Demand for strategy, tech-related consulting could fall amid downturn: analysts

DEMAND for strategy and technology-related consulting services could fall as businesses reduce growth plans and tighten budgets amid economic weakness, said market watchers.

But conversely, weak conditions could spur demand for advisory on operations management, restructuring and insolvency. Longer-term demand also remains in areas such as environmental, social and governance (ESG).

The global consulting industry has been rocked by job cuts in recent months. Globally, McKinsey & Co is cutting 2,000 jobs and Accenture is slashing 19,000. In the United States, KPMG is laying off 2 per cent of its staff; EY is cutting 3,000, mostly in consulting; and Deloitte will cut 1,200.

Market watchers said weak global growth has dampened demand for consultancy, both worldwide and in Singapore.

Tong Yen Hee, an associate professor in accounting at the Nanyang Technological University, believes the consulting business in Singapore has seen slower growth for at least the past three to four quarters.

“This is not surprising, given the environment of heightened interest rates and geopolitical risks that started around the first quarter of 2022,” he told The Business Times.

DBS economist Chua Han Teng said Singapore’s weaker growth prospects in 2023 would “spill over into a softer outlook” for professional services, including business and management consulting.

“This is given the sector’s reliance on intermediate demand from other economic clusters that are facing challenging conditions,” he added.

Strategy consulting and financial advisory services could be hit harder, Prof Tong noted, as “firms rein in growth plans and refrain from deals such as mergers and acquisitions (M&A)”.

Demand for information technology consulting may also taper as firms cut back on capital expenditure, especially as most made already “significant upgrades” earlier in the pandemic, he added.

“The recent job layoffs and other cutbacks by consulting firms are a rational response to the changing economic conditions, especially given their robust growth during the pandemic when monetary policies were looser and rapid digitalisation by their clients were taking place,” he said.

But the impact from these headwinds could vary. More specialised consulting firms are “more vulnerable to the cyclical nature of consulting”, said Mak Yuen Teen, professor of accounting at the National University of Singapore Business School.

“For example, Accenture’s consulting tends to be technology-related so with the tech sector facing challenges, it is not surprising that they have announced one of the biggest layoffs,” he said.

“Similarly, McKinsey is most well known for its strategy and M&A consulting, and that may make it more vulnerable to a decline in demand in these areas.”

In contrast, the Big Four firms – EY, KPMG, PwC and Deloitte – are likely to be cushioned as they are “more diversified” in their consulting practice, noted Prof Mak.

Their consultants can “move to different areas” and double up as “M&A experts, restructuring or turnaround experts, or insolvency experts, depending on the state of the economy”, he said.

Silver linings

Indeed, the downturn could mean a counter-cyclical rise in demand for such areas of consulting.

Eugene Ho, regional managing director of Deloitte Consulting South-east Asia, said: “In growing economic cycles, there will be demand for services such as market expansion and growth initiatives. In a downward economic cycle, clients will look for other services, such as cost optimisation and operations transformation.”

Demand for operations consulting could rise as firms “seek cost rationalisation through streamlining of their internal operations and supply chain activities”, Prof Tong said.

Similarly, TSMP Law Corporation partner Felicia Tan noted that consulting services in restructuring and insolvency are highly sought after – “especially so, given the uncertainties in the global economy”. Amid these uncertainties, companies will be re-evaluating their projections “and some may consider a healthy restructuring”, she added.

Long-term prospects

In the longer term, consulting practices in Singapore see no existential threat. The Big Four firms in Singapore have no plans to cut jobs like their US counterparts, expecting innovation, digital transformation, and ESG concerns to continue driving demand.

Prof Mak expects overall consulting demand to recover with the economy, though areas such as technology could see a “long-term decline” or take “much longer” to turn the corner.

PwC Singapore executive chairman Marcus Lam said that while the pace of technological adoption may have slowed, companies “continuously need help to implement new technology systems, manage digital risks and comply with new and evolving regulations”.

He expects the recent focus on generative AI (artificial intelligence) to be a “significant driver of future demand”.

A spokesperson from McKinsey said the firm will continue to invest in capabilities in sustainability, green business building, generative AI and core technology.

Similarly, ESG issues remain a focus for Oliver Wyman and its clients, along with analytics-led transformation, said partner and head of South-east Asia Seo Young Lee.

Besides firms, business associations may be another source of demand. The Singapore Manufacturing Federation (SMF) engaged a consulting firm last year on growing its human capital capabilities, said president Lennon Tan.

In emerging areas such as ESG and AI, the SMF “does not rule out” engaging such firms on a project basis to enable its members to access knowledge, he added. Consultancy services also remain important in, for example, providing customised training and adaptation plans for companies that adopt new technologies.