It has been widely recognised for some time that consulting firms have greater intrinsic value when they adopt an ‘employed’ model as opposed to leveraging a network of self-employed consultants under an ‘associate’ model. Simply put, consultancy firms that own – rather than rent – their expertise are seen as intrinsically more valuable to strategic acquirers and investors.
However, across the mid-market and early stage consultancies, the rise of challenger firms and ‘gig consulting’ is beginning to challenge this status quo.
Early stage consultancies commonly adopt a blended employment model with a relatively significant pool of associates to accommodate volatility in demand and fill skills gaps across the employee base. As firms scale, it becomes feasible to invest in a higher proportion of employed consultants as project volatility decreases and firms build out a wider and deeper base of expertise. This in turn drives higher value in the eyes of investors and acquirers for a number of reasons:
- Greater control of the consulting base with employed consultants considered an ‘asset’ of the business, whereas associates are not always available or willing to engage, in particular in markets where skills are in short supply and high demand;
- Higher margins can be achieved from a tighly utilised base of employed consultants compared to the higher costs of mobilising associates – our recent analysis suggests Human Capital Resourcing firms (akin to leveraging associates) generate around 21.5% gross margins compared to 34.8% on average across Professional Services firms;
- Greater consistency in approach and quality from employed consultants, supported by greater investment in training and skills development. Importantly, the creation of a consistent and differentiated culture which can be difficult to achieve with a fluid associate base; and
- Greater defensibility of client relationships given the natural loss of intimacy between a firm and its clients where third party associates are delivering client-facing support.
Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) multiples – a common measure of value for consulting firms – across publicly-listed companies reflect the difference in intrinsic value placed by investors on the sector, with Professional Services firms trading at around 12.7x EBITDA, and Human Capital Resourcing firms (a proxy for associated-led consulting firms) trading at 8.8x EBITDA, a 30% discount.
Challenging the status quo
The ‘gig’ economy is more commonly associated with disruptive technology companies such as Uber or Deliveroo. However, increasing levels of self-employment across the consultancy sector is driving a rapidly-growing ‘gig consulting’ sector. The emergence of this sub-sector is being fuelled by the consultants themselves, with self-employed consultants now making up 55,000 of the 175,000 strategy and management consultants in the UK (ONS, 2018). This is being driven by a number of factors:
- Flexibility: Self-employed consultants are able to choose projects that interest them, in locations and at times that suit them. Acting as their own bosses, they are also able to free up time for other ventures or interests, increasing their focus on a sustainable work-life balance.
- Technology: Cloud computing and increased connectivity is supporting a workspace that is less defined, allowing consultants to operate remotely and run their business from their laptop or smartphone.
- Demand: Experienced consultants with niche skills are in high demand and companies are increasingly turning to trusted individual experts as opposed to large generalists for advice.
- Glass Ceilings: Across traditional consulting firms, employees can often reach a glass ceiling due to their hierarchical structure or need to take time out for family commitments. A self-employed career provides an alternative route to strong earnings potential and greater control.
These drivers were brought into focus by a recent Odgers Connect survey amongst independent associates (see below):
How is the sector reacting to this growing pool of self-employed consultants?
This dynamic has played into the hand of hybrid Human Capital Resourcing / Consulting firms, which are experienced in mobilising large numbers of self-employed consultants to deliver projects. Despite their comparatively lower margins, companies in this space such as RFS, Campion Wilcox, Anchura and Gibbs Hybrid have flexible models with lower fixed overheads, whilst also being able to scale rapidly in response to periods of strong demand.
A number of platforms have also been established with a pure focus on connecting the most appropriate and qualified self-employed consultants with specific projects. Although a relatively new proposition, these disruptors, including Eden McCallum, b2e and Outsized, leverage their extensive networks of associate consultants and lean business models to provide low cost consulting resource tailored to specific project requirements.
Procurement consultancy Odesma has adopted ‘cloud principles’ to deliver its disruptive breed of consulting, with an employed senior team bringing together leading subject matter expertise, technology, governance and leadership from across its self-employed network in a way that is tailored to the needs of its clients.
Across the Pond, Catalant recently landed $41m in funding to exploit smart algorithms and AI to help clients build an agile workforce with technology & programs that enable access to talent they need.
This emerging ‘gig-consulting’ sector is still some way off sending shockwaves through the traditional consulting industry and established employee models still hold the most intrinsic value in the eyes of investors. However, there is no denying the fact that the rise of the self-employed consultant – certainly those with differentiated domain expertise – will continue to disrupt the sector, presenting both investment opportunities and challenges for incumbents.