MANAGEMENT CONSULTING IN CANADA

Size of the Consulting Market
Management Consulting is a dynamic and growing industry in Canada that not only generates significant revenues and profits, but also provides value to all types of organizations. Approximately 70% of all business and government organizations in Canada have used the services of a management consultant at least once in the last five years.1 There are many challenges in defining the size of the consulting market due to definitional issues around “management consulting,” and the fact that many firms in other industries also provide management consulting services. Under Statistics Canada’s Standard Industrial Classification (SIC) system, Management Consulting is captured under code 7771. Industry Canada also collects statistics based on the North American Industry Classification System (NAICS). The consulting codes are as follows: 54161 Management Consulting Services 541611, Administrative & General Management Consulting Services 541612, Human Resource & Executive Search Consulting Services 541619, Other Management Consulting Services 5416A Scientific & Technical Consulting Services 54162, Environmental Consulting Services 54169, Other Scientific & Technical Consulting Services Based on the NAICS categorization, the Canadian market for management consulting services is estimated at $5.7 billion (all funds are in Canadian dollars unless otherwise stated). Revenue of all Canadian Management Consulting Firms, 1998
NAICS 54161 5416A 5416 Management Consulting Scientific & Technical Consulting Total Total Revenue $000s 5,736,024 86% 940,033 14% 6,676,057

Source: 1998 Survey of Service Industries: Management, Scientific & Technical Consulting Industry, Industry Canada, March 2001

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Management Consulting Services, Industry Sector Analysis, US & Foreign Commercial Services and US Department of State, 1998

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The consulting industry in Canada had grown significantly over the past two decades. The industry was growing at levels greater than 15% per year up to the 1990-92 recession. In 1995, Industry Canada estimated the size of the Canadian Market for Management Consulting services (based on Canadian industry revenues) at between $2.3 billion and $3.0 billion. 2 Although data is not available, annual growth rates for the late 1990s were estimated to be in the range of 20%.3 Consulting revenue in Canada is concentrated in the most populous regions, with more than half of all revenue from the province of Ontario. Many of the largest firms have offices in at least one or two of the larger cities (Vancouver, Calgary, Toronto, Montreal). In the last few years, the accounting based consulting firms have reduced the number of offices by exiting smaller communities. In addition, with the drive to have consultants billable, and working at the client site, larger firms are experimenting with “hotelling" arrangements, which enable several consultants to share office workspace. Provincial Distribution of Consulting Revenue, 1998
Total Revenue $000’s 2,935,726 1,160,266 710,579 629,197 109,953 64,971 55,348 39,472 14,539 9,543 6,429 5,736,024 % Total Canada % 51.2% 20.2% 12.4% 11.0% 1.9% 1.1% 1.0% 0.7% 0.3% 0.2% 0.1%

Ontario Quebec British Columbia Alberta Manitoba Saskatchewan Nova Scotia New Brunswick Yukon & Northwest Territories Newfoundland Prince Edward Island Canada

Source: 1998 Survey of Service Industries: Management, Scientific & Technical Consulting Industry, Industry Canada, March 2001

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Sector Competitiveness Survey – Management Consulting, Industry Canada, 1997

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Management Consulting Services, Industry Sector Analysis, US & Foreign Commercial Services and US Department of State, 1998

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Providers of Consulting Services
There are approximately 5,000 management consulting companies in Canada, and over 20,000 management consultants, depending on the definition used. According to the 1996 census, women account for 44% of those employed in the Canadian consulting industry. The number of consultants in Canada has increased over the last two decades. In the early nineties, much of the growth was attributed to the downsizing of senior executives. The Canadian situation mirrors that in the US where growth is also triggered by the blurring of boundaries with technology service providers. Increasingly traditional hardware, software and telecommunications companies are opening consulting divisions. In addition, other professional service firms such as law firms and advertising agencies are beginning to provide management consulting services to their clients. According to Human Resource Development Canada, two thirds of consultants in Canada are employed by firms with more than 100 employees. Some 28% of consultants work in firms with less than 20 employees, and many of these people would be sole practitioners. Where consultants work, by firm size.. .
<20 employees 28%

