Top 250 Consultants 2009: 'As bad as it gets'

This time last year, the industry’s consultants, like much of the rest of the world, were in shock. Lehman Brothers had just collapsed and looked as though it might bring the capitalist system down with it, and a global recession was a cast-iron certainty. Yet, as Building published its Top 250 Consultants tables, there were still some grounds for not giving in to despair: after all, the government was still spending on building projects and, of course, there would always be Dubai. Indeed, some 70% of respondents were planning to recruit staff in the year ahead … Admittedly they took part in the survey shortly before Lehmans went under, but Building interviewed them just after, and found they were still relatively optimistic.

Well, one of the main characteristics of times of global uncertainty is that things can be quite … uncertain. Over the 12 months to June 2009, new orders plummeted 25%, and staff levels fell 7%, which means the top 250 consultants now employ 20,000 fewer people. Meanwhile, Dubai has gone from El Dorado to the City of Broken Dreams, and everybody is bracing themselves for the fall of the next government’s public spending axe.

“When this survey was taken a year ago,” says Keith Clarke, chief executive of Atkins, “the more prudent among us were thinking that we were in for a serious recession, but we still thought it would be within the realms of our understanding and experience. At that stage nobody understood the true extent of the crisis.”

So is it foolish to ask whether 2010 will be any better, or should we confess that nobody has a clue what’s going to happen next? Well, there is no harm in trying, although we will have to wait until this time next year to find out whether there was also no point. Here, we analyse the Top 250 tables and our corresponding survey to see how consultants have reacted to the post-Lehman world; starting on page 45, we catch up with the five firms whose survival strategies we highlighted 12 distant months ago …

The worst of times

Hugh Blackwood, chief executive of consulting engineer Scott Wilson, sums up the past year succinctly: “This year has been as bad as it gets.” Back in 2008 consultants were continuing to expand, albeit at a slower pace than previous years. Now, the 7% fall in staff numbers in the UK has cut the number employed by the top 250 consultants down from 128,00 to 106,900. Chartered staff, which represented 40% of the consultants’ employees both this year and last, have also fallen 7% to 43,850, compared with a rise last year of 8%.

The decline in staff numbers is an obvious consequence of the simple fact that not enough business has been coming in. Blackwood says that at Scott Wilson, which made 750 of its 7,100 staff redundant this year, the cuts were directly due to the “shock of the almost complete demise of the private sector”.

Consultants can take some comfort from the fact that their fees are holding up relatively well. Like last year, UK fee income data was supplied by about 230 firms and this year it added up to a total of £8.5bn, which had fallen only slightly from £8.7bn. Average income growth was about 7%, against roughly 15% the previous year.

That may be deceptive. Martin Hewes, the economist who compiled the data for Building, says that fees are probably being cushioned by a time lag. “Firms are still being paid for work they won in the past, so that’s why fee growth has slowed but not stopped.”

A year ago, the more prudent among us were thinking that we were in for a serious recession but still one within the realms of our understanding and experience. Nobody understood the true extent of the crisis

Keith Clarke, Atkins

Next year, Hewes predicts that fee growth will be “zero or even a negative number”, as consultants start to really feel the effects of cuts by clients such as Tesco, which has demanded discounts of up to 50%, as well as the impact of clients that have abandoned their framework agreements, such as BAA and the Ministry of Justice.

The survey results on the pie charts above and overleaf are probably a more up-to-date indicator of the sector’s health. They show that 57% of respondents are experiencing falling margins, in contrast to 2008, when most consultants thought they were heading upwards.

Despite these signs of weakness among consultants, acquisitions did take place, albeit in a less frenzied fashion; 20 deals were done within the top 250 over the past 12 months, compared with 50 the previous year. And after our research was completed, Ramboll UK bought RYB Konsult, a £2.7m turnover London-based services engineer.

Mike Allen, an analyst at stockbroker Panmure Gordon, says consultants are well capitalised on the whole and many want to add specialist skills to their offering. Probably the most high-profile examples of this was Davis Langdon’s acquisition of architect DEGW in late July, which resurrected predictions of consultants transforming themselves into one-stop shop “solution providers”.

However, apart from Balfour Beatty swallowing up Parsons Brinckerhoff last month, acquisitions in UK construction have been “bite sized”, says Allen, and will continue to be for some time. “The value of acquisitions tends to be small, with the buyer gaining a few specialist capabilities.” Few are willing to take big risks in the present conditions. In particular, the uncertainty surrounding future public spending is holding back deals. Allen says: “There’s no point buying someone who specialises in a certain types of public sector work when you don’t know which areas of public spending will be cut.”

