Management Consultancies Association—Written evidence (TAS0002)
Evidence to the House of Lords EU Internal Market Sub-Committee
UK-EU trade in non-financial services
Questions
Sectoral overview
Please provide us with an overview of trade in your sector. Please include a summary of the significance of the sector to UK trade in services, including employment statistics (linked to trade if possible), the volume and balance of trade, value added and Foreign Directive Investment (FDI), and UK strengths and specialisations in the sector.
The Management Consultancies Association (MCA) is the trade association for UK management consulting firms. With around 60 members, ranging from Accenture, IBM and the Big Four accounting firms, but also comprising the consulting practices of large engineering companies, IT service providers, middle-sized generalist consultants and niche specialists, MCA membership accounts for around 60-65% of the UK consulting market. Our share of that market is £5.5bn by fee income (2015) and our member firms employ around 45 000 staff.
UK consulting is highly regarded around the world. Our Consulting Excellence initiative commits MCA member firms to the highest standards of ethical behaviour, client value and professional development.
In recent decades, the UK has grown to become one of the largest international centres for management consulting, rivalled only by the US and Germany. We are also the base for a huge amount of work overseas. Consulting is a significant export. Even multinational MCA member firms with permanent outlets abroad export significant volumes of UK consultants and insights to overseas jurisdictions. 68% of member firms indicate that they sell work overseas, with around half active in the Eurozone. Indeed, around a quarter do more than 20% of their business in the Eurozone.
The consulting workforce itself is internationally diverse. In a recent MCA survey of young consultants, only 75% of respondents self-identified as British, with around 12% identifying as non-UK EU nationals.
In a survey prior to the EU referendum, MCA member firms were overwhelming opposed to Brexit. They cited access to markets and skilled labour as principal considerations, both for consulting per se and, more importantly, for client markets. Consulting’s role is to support business in dealing with problems, helping them to grow. Clearly, reduced access to EU markets and to skilled labour could radically slow that growth.
Since management consultants support businesses and public sector organisations with challenges, they are adaptable, evolving and relentlessly positive. MCA member firms have agreed an action plan to ensure that our industry helps make Brexit a success. They are also encouraging client businesses to continue to take strategic decisions, to invest and innovate, in order to keep Britain competitive, rather than using Brexit as an excuse for caution or reduced ambition. However, uncertainty about the nature and implications of Brexit inhibit consultants’ capacity to support business. Simply stated, it is impossible to assist with a problem if the dimensions and character of the problem are not clear. Furthermore, any version of Brexit that does not retain many of the benefits of EU membership, particularly Single Market access and fluidity in the labour supply, would, in the judgement of many MCA member firms, put our industry at a significant disadvantage.
EU and market access
How and to what extent does the EU facilitate enhanced market access for your business/in your sector? Is there a harmonised Single Market framework that allows you full access to other member states’ markets? If not, how (and how well) does the Single Market function in your sector?
For consulting firms, access to opportunities is considerably enhanced by the UK presence within the EU. More particularly, the prominent role accorded to key client sectors, as a consequence of that presence, is critical to our industry and its ability to support UK growth. For example, 33% of all UK consulting is focused on financial services. From support to the restructuring of the industry after the Financial Crisis, to help in digitisation, business development and customer-centricity, consulting is critical to the sector’s success. That success is in turn, however, plainly dependent on the pivotal position of UK FS as a global hub, leading in and serving the EU. It is idle to pretend that the departure of the UK from the EU will not adversely impact that status without mitigating steps that are tantamount to an approximation of EU membership being put in place.
MCA member firms also provide advisory support for clients operating across a range of pan-EU value chains. These include UK component manufacture for European automotive giants, high-value aerospace manufactures, as well as involvement in major infrastructure and energy projects. These are often substantially dependent on the multilateral and intergovernmental relationships our EU presence facilitates.
It is worth noting that even with these arrangements, the Single Market for consulting, as well as other professional services, is still imperfect. Prior to the Brexit vote, the MCA was engaged in discussions about improving the market. In particular, we argued that cultural barriers across the EU inhibit the maximisation of UK consulting sales. These include public-sector procurement requirements for local investment or ‘presence’. While legitimate in many instances, these conditions are also used to guarantee local contract awards. Such practices would almost inevitably become more commonplace under any post-Brexit arrangements in which EU member states did not have to guarantee equal rights of market access to a UK consulting firm.
Do other aspects of EU membership help or impede the ability of your business to operate (eg, access to justice, horizontal legal regimes, free movement of persons, mutual recognition of professional qualifications, regulation and standards)?
As indicated, access to skilled labour, both for consulting, and for client industries, is a key benefit of EU membership. The benefits are worth stating.
The UK’s skills shortages are systemic. Yet the UK enjoys its highest levels of employment for decades. The residuum of the economically inactive is accordingly comparatively small. Even with significant initiatives to get that residuum into the workforce, combined with an uplift in the productivity of the ‘indigenous’ workforce, it is inconceivable that the UK could retain its position as the fifth largest economy in the world without a substantial volume of migrant labour.
Plainly that labour can be diversified to include a greater proportion of non-EU nationals. However, any new arrangements would need to match a particular characteristic of EU-wide free movement from which consulting benefits: agility. As is the case for many industries, consulting frequently moves quickly in response to market conditions and demands. Clients want suitable skilled teams mobilised at speed.
The position of UK consulting as a global industry cuts in both directions here. Consider a UK car manufacturer exploring an issue concerned with connected cars and requiring immediate consulting support. Freedom of labour movement across the EU means that a UK advisory firm with relevant capabilities in Germany can deploy a suitable team immediately. Work permit systems lack this fluidity and are ill-adapted to meet the pace of modern workplace conditions. Equally, freedom of movement has enabled UK-based consulting firms to grow their capabilities in other member states in response to market opportunities.