20-100 employees 6%

> 100 Employees+ 66%

Source: HRDC Industry Profile, Management Consulting Services

The largest consulting companies in Canada are the same large international players that one sees in developed nations around the world. Although some repositioning has occurred, there has been little movement in the composition of the top firms over the past 10 years. The large consulting firms are becoming larger and the smaller firms more numerous, and this trend is likely to continue. Frequently, firms which reach 20-50 employees are acquired by the larger companies. Currently, mid-sized Canadian firms include Western Management Consultants Myers Norris Penny, and Johnston Smith International. The top 20 consulting firms in Canada represented more than one third of the total industry revenue in 1999. The largest consulting firm in Canada at the end of 1999 was PricewaterhouseCoopers with revenue of $44.1 million from a total staff of 1749.

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Major Consulting Companies by Revenue and Staff
Number Revenue / Revenue / Revenue Growth Effective Number of of Total Consultant Partner Consultants / Rank Firm ($Cmn) rate % date Consultants Partners Staff ($Cmn) ($Cmn) Partner 1 PricewaterhouseCoopers 441.0 282% Jun-99 1511 81 1749 0.29 5.44 18.65 2 Deloitte Consulting / DTT 388.5 16% Aug-99 n/a n/a 1825 3 Andersen Consulting 226.4 28% Dec-98 1070 14 1350 0.21 16.17 76.43 4 William M. Mercer 208.0 22% Sep-99 697 n/a 1275 0.30 5 Ernst & Young Consulting Services 187.0 15% Sep-99 463 67 620 0.40 2.79 6.91 6 KPMG Consulting 148.0 32% Sep-99 659 55 861 0.22 2.69 11.98 7 Aon Consulting 66.0 3% Dec-98 230 n/a 550 0.29 8 Watson Wyatt Worldwide 62.6 2% Jun-99 289 0 375 0.22 9 AT Kearney 60.0 20% Dec-98 77 4 119 0.78 15.00 19.25 10 Computer Sciences Corporation 60.0 16% Mar-99 400 n/a 600 0.15 11 AMS Management Systems Canada 42.0 -3% Dec-98 50 9 230 0.84 4.67 5.56 12 Boston Consulting Group of Canada 36.0 63% Dec-98 63 n/a n/a 0.57 13 Arthur Andersen 31.5 24% Aug-99 n/a n/a 182 14 Bain & Company 29.8 19% n/a 60 6 80 0.50 4.97 10.00 15 DMR Consulting Group 28.0 33% Dec-98 260 0 n/a 0.11 16 Hay Management Consultants 24.2 13% Sep-99 87 9 156 0.28 2.69 9.67 17 Eckler Partners 20.3 17% Dec-98 80 22 110 0.25 0.92 3.64 18 Ajilon Canada 9.2 70% Dec-99 60 5 n/a 0.15 1.84 12.00 19 RSM Canada 6.5 23% Dec-98 20 5 30 0.33 1.30 4.00 20 CPCS Transcom 4.0 33% Aug-99 12 2 15 0.33 2.00 6.00

Source: Management Consultant International: 12, January 20,2000, CAMC Analysis

Of the firms listed, Andersen Consulting (now Accenture) had by far the highest leverage model, with a ratio of over 75 consultants for each partner. As a result, it also had the highest revenue per partner at over $16 million. The other major firms had an average of between four and twenty consultants per partner. Average revenue per consultant ranged from $110780,000, with most of the top twenty companies billing between $200-300,000 per consultant. Different consulting firms focus on providing different services. Over time, technology related services are becoming an increasing portion of most firm’s offerings. Leading Canadian Consultancies: Fee Split by Activity
IT Strategy & Organization Financial Project Mgmt HR & Search Change Mgmt Marketing Operations Mgmt Process Facilities / ReOutengineer sourcing Others

