Main findings on technical consulting

6.1 Sector overview

Technical consulting mainly covers engineering consulting and architectural services. The case study focuses on engineering consulting services, although statistics are mainly available at a higher level of sector classification (NACE 71- Architectural and engineering services, technical testing and analysis). According to Eurostat data, the sector employed just above 2 million full-time employees in 2009 and generated a turnover of around EUR 255 billion in the EU27. ECFA estimates that the engineering consulting sector accounts for about half of employment of the total sector, and about 40 percent of total turnover. The sector was also affected by the economic crisis, as turnover levels decreased in 2008 and 2009.

The sector structure is characterised by the prevalence of both small and very large companies. The number of middle-sized companies is relatively low and the economic crisis has further reduced their number. In most European countries there are many small engineering consultancy firms.The very small companies with only 1 employee (self-employed) are especially common in Italy, Portugal, Hungary, and Belgium, while large companies are especially predominant in the Nordic countries, the Netherlands and the UK, where a trend towards consolidation in the sector started about a decade ago. Large companies (250+) generate almost one third of the total turnover (28%) in the EU 27, and micro-enterprises (<10 employees) account for almost the same percentage, i.e. 23%. The differences in sector structure can be explained by differences in tradition. In countries with a high degree of consolidation (mainly Northern/Anglo-Saxon countries), there is a tradition for strong consultancies with a large degree of responsibility towards the clients (which create large companies), whereas engineering consultants in other countries (typically Southern European countries) usually provide services to large contractors and are thereby traditionally smaller.

6.2 Competitive position

The share of personnel costs amounts to 33 percent of total production costs in the EU in the engineering consulting sector, despite employing mainly high-skilled labour. The figure seems underestimated, as according to EFCA data employee costs account for more than 70% in

Denmark, Sweden, Germany, Finland, and the Netherlands (EFCA 2011). The difference can partly be explained by the fact that in micro-enterprises, payment to the owner is registered under operating surplus and not personnel cost.

The average gross value added per employee was EUR 66,000 in the EU27 in 2009. There are significant differences between Member States, which partly reflect differences in average wage levels. Correcting for these differences, highest productivity levels are achieved in Romania and Bulgaria, while Hungary, Ireland and Italy have the lowest levels. There are some indications that lower productivity may be associated with a smaller company size, but available data are not conclusive.

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6.3 Downstream relations and market conditions

The engineering consulting sector is diverse and involved in different areas of activity, related to e.g. buildings, infrastructure, public utilities, and industrial plants. For most companies in the sector, construction is the main client sector, with transportation, environment and energy being other important client sectors. In terms of the services provided, a distinction is made between specialist engineering consultants (often SMEs) that provide a single service to their client or several services to a specific sector and generalists (typically large firms) that provide multidisciplinary services.

Although there are differences between sectors and countries, the prevailing trend is that customers ask for an integrated process from design to operation (such as DBFO- Design, Build, Finance, Operate), as they want to focus on their core activities. The increased outsourcing by major clients and the increased demand for multidisciplinary services have resulted in larger assignments and contracts. Partly as a result of this development, an increasing number of engineering consultants now covers the entire supply chain and this trend is likely to continue.

Price is also an important factor for competition in the sector. This is especially true for contracts with public clients as the use of procurement rules favour transparent parameters. In order to reduce costs, engineering consulting companies have moved some of their activities to lower-cost countries such as India, although there are also companies that have moved activities back due to problems with culture, distance and differences in perceived quality levels. Outsourcing mainly seems to be applied for standard solutions.

For smaller clients, trust and management of client relations are vital for the engineering consultancies to remain competitive, next to good knowledge and insight into local market conditions, requirements and client needs.

The size of client companies plays a role in the degree of innovation, as innovation in the engineering sector typically takes place in the project work with large (notably private sector) clients. This can be process innovation, linked to the provision of integrated or multidisciplinary services described above, but also technological innovation. The innovation can take place at the request of a client seeking an innovative solution for a specific problem, even if this may be more expensive in the short run. Other types of innovation are not client driven and are often developed anticipating future client demands (several clients). This latter type of innovation is a prevalent trend, and leads to an increasing interaction between science and industry, e.g. through co- operating on framework projects such as the FP7. This type of innovation also benefits clients. Innovations in the area of sustainability constitute an example where industry-science relations have been successful and the innovations have been commercialised by the sector.

