Global business pulse
While the pandemic has certainly tested professional services firms, our global business pulse shows they have responded with agility, evolving their services and business models to meet the impacts. In this article we explore the pandemic’s ongoing impact and how firms can continue to drive forward despite the economic uncertainty.
Covid-19 has tested professional services firms, forcing them to implement remote working at scale, prepare for a potential reduction in their clients’ revenues, and adjust their business strategies to rapidly changing market conditions and client behaviours.
Nevertheless, our new index tracking the health of the mid-market businesses finds that while the impact of coronavirus has been wide, it is perhaps not as deep as anticipated. And professional services firms have performed relatively well in the face of considerable challenge. More than a fifth (22.3%) anticipate they will deliver more work and therefore grow their revenues for 2020, with 7% anticipating an increase of 10% or more. This makes professional services one of the three top-performing sectors in our index, along with technology, media & telecoms and oil & gas.
As markets recover and clients shore up resilience, advisory work is driving growth.
“Most professional services firms have held up,” observes Sean Denham, partner at Grant Thornton US and global head of professional services. “From the end of March into July, there was a dip in certain non-compliance advisory disciplines. When large companies were dealing with Covid, their first reaction was to press the ‘pause’ button on any and all possible spend. But companies with revenues of over $200m are now getting back into their buying habits. They have goals to meet and they need help achieving them. That’s where professional services firms come in.”
Tim Klatte, partner at Grant Thornton China, notes that many SMEs in China were forced to shut down temporarily or lay off workers during the first two quarters of 2020 as they struggled with interrupted cash flow and an inability to recover from lockdown. This trend rebounded in the first half of Q3, and the Chinese economy looks set to continue its recovery in Q4.
“The need for services from professional firms has returned,” says Klatte. “It is a bellwether of hope for industry, since recovery has taken place in an orderly way with government-led instruction.”
Large companies globally are particularly keen to invest in the implementation of enterprise resource planning (ERP) systems, which will enable them to integrate their people, processes and technologies and manage their businesses more effectively. They are also making use of new Covid-19 resilience-related offerings from advisory firms.
Consultancy firms have adjusted their business models swiftly in response to the pandemic, taking existing offerings and enhancing them to meet companies’ current needs. These enhanced client offerings include cashflow forecasting and modelling, negotiation support with banks, and human capital advice, including on compensation and workforce reductions.
The crisis has affected companies of different sizes in different ways. Denham notes that companies with revenues of $100m or less have tended to feel the impact more than their larger counterparts – often because they didn’t have adequate technological infrastructure in place before the pandemic broke out. As a result, they are finding it harder to recover, which inevitably has a knock-on impact on the professional services firms that serve them.
At the same time, ongoing challenges, especially in certain industries, are weighing on the broad business services sector, which includes organisations from marketing agencies to architectural firms. Commercial real estate, for example, has been dramatically affected by the crisis with many projects cancelled or paused. This impacts the architectural firms that had been hired to design these projects. It is telling that just 12.3% of business services firms in our index expected their revenues to grow in 2020, while 16.7% expected them to fall by up to 9%.
Due to the varying conditions across the market, it is essential that professional services firms closely monitor the buying patterns of their clients. Alongside regular market monitoring, more proactive communication with existing and prospective clients will allow them to align their services with where the opportunities lie, both today and in the future.
Encouragingly, the pandemic has highlighted the financial resilience of professional services firms. More than a quarter (27.8%) say they can continue to trade using existing funds without needing to cut costs or restructure.
Peter Gamson, partner and head of professional practices at Grant Thornton UK, also notes that many firms have reported improved working capital management. As one senior partner put it: “It seems odd that it took a global pandemic for our fee earners to up their game on working capital management, but we will take that as an outcome.”
Nevertheless, as business leaders increasingly view economic uncertainty as a constraint, they remain cautious about the future. Nearly half (46.1%) have revised their annual budget and/or postponed or cancelled new investments. More than a third (37%) anticipate a decline in their revenues over the coming year.
Denham believes there are a few reasons for this caution. Amid concerns about falling demand and economic uncertainty, companies are continuing to evaluate which of their requirements are ‘needs’ versus ‘wants’. This influences when, and how, they engage professional services firms.