Ajilon Canada Aon Consulting Computer Sciences Corporation Hay Management Consultants KPMG Consulting PricewaterhouseCoopers

20 30 30 60

15 20 15 8 10 20 0.5

5

27 14 80 29

10 10 5 2

3 10 0.5

10 10 21

10 86

7

1 30

1

Source: Management Consultant International: 12, January 20,2000

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Metrics on Consulting Service Providers
On average, management consulting firms in Canada earn 22% profit before taxes, and scientific and technical consulting firms earn 20%. Salaries and benefits are the largest component of expenses, accounting for 40% of total expenses. Other main expenses include sub-contractor fees and occupancy costs. Revenue and Expenses by Province, Canada, 1998
Salaries, Total Wages & Total Revenue Benefits1 Expenses $000’s $000’s $000’s 2,935,726 948,419 2,260,305 1,160,266 397,342 938,837 710,579 258,233 568,786 629,197 218,110 466,825 109,953 37,099 81,308 64,971 16,461 47,199 55,348 18,943 39,238 39,472 8,724 26,928 14,539 3,139 11,730 9,543 2,647 5,819 6,429 1,793 4,374 5,736,024 1,910,910 4,451,349 Profit before taxes % 23 19 20 26 26 27 29 32 19 39 32 22

NAICS 54161 Management Consulting Ontario Quebec British Columbia Alberta Manitoba Saskatchewan Nova Scotia New Brunswick Yukon & Northwest Territories Newfoundland Prince Edward Island Canada NAICS 5416A Scientific & Technical Consulting

940,033

311,808

752,850

20

Source: 1998 Survey of Service Industries: Management, Scientific & Technical Consulting Industry, Industry Canada, March 2001

Operating Expenses by Type as a Percentage of Total Revenue, Canada 1998
Salaries, NAICS 54161 Management Consulting 5416A Scientific & Technical Consulting 5416 Notes: 1. 2. 3. 4. Total Benefits2 40 39 40 Work subto others 9 9 9 Repair & Maintenance 1 1 1 1 1 1 2 2 2 Advertising Depreciation Occupancy & other rental3 7 6 7 Materials, Components & Supplies 3 2 2 20 23 21 82 83 82 Other4 Total Expenses Wages & contracted

Data for surveyed firms only, accounting for 89% of incorporated firms’ revenue, and 79% of revenue overall Fees paid to contract employees are not included Includes rent or lease of land and buildings, rent/leasing of motor vehicles, computer equipment, machinery and other equipment, heat, light, power and water, insurance, taxes, permit and licences. Mortgage payments are excluded. Includes fees paid to contract employees, interest paid, office supplies, telephone, travel and entertainment, royalties, franchise fees paid, legal, accounting and consulting fees, and other operating expenses.

Source: 1998 Survey of Service Industries: Management, Scientific & Technical Consulting Industry, Industry Canada, March 2001

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Consumers of Management Consulting Services
Businesses are the largest consumers of management consulting services, representing 71% of services based on revenue. It should be noted that the government portion (15%) may be slightly overstated as it may include consulting services provided to private organizations, but funded by government or other public agencies. For example, organizations such as the Canadian Technology Network (CTN) and the Industrial Research Assistance Program (IRAP) contract consultants on behalf of small and medium sized businesses. Distribution of the Client Base as a Percentage of Total Operating Revenue, 1998
Households & Individuals Business Government Foreign Consumers

54161 5416A 5416

Management Consulting Scientific & Technical Consulting Total

3 2 3

71 58 69

15 25 17

11 14 11

Source: 1998 Survey of Service Industries: Management, Scientific & Technical Consulting Industry, Industry Canada, March 2001

Canadian consulting companies provide services to a variety of industries, although some firms have much deeper penetration of different industry verticals. Based on the fee revenue of a selected group of the largest firms, the financial services and high tech firms are the largest private sector users of consulting services. Leading Canadian Consultancies: Fee Split by Industry
Financial Services Mfg. Telecom Gov't Energy / Enviro. Products Utilities Distri-bution Transportation Health-care Techno-logy Other

