Special Report

Fighting it out in a tight market

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Special Report: ENDS Consultancy Market Guide 2011


Given the evolving market, which of the many types of consultancy look best prepared for future growth?

Building a wind turbine. Credit: Construction photography/ Alamy
Building a wind turbine. Credit: Construction photography/ Alamy
The structure of the environmental, carbon and sustainability consulting marketplace has long been evolving.

On the one hand, the market has become more fragmented, with new entrants seeking a foothold on the turf traditionally occupied by the established ‘full-service’ environmental consultancies. On the other, merger and acquisition activity has consolidated some organisations’ market position.

The recession and its aftermath, the 2009 market downturn and slow recovery since have served to accelerate these trends, further shaking up the market’s structure.

Some organisations have folded, while others have been bought by firms with a strategic vision and the necessary financial muscle.

Rising competition

At the same time, the large, full-service environmental consultancies have faced rising competition from sector-specific specialists, engineering-based firms and the large established ‘management’ consultancies.

From something of a low base, these organisations have chipped away at the market space held by the large, established consultancies.   

Recent data from the Management Consultancies Association (MCA) bear this out. The MCA’s 51 member companies include the ‘big 4’ management consultancies (Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG) alongside engineering-based firms such as Mott MacDonald, Mouchel and Arup.

These 51 firms’ environmental consulting revenues rose 22% last year to £87m, comfortably outstripping the 1% growth in the wider consulting market.

Those MCA member companies with a heritage in civil engineering and project management fared best in the environmental consulting sphere last year.

The data are revealed in the MCA’s annual statistical review, the UK Consulting Industry Statistics 2011.1 They compare with 2009 dips of 6%, in both their environmental consulting revenues and wider consulting activities (ENDS Report 424, p 12).

The recession caused the market to shrink in 2009 as companies focused on cost-cutting, but private sector demand drove much of the rebound in environmental consulting revenues last year.

And bucking the wider 15% dip in demand from the public sector, MCA members’ public sector environmental consulting revenues rose 13% last year.

But despite the rise of these ‘new kids on the block’, the large, established full-service environmental, sustainability and carbon consultants, alongside those specialising in a particular sphere, retain a large part of the UK market.

Nevertheless, the outlook for the environmental, carbon and sustainability consultancy market is uncertain. The market is showing no signs of returning to pre-recession rates of expansion.

Consequently, turnover growth for many organisations will be slow at best. While some consultancies foresee more rapid growth, much depends on the composition of the organisation’s client base.

Those with a greater proportion of clients in the energy and waste sectors, or those with expertise in areas such as carbon and energy management, will enjoy most of the gains from market growth in these areas. In contrast, consultancies that are more geared towards public sector clients face a much tougher time in growing their turnover. 

Indeed, analysis of organisations’ forecast change in their UK environmental, carbon or sustainability consultancy turnover indicates a mixed picture.

Of those providing ENDS with an estimate of their expected 2011/12 turnover growth, one third see a flat or declining picture. Half of these expect their turnover to fall, the other half expect to see ‘zero’ growth.

Two thirds expect to enjoy some growth in turnover over the next 12 months, but for a quarter of these, the increase will be in single-digit percentage terms at best.

Fewer than half of consultancies surveyed by ENDS foresee double digit turnover growth. And for some, this will be from a low base, given the market contraction of 2009 and the slow recovery of last year.

The near-term employment outlook is similarly lacklustre. Two in five consultancies expect to either lose staff or to not add to the payroll in their UK environmental, carbon or sustainability consultancy operations over the next year.

The finding mirrors that of ENDS’ annual survey of environmental professionals, undertaken in January and February 2011 (ENDS Report 434, pp 38-41).

This revealed green-collar employment levels declining at three in ten professional, scientific and technical service providers and consultancies, and a flat employment picture at half of such organisations.

Mott MacDonald is among those consultancies that have had to shed UK staff in areas exposed to shrinking demand from public sector clients.

And geotechnical and environmental consultancy, Southern Testing Laboratories, is typical of many businesses that expect to see some modest turnover growth this year, but no increase in employment levels. 

Modest employment growth

Some employment growth, however limited, is expected at three in five environmental, carbon and sustainability consultancies surveyed by ENDS.

A quarter of these said growth would be no greater than 5%, while the others were more bullish, forecasting double digit percentage employment growth over the next 12 months.

With market conditions tough, competitive pressures are further impacting business prospects. Indeed, more than a quarter of environmental, carbon and sustainability consultancies see rising competition as a key current growth constraint.

SKM Enviros’ Mr Clark says the UK has become an advanced environmental services market and one in which organisations must be competitive to succeed.

“New and existing firms are always looking to break into different sectors, especially if their traditional markets are falling away. To do so, they are willing to price low to gain experience,” he says.

“Although the market outlook is looking better, we expect any growth will be hard fought over.”

And importantly, almost half of consultancies see price competition as a major constraint on their 2011/12 business growth prospects. Consequently, growth in average fees charged will be lacklustre for many.

When asked to forecast the percentage change in their average fees over the coming year, consultancies’ responses were wide-ranging.

A few expect declines of up to 10%, while a handful foresee average fee growth of 10-20% or more. But half expect to see no increase at all over the next year.

Of those forecasting any growth in average fees, for most it will be 5% or less. And with wider inflation at about this level, most consultancies will see real (inflation-adjusted) erosion in average fees earned this year. Revenues, margins and profitability will all be hit accordingly.

Discount-seeking clients

Duncan Laxen, managing director of Bristol-based Air Quality Consultants, says clients are seeking discounts on top of already competitive quotes, which service providers are having to grant to win work.

“We have maintained our work loads through the recession, but we are often undertaking jobs at price levels akin to those of two years ago and given the general rate of inflation, this has eroded our margins,” he says.

And even where growth prospects exist, an inability to raise finance remains a likely drag on expansion plans for many.

This factor was cited as a major growth constraint by a third of consultancies this year. A year ago, it was noted by a quarter; clear evidence that banks’ reticence to lend is holding back expansion plans and that the ‘credit crunch’ remains real for many.

Some are seeking alternative financing, among them WYG. It is looking to a capital restructuring to provide funding for expansion and in June invited shareholders to consider a £30m share issue.

Paul Hamer, WYG’s chief executive, says it should help to “establish a stronger platform from which to take advantage of the growth opportunities that now exist”.

But many such opportunities are overseas and WYG is among those organisations that have had to look abroad for growth, amid ongoing domestic market weakness (ENDS Report 428, pp 32-36).

And despite weakness in the wider green-collar labour market, skills and personnel shortages are continuing to impact some consultancies’ growth prospects (ENDS Report 434, pp 38-41). Almost a third of them say such shortages are a constraint for them. 

They are most apparent in the energy and carbon, waste and resources and complex project management spheres, particularly EIA and environmental management, says Mr Clark.

In these areas, consultants with the necessary skills and experience are in short supply, while demand for their services is growing.

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