Eastern European consulting industry grows 7%, market worth €1.4 billion

The Eastern Europe consulting market has seen a solid year of growth in 2017, with every major country in the region – Poland, Romania, Czech Republic, Hungary, and Slovakia – expanding faster than the year previous.

Despite a turbulent political environment, Eastern Europe's consulting market has recorded solid growth of around 5% since 2012. And while geopolitical tensions and mixed signals from governments and corporations remain, the outlook for 2018 still seems positive. Eastern Europe’s consulting market saw stronger growth in 2017, with the highest level of expansion in five years hitting 6.7%, and taking the market to €1.4 billion, according to the latest data from Source Global Research.

It is important to note that Source’s definition of Eastern Europe’s consulting market differs drastically from other sources, as the firm notes the top segment of management consultancy in its figures, meaning the UK-based analyst firm provides a relatively conservative estimate of the market’s size. In the case of Statista, as one contrasting example, a wider range of firms and scope falls within the research focus, leading to a much larger estimation of $5.3 billion for the Bulgarian and Romanian consulting scene alone.

Movers and shakers

Poland is in Source's dataset by far the region’s largest market, and is emblematic of the trends engulfing the whole region. While the nation has been embroiled in a protracted constitutional crisis, extending back to 2015, Poland’s consulting industry shrugged off the continuous uncertainty surrounding the country to once again enjoy Eastern Europe’s strongest growth rate. Estimates from Consultancy.eu suggest that Polish consulting likely accommodates 40% of the Eastern European management consulting market, dwarfing the nearest competitor of Romania, which holds around 17%.

Romania might have enjoyed higher rates of growth but for the political turmoil which has engulfed the nation following growing unrest regarding corruption allegations. According to Transparency International's annual Corruption Perceptions Index, as of 2017, Romania is the third most corrupt country in the European Union after Bulgaria and Hungary. And in the summer of 2018 this has reached a head, as Romania’s President Klaus Iohannis sacked chief anti-corruption prosecutor Laura Codruta Kovesi to honour a constitutional court ruling which she had criticised for leaving prosecutors exposed to political interference. This development emerged after the IMF had predicted Romania was actually due to up its economic growth to 5%, and it could now further hamper the growth of the country’s economy and its consulting sector as a result.

The pair are followed by the other mature markets; the Czech Republic, at an estimated 16% of the market, and Hungary, which, due to a drop in EU funding, holds a slimmer 12% share. Other countries included in the assessment are Albania, Bosnia, Bulgaria, Croatia, Macedonia, Serbia, and Slovenia. These markets saw mixed fortunes, and combined hold around 9% to 10% of the market.

Public/private divide

The private sector continues to be the core source of consulting work in the region. The financial services sector remains the market’s largest, with demand driven chiefly by growing interest in front-to-back digitisation, regulation and data & analytics, which drive the need for technology-led efficiency projects and large-scale transformation, on top of regulatory work. Much of the work in the financial services sector of Eastern Europe is not necessarily driven by local decision makers, because the majority of banks with significant operations in the region are headquartered elsewhere.

In terms of where revenues are growing fastest, however, retail and manufacturing is providing a glut of work for consultants, as clients continue to respond to the disruption caused by ecommerce and the need to update legacy technology throughout the supply chain. At the same time, digital disruption is pushing a growing number of manufacturers to seek external expertise, with manufacturing the second fastest-growing consulting market at 9.7% in Eastern Europe in 2017.  Clients reached out to consultants for help maintaining or updating legacy technology throughout their supply chains, particularly in the automotive industry – but growth in this sector may increasingly also be driven by the aviation segment, with Eastern Europe hosting the continent’s fastest growing aviation industry. There was also strong growth in technology and in media and telecoms, with a growing proportion of this work taking on a more digital feel, particularly from clients further along their digital journey.

Conversely, public sector consulting across the region has witnessed very slow growth. Along with relating to the growing allegations of corruption to hit nations across Eastern Europe, this is also due to governments throughout the region continuing to actively involve themselves in business affairs and adopting increasingly protectionist regulations, limiting the availability of foreign investment in the process. This is symptomatic of Hungarian Prime Minister Viktor Orban, a hard-right populist whose push to decrease migration to the country has seen it become isolated, exacerbating reductions in EU funding to Hungary. With less money to go around, the public sector consulting market grew slowly because of an underlying scepticism about the value for money consultants provide, and a lack of funds to employ them. Going forward, politics will need to remain front and center in the minds of public sector consultants across Eastern Europe, if they are to navigate this challenging market.

Service lines

With respects to service lines offered by consultancies in Eastern Europe, technology is by far the largest and the fastest growing service line driven by continued demand around updating legacy technology and a growing desire from clients to catch up with their counterparts in more digitally advanced markets. Although the region still lags behind Western Europe on the matter, this has seen digital transformation become a key driving force of consulting demand of late. As clients looked to automate tasks to reduce cost and drive efficiencies at both the front and back end, the digital transformation consulting line has become a $44 billion global market, and Eastern Europe is set to continue tapping into that growth in coming years.

Risk & regulatory work constitutes the second fastest growing service line, with clients seeking consulting support to deal with an increasingly heavy regulatory burden in line with the rest of the world, particularly thanks to the landmark GDPR roll-out of the past year. Eastern Europe is also a popular destination for housing shared services, so as a result consultants are often involved in helping remote clients set up locally, providing strategy, real estate and location services.

Robotic Process Automation (RPA) is in demand, as the region looked to maintain its competitive edge as a primary destination for nearshoring activity and shared service centres. Their view is that RPA will enable them to continue to deliver the same service, but at a much faster pace than they were previously able to. This will in turn liberate consultants to work on higher-quality, value-adding outsourcing opportunities (such as risk management) for their customers. However, the industry is not unified on the matter, and a minority of consultants in the region have expressed concern about the impact RPA will have on nearshoring practices. Their main concern is that other parts of Europe may potentially begin to automate repetitive tasks that would have previously been sent to lower-cost destinations in Eastern Europe. When this is combined with rising wages (especially in Poland), the perception is that the nearshoring market in Eastern Europe is under threat.

Commenting on the matter, Magdalena Warzybok of Aon Hewitt noted, “For the first time in years, the nearshoring industry in Poland is not expected to grow.”

Outlook

From the perspective of individual firms, Eastern Europe still sees an entrenched division between global firms and smaller local firms. The Big Four remain the largest players by some distance, thanks to end to end services they offer, while top strategy firms also saw modest, solid growth in 2017. While none of this comes as a particular surprise, given the global dominance of these entities, a worrying sign for Eastern Europe is that its HR consulting market is floundering.

HR firms struggled amid a continued rise in competition for their core services. This is born from the fact large parts of the region, particularly the Czech Republic, have some of the lowest unemployment rates in the EU. The Czech Republic currently hosts 215,000-220,000 open jobs, and a labour shortage to fill these positions has seen demand for HR consultants plummet.

Despite this, Source expects the overall Eastern Europe consulting market to grow at a slightly higher rate in 2018, with at least moderate growth in all regions, although market performance does, of course, vary by country. Consultancy.eu analysis of the data projects a 7% growth spike for Eastern European consulting.