to manufacture just one part might cross borders three or four times.
“For almost 40 years, companies have been designing their supply chains . . . based on an operating assumption that there is very little paperwork and zero tariffs,” says Michael Garstka, managing partner of Bain & Company’s UK business.
“The complexity of the detail of the supply chain that’s been configured for a borderless world is probably the most profound thing that companies are having to deal with.”
The resulting mathematical modelling and redesigning of business structures as companies set up contingency plans for a so-called hard or soft Brexit could seem like a boom time for the consulting industry.
But the reality is more nuanced as smaller firms as well as bigger consultancies see a fall in deals and investment projects as a result of the uncertainty surrounding the UK’s decision to leave the EU. A recent survey by the Management Consultancies Association showed that more than one in 10 firms had already suffered a decline in revenue as clients put development plans on hold a result of the Brexit referendum vote.
“You only have to have one or two major projects put on hold and that’s your pipeline gone in some cases,” says Alan Leaman, chief executive of the MCA, which represents more than 60 per cent of the UK’s £6bn-plus consulting industry. Half of the members’ clients had experienced a negative impact on growth expectations and confidence as a result of the June vote, the survey showed.
For some firms, hours spent advising clients on the potential impact of Brexit were providing only a “temporary” boost, Mr Leaman says. “When there’s a car crash on the motorway the emergency services get called out. But there’s also a big tailback holding everyone up.”
The picture varies across the industry and global firms may well be better positioned to hedge the downturn. Bain is still on track for its strongest year yet as large clients push ahead with far-reaching moves to stay on top of the growing digitalisation of industry sectors, Mr Garstka says. “Most of the major businesses we’re dealing with [are still working on] longer sectoral trends,” he says.
For example, the impact of the digitalisation of the UK retail banking industry, as banks switch to expanding online businesses and close branches, is “much more profound than from Brexit”. The same goes for media clients as publishing platforms switch from print to online and mobile devices.
The problems that Bain worked on before the Brexit vote continue today, Mr Garstka says. “That’s the core of our work at the premium end of the consulting business and we see this continuing to grow.”
Other global firms, such as AlixPartners, which employs almost twice as many people in Europe as it does in the UK, are noticing an effect on their smaller contracts. Some smaller deals by hedge funds and in the private equity sector have been “put on ice”, says Eric Benedict, a managing director at AlixPartners. “But for advice on performance improvement of operations . . . it’s very much business as usual.”
However, there is anecdotal evidence suggesting that a deeper downturn has started. Some of the consultancy giants are now facing excess capacity after embarking on a hiring spree in the past few years in anticipation of continued industry growth. The consulting industry had been one of the UK’s fastest growing sectors in recent years, with the big four and others notching up double-digit growth as increasing technical innovation fuelled demand. At least one large consultancy firm recently asked junior analysts to take sabbaticals as the pipeline of deals started to wind down, says one senior industry executive.
Some firms are already reporting a blow to income because of the vote to leave the EU. Oliver Wyman, the New York-based consultancy group, recently reported a one-10th drop in revenues owing to “global growth concerns, exacerbated by Brexit uncertainty”. Capita, the UK-based IT and business systems provider with offices across Europe, South Africa and India, also warned of lower profits and revenue growth due to “continued delays in decision making and lower conversion of our pipeline”.
An industry shake-up could be looming, says Adrian Bettridge, managing partner at Baringa, the UK-based global management consultancy. He believes that midsized firms such as his could seize market share from bigger firms as clients look to cut costs and seek faster, more flexible forms of advice.
“We’re going to see a shake-up in the consulting market in a similar way there was as a result of the financial crisis of 2008,” he says.
The outlook is not clear even for consultancies that have previously worked closely with the government. A senior executive at one such UK consultancy says his firm had offered to help government work through the impact of Brexit on a number of key UK industries, but had received no response. “It’s not clear where they’re getting advice from,” the executive says. “But it’s well understood that relations between [Theresa] May and business are perceived to be strained,” he adds.
“We’re in a post-factual world where anyone who knows anything about anything is not to be trusted.”