28% of all management consulting advice concerns digital, the highest specialist share. The UK benefits from our presence within a number of pan-EU digital initiatives and standards. Moreover, the cutting edge nature of what MCA member firms and their clients do in digital relates critically to the ability to marshal global insights and apply them relevantly in the UK context. Being subject to multilateral agreements in this area, negotiated or overseen by the EU, supports this.
Exiting the European Union
What specific issues does the UK exiting the EU raise for your business/sector? Please be as specific as possible.
Expected reductions in inward investment to the UK over the next few years is a potential and immediate problem for consulting clients and thus for consulting.
More intangibly, the general perception of the UK as an innovative, flexible business environment, with access to the Single Market, is beneficial. MCA member firms are already reporting since June that overseas partners and suppliers find the Brexit decision mystifying and potentially damaging to the UK’s reputation.
The ability to sell consulting services around the world depends in part on that reputation. This works in quite fluid ways. For example, the UK is regarded as an innovative centre for retail, one which creates fashions and approaches which are then adopted EU-wide. Consulting in retail is likewise innovative. The ability to sell a consulting project on retail in Germany is thus a function of Single Market access and the UK’s strong reputation. Repeat sales of this sort build up that reputation and support sales beyond the EU. Withdrawal from the EU could dent that reputation, reduce the capacity to build up advisory track records, and thus adversely impact consulting sales globally.
This reputational damage and associated changes in the UK’s structural relation to the EU might also inhibit the UK’s ability to attract non-EU talent. Just as non-EU investment in the UK (for example in the car industry and financial services) is fuelled by access to the Single Market, so anecdotal evidence suggests that the presence of non-EU skilled labour in the UK has similar drivers. One source of income for the UK and talent for the consulting industry is overseas graduates of the UK’s prestigious business schools. At a recent MCA event, non-EU students at a top London business school were asked if their decision to attend the school would have been affected adversely had they known the referendum result. A majority indicated that it would. Since many of these graduates are targets for consulting, other professional services, and a host of other strategic and cutting-edge digital industries, this evidence is worrying.
It should be noted, of course, that the backbone of UK consulting firms is UK consultants. Indeed, consulting firms work very hard to diversify their sources of UK labour supply. As well as industrial-scale graduate recruitment, consulting firms have taken steps to hire more school-leavers and supporting apprenticeships. However, the use of overseas labour, as well as being a sheer numerical necessity for the foreseeable future, is also about ensuring that UK management consulting has an international feel and range of expertise, essential for competition in global markets. It is also about innovation. Effective, innovative – and thus world-beating teams – are diverse teams. The international character of UK consulting is critical to its innovative character and global success.
Future UK-EU trade relationships
What would the impact be for your business/sector of leaving the EU and operating on WTO (GATS) terms? To what extent would businesses be able to continue to trade in services as at present? How would your business adapt to this specific scenario? Are WTO terms an attractive option?
The UK promoted free trade and the corresponding removal of tariffs to the world. It is disappointing that we are even entertaining their re-imposition in markets where they have been removed. UK consulting would adapt to becoming more expensive, of course, but with difficulty. Moreover, there is a risk that many of our global consulting companies, who have used UK consulting resources on projects within the EU, would simply equip their local EU offices to respond to local demands, reducing net UK consulting exports, or re-balance their international resources. WTO terms, accordingly, while manageable are scarcely attractive, and do not constitute a route to ‘freeing’ UK trade.
Would leaving the EU but remaining a member of the European Economic Area (EEA) retain present levels of market access for your business or not? Is this an attractive option?
This would depend on the precise terms of the agreement, as well as issues of timing. A suitably calibrated deal, which retained the current levels of market access and was properly aligned to a precise assessment of the UK’s skills needs, might be the best way forward. However, such a deal may take many years to forge. The attendant uncertainty could reverse the UK’s economic progress. A comparison between embarking on such a process in order to achieve an approximation of the status quo and the status quo itself is inevitably unfavourable.
Is a negotiated UK-EU Free Trade Agreement (FTA) an attractive option? How confident are you that the needs of your business/sector, including but not limited to market access, would be accommodated in such an agreement?
See above.
What should the Government’s key objectives be for your sector in its negotiations with the EU?
The Government should prioritise continued and best possible access to:
Skilled and mobile labour
The Single Market
EU/international business agreements on digital
Pan-EU value and supply chains in manufacturing, aerospace, energy and transport infrastructure, communications.
The Government should also ensure that the strategic position of certain UK industries, such as financial services, in relation to the EU, is protected.
Opportunities
Does leaving the EU raise significant benefits or growth opportunities for your business/sector? What are these and how can they best be exploited? To what extent do they offset/outweigh concerns about reduced access to EU markets?
An economic shock as large as exit from the EU inevitably leads to large amounts of change in business and elsewhere. In many cases, government departments as well as businesses will require the advice and assistance of management consultancies as they negotiate this period of turbulence and uncertainty. But these opportunities are temporary and counter-balanced by reductions in activity elsewhere and in the longer-term.
Outside of the EU, there may be an opportunity to reinvent certain aspects of digital regulation. While needing to remain part of EU and other global digital initiatives, the UK could overhaul domestic regulation and incentives in ways that would benefit this critical industry. There would also be an opportunity to take a strategic view of skills, establishing from where in the world it might be best to source our overseas labour in future.
Since these are, however, entirely achievable within the existing EU framework, they do not outweigh concerns about withdrawal.