No more safe havens

Figures from the department for business and innovation show the industry was right to count on the government as the client of last resort. New work orders in the public sector from June 2007 to June 2008 were up 12.5% and from June 2008 to June 2009 they were not quite as healthy, but they still rose 5%. In contrast, over the same periods, total new work orders fell by 5% and 25% respectively.

However, while state aid may have seen consultants through some difficult months, few are expecting it to save them over the coming year. Hewes forecasts that the signs point to a 25% decrease in the government’s capital spending between the end of 2009 and 2013. He says: “My feeling is that the fall will be around that magnitude, more likely 30%, although some sectors will, due to their size, suffer more harshly.” Education is a prime target, he adds, as it accounts for close to 30% of all public sector new construction work. This will come as unsettling, if hardly revelatory, news for the 45% of the top 250 that rely on the public sector for 50% of their income.

So how else can consultants prepare for even more years of famine? Last year many were hoping that overseas business would help. Oil revenues had sailed over the $100 barrel threshold, and wise and authoritative voices were predicting that they might peak, or at least pause, at $200. So, naturally they tended to think that the Middle East in general, and Dubai in particular, was the place to be opening offices and recruiting staff. Indeed, last year’s survey found that nearly 70% of firms had an overseas presence and 89% of them planned to boost the income they were getting from abroad. Meanwhile, 31% of consultants with no overseas income planned to rectify that.

There’s no point buying someone who specialises in a certain type of public sector work when you don’t know which areas of public spending will be cut

Mike Allen, Panmure Gordon

Yet this year’s results show that the overseas presence of UK consultants has shrunk: only 53% of consultants in the top 250 have a foreign presence, compared with 70% last year. This is not surprising, given that last year’s survey was undertaken just weeks before Dubai’s property market crashed, leading to hundreds of construction projects skidding to as halt. The latest figures from research firm Proleads found there were 556 major projects on hold or cancelled in the UAE, which it says is the worst-hit construction market in the Middle East. The slowdown is also affecting the rest of the Middle East, with 106 projects in Saudi Arabia and 54 in Bahrain on hold or cancelled.

On top of workload falling away, consultants have suffered from late payments in the Middle East. The Association of Consulting Engineers says its members are owed at least £400m in the UAE. The problem is hurting other professions, too. For example, architect Marks Barfield is owed one third of its turnover for work in Dubai. Panmure’s Allen says: “It’s taking an average of 120 days to get paid in the Middle East compared with 60 in the UK. It’s worst in Dubai and I don’t see any green shoots there yet.”

He adds, though, that he is less concerned about consultants’ debts in the Middle East than he was a year ago. “Firms such as WSP and Hyder were owed big amounts but they have put more than adequate levels of provisions in their accounts for them, so my worries about that situation have passed.”

The return of Dubai?

The evidence from this year’s tables suggests that plans to build up overseas business still have legs. Consultants are garnering 19.5% of their turnover from foreign operations, compared with 14.5% in 2008. Atkins’ Clarke is relatively bullish on the Middle East in particular. “We think it is still a robust market. The problems there were due to a collapse in liquidity, not the oil price, so when cash returns it will be a good market. That included Dubai – it won’t go back to the mega boom beyond our comprehension but it will come back.”

There are also significant opportunities around the world for consultants in infrastructure, which is something governments are loath to cut even in recessions, both because it is so fundamental and because of its role in quickening economic activity. For example, Saudi Arabia has at least $400bn in the bank ready to spend on construction projects, Mexico has $226bn earmarked for infrastructure projects and Libya is spending £100bn on infrastructure over the next five years.

There were other glimmers of optimism in our survey, too. For one, most of the respondents are hopeful that no more lay-offs will be necessary, with 66% saying they planned to leave staff numbers unchanged over the next year.

But this brings us back to the dangers of making predictions. Hewes says the inflow of construction work by the end of the year is likely to be at least 25% below its peak in mid-2007, creating “a gulf between industry output and consultants’ capacity”. In other words, staff numbers will exceed demand and the need to make further redundancies will become “painfully obvious”. So although there is hope for consultants, it’s safe to predict they are in for another tough 12 months.