Ajilon Canada AMS Management Systems Andersen Consulting Computer Sciences Corporation DMR Consulting Group Ernst & Young Consulting Services Hay Management Consultants KPMG PricewaterhouseCoopers

5 60 21 10 23 22 29 9 15

5

25 9 9 29 4 10 7

10 13 20 15 10

30 30 22 40 13 3 16 29

5 25

5

5 1 5

20 23 35 10 13 20 4 32

8 20 3 18

4 14 5 8 4 2 4 11 5

8

10

2 28

Source: Management Consultant International: 12, January 20,2000

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Trade in Management Consulting Services
Canadian management consultants have been successful in work markets, and are a major source of export earnings. The exact dollar value of exports is difficult to track due to internal transfer payments between the different country offices of the large consulting firms. Trade in Management Consulting
250

Exports
200

Imports

C$ millions

150 100 50 0 1991 1992 1993 1994 1995 1996

Source: Canada’s International Management Consulting, 1990-1996, Statistics Canada, 1997

Exports are more predominant in the larger firms. It is estimated that exports account for approximately 15% of total billings, however they may reach over 20% for the largest firms.4 The lower value of the Canadian dollar has made Canadian consultants economical in the US market, and this country is the source of most export revenue. The export of management consulting service to the US has also been facilitated by the North American Free Trade Agreement (NAFTA), and in a broader context by the General Agreement on Trade in Services (GATS). Given the extent of cross border activity, many industry analysts see Canada not as a separate entity but as part of the larger North American market given the numerous affiliations between the major U.S. and Canadian firms and the significant, cross-border relationships held by the major consulting groups. In addition to providing services in the United States, Canadian consultants do export their services around the world. Canadian consultants participate on large projects in the developing world, which are funded by the International Financial Institutions (IFIs), as well as the Canadian International Development Agency (CIDA). In the winter of 2001, CIDA replenished its Canadian Consultant Trust Funds (CCTFs) at the World Bank and the InterAmerican Development Bank (IDB). With these replenishments, CIDA has committed approximately CDN$ 26.5 million over the next four years to be used by the World Bank and IDB to hire Canadians to assist in the preparation of Bank-financed projects.
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Management Consulting Services, Industry Sector Analysis, US & Foreign Commercial Services and US Department of State, 1998

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The Canadian Association of Management Consultants
Management consulting in Canada has been represented by a professional and trade association for over 30 years. The Canadian Association of Management Consultants was formed as a trade association in 1963 to promote professionalism in the industry. CAMC has 10 regional chapters which offer local networking and professional development benefits to members. While administration is centrally coordinated from the Toronto based National office, each of the provincial institutes is still responsible for conferring the Certified Management Consultant (CMC) designation. This designation is given to practitioners who successfully complete its course of studies, academic requirements (university degree), and practical experience components. The CAMC Uniform Code of Conduct, and the CMC designation serve to help differentiate those professional consultants from those who merely hang out a shingle while they are looking for other work. The CAMC currently has over 4,500 members, of whom nearly half are in the province of Ontario. Of the members, over 2,200 are certified members. Membership includes representation from the large firms, the specialty boutique shops, and independent consultants. As the “Voice of Management Consulting in Canada,” CAMC is active in government lobbying and promotes the interest of consulting in Canada.

Sources
1998 Survey of Service Industries: Management, Scientific & Technical Consulting Industry, Stats Canada, March 2001 Management Consulting Services, Industry Sector Analysis, US & Foreign Commercial Services and US Department of State, 1998 Management Consulting Industry, Service Industries Overviews Series, Industry Canada, February 2001 Sector Competitiveness Survey – Management Consulting, Industry Canada, 1997 Management Consultant International, 12, January 20,2000 Reprinted by permission of Management Consultant International. Copyright 2000 Kennedy Information Inc, Fitzwilliam NH 03447 USA (800) - 531- 0007 http://www.consultingcentral.com

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