6.4 Framework and regulatory conditions

The engineering consulting sector is characterised by a highly skilled workforce. There is a lack of certain types of engineers (e.g. construction, offshore, energy, infrastructure), and this shortage of labour acts as a barrier to the sector’s development. The problem is less pressing for global engineering companies as these companies can often find the required engineers abroad. In some countries there is also a skills shortage. According to EFCA, the EU skills shortage in STEM (Science, Technology, Education and Math) is considered to be one of the main obstacles to economic growth (EFCA 2011). Several initiatives are being introduced to help remedy the situation.

Although national labour standards and regulations shape the sector, local presence is more important than differences in or the level of labour regulation. Nevertheless, there are examples of language skills being used for protectionist purposes. With respect to labour mobility in the EU, companies still face problems. Although engineering consultants qualified in a Member State can apply for the recognition of their qualification in another Member State according to the rules defined in the Professional Qualifications Directive, there are situations where the recognition process lasts up to six months and can cost several hundred Euros together with certification and translation costs.

Knowledge and innovation

As mentioned before, knowledge and innovation can be created in the service company itself as well as in close co-operation with the client. Especially in the case of innovation at the request of clients, it is important to be physically present when developing a new product, service, or process, which is often difficult in a global/international context. A recent study seems to suggest that knowledge management in a company is important for the relation between knowledge-intensive business services (KIBS) and their ability to co-innovate.

Market access: internal market and cross-border trade

While some services can be provided through cross-border trade (e.g. software, product development), in many cases market presence is required as the work needs to be carried out close to production. When operating in foreign countries, companies therefore open subsidiaries to understand the needs of the local clients. The decision whether to establish a company in a country depends on the business climate and local market conditions, and there are differences between EU countries in this respect. Cross-border work in Europe is also still affected by administrative burdens. Outside the EU, countries such as China, the Middle East, Russia and Brazil provide opportunities for the sector. These are particularly being absorbed by large engineering consultancies which are financially better able to deal with the challenges for foreign expansion.

Standards and regulations

The client sector varies and so do the standards and regulations to which engineering consultants must adhere. In general, the standards and regulations of the client sector do not present large barriers to engineering consultants but obviously need to be considered in the project. In the construction sector, which is the largest client sector, Eurocodes were introduced in 2009 as common standards for technical design and construction of buildings and are reported to work well.18

According to EFCA, sector level standards and regulations vary considerably from country to country, but they do not create a major barrier to trade across EU borders. The reason for this variation is primarily to be found in how the engineering consultants and contractors traditionally have divided the work and client responsibility19.

Public procurement is also important for the sector. There are some clauses in the European Public Procurement Directive that support innovation but that could be promoted more, although not all projects lend themselves for innovative solutions. Another issue related to public procurement is that public contract documents are often published in the national language, making it difficult for foreign engineering consultants to bid for a project, although this problem is limited by the fact that engineering consultancies rarely enter a market where they are not present or have a local partner.

18

http://eurocodes.ds.dk/en/what-are-eurocodes/

19

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6.5 SWOT analysis

The following tables provide an overview of the strengths, weaknesses, opportunities and threats (SWOT) for the engineering consulting sector.

Strengths

• Close relationships with clients – “trusted advisors”

• Large companies: Multidisciplinary staff – can be moved to other business areas in times of crisis

• Large companies: Provider of multidisciplinary solutions – can meet the clients’ needs

• Small companies: close relations with contractors

Weaknesses

• Medium-sized companies: lack of ability to provide multidisciplinary services and too large to be a niche player

• Lack of visibility of engineering consultancy services – companies are not good enough to promote

themselves

Opportunities

• Creating innovation together with universities

• Clients become more educated & professional

• Increasing life-cycle and quality of life considerations by clients, thus making it possible for the engineering

consultants to provide services along the clients’ value chain

• Low barriers: relatively open markets and competition (potential for innovation)

• Contractors as clients and partners (especially for small companies)

Threats

• Price competition • Credit crunch • Labour shortage

• Skills shortage / lack of qualified staff • Limited political focus on promoting

engineering consulting as a high- profile sector

• Public clients’ knowledge of engineering consulting services is insufficient and can result in price competition which in turn can reduce the incentive for creating innovative solutions and/or the quality of the solution

7 SWOT analysis of business services: a