Caution is also linked to the ongoing health threat posed by the virus. Here, China is setting a powerful example. Klatte says: “The stringent standards implemented to contain the spread of Covid-19, including omnipresent temperature checks and the use of health QR codes to provide instant responses to any potential cases of infection, resulted in China leading the way for other countries, both in the region and globally. They’re defining best practice to mitigate another outbreak.”
The ongoing fear of fresh outbreaks means there is understandable qualified pessimism about the future for many. But there is also cause for optimism. Certain skills, such as audit and legal, will always be highly sought after by companies for compliance work. Furthermore, professional services firms offer specialist expertise that can bolster companies’ internal resources during troubled times.
“The best businesses in the world know they don’t know everything,” says Denham. “So, they look to advisors to help them. They want the best thoughts, the best talent and the best minds. Often these will come from outside the organisation. The business model of large companies is often predicated on consultants. They need third parties to help them continue to run their business.”
A major advantage that professional services firms have over businesses in other sectors is their ability to pivot quickly as circumstances change. They tend to be less levered than many sectors and they don’t have large amounts of cash tied up in inventory. Instead they rely on human capital, which they can scale up and down according to their demand pipeline. They can also reskill their people to focus on new areas of demand.
Gamson notes that many firms have altered their business model since the last recession to allow them to more readily redeploy senior skills from one part of their business to another. “They don’t face the challenge that an entire team of, say, transaction support specialists are ‘sitting on the bench’,” he says. “This time round, those individuals have more easily switched to working with restructuring and insolvency colleagues on in-demand advisory work.”
In Australia, professional services firms have responded to Covid by reducing their overheads and looking to lower the cost of their most valuable asset – their people. “Equity partner draws were reduced, pay increases and bonuses were deferred or cancelled, and staff were asked to take up annual leave,” says Conor Farley, partner at Grant Thornton Australia. “In some cases, staff accepted lower pay with or without commensurate reduction in hours.”
According to the index, 27.7% of professional services firms have either taken or plan to make tough staffing decisions as part of their Covid-19 strategy to ensure business continuity and viability. These include staff redundancies, using governmental support mechanisms, reducing pay and offering unpaid leave. “Professional firms have looked at their cost of revenue and they have made adjustments to ensure their cash flow is strong enough to support their business,” says Denham. “Human capital has the ability to flex much easier than other industries.”
He points out, however, that human capital management carries high reputational risks if it isn’t handled sensitively. The firms that are most likely to flex successfully will be those with a strong culture, and which have built up trust and goodwill among their employees. Indeed, even in these difficult times, firms need to demonstrate integrity and embed their core values in their DNA. A firm’s culture can be its shop window to clients and its biggest recruitment and retention tool for its people.
To date, many professional services firms have managed to navigate the Covid-19 crisis without drastic implications. Their strong and increasingly diverse leadership teams, sound balance sheets, innovative offerings, technology investments and resilient business models have allowed them to flex their human capital effectively.
In China, professional services firms are seizing the adjustment opportunities that have arisen with the early nationwide resumption of work and the reopening of the economy. Meanwhile, in Australia, many professional services firms have moved seamlessly to remote working, enabling partners and staff to continue to deliver services while working from home. “Australian professional services firms expect to deliver more services digitally,” explains Farley. “With more of their people working from home than before, investment in technology and cybersecurity will gain further momentum.”
So how can professional services firms continue to flourish despite the economic uncertainty? Our index found that professional services firms are already making detailed plans in relation to workplace safety, financial resources, leadership and people management. Denham also anticipates further consolidation in the market as high-performing professional services firms take the opportunity to make acquisitions – potentially for an attractive price. “This crisis could certainly accelerate deal-making,” he concludes. “I think the companies that were prepared, and have an acquisitive mindset, will drive deals in the sector.”
In reality, Covid-19 has accelerated many of the changes that were already disrupting professional services firms at the start of this year. Firms have responded to the pandemic by further harnessing the power of technology, re-evaluating their talent proposition, and focusing even more acutely on the management of reputational risks. Now, as they prepare for likely challenges ahead, they should also be rethinking their business models to ensure they have the financing, skills, tools and pricing structures to capitalise on what is likely to be an era of opportunity, as well as a period of extended disruption.
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Please take a look at our methodology section if you’d like further details about the nature of the index before reading further.
Visit Recovery through resilience to read more about the characteristics businesses will need to move from crisis management to restoring and rebuilding.
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