Professional Services: New opportunities, threats and working practices

Change, uncertainty and perceived risk drive demand for Professional Services and COVID has delivered them all in spades.

The sector’s clients have, on the positive side, seen new markets and routes to market open up (such as digital, home delivery) and existing markets reinforced (healthcare, infrastructure). On the negative side, clients have seen established markets shut down (retail, travel, hospitality) at least temporarily, with some possibly changed forever (office space).

At the same time, working practices had to change dramatically with home working and social distancing. IT infrastructure and staff ability were put to a severe test.

At the beginning of the pandemic, it felt like all the business norms, established over decades if not centuries, had been thrown up in the air. Rather than wait for the new norm to settle, the best companies sought advice and then acted on it, quickly.

Consultants advised on how to address the market changes and deliver services remotely.

Lawyers advised on achieving structural and financial changes and dealt with the inevitable disputes that sudden change brings. Reflecting many of these changes, we recently published a report on the rapid growth of Legal Tech.

Recruiters sought to find the skills that in some instances were already hard to find but were now critical (digital, data science, cyber security). Again this is an area we've looked into at length. Our last report on M&A trends in the Human Capital sector can be dowloaded below.

We also have an online roundtable event upcoming - 14 September 2021 - which will look further into current trends in Human Capital and Recruitment. To register your interest and find out more, please email us.

Marketing Services had to deal with markets either rapidly expanding or contracting alongside buyers whose habits had suddenly changed in both what they could afford, the way they made decisions and how they could be reached.

Forecasts set to rise

With the exception of Recruitment (where analysts are used to dealing with the impact of rapid changes in market conditions and company news flow is more frequent and detailed), sales growth forecasts are similar or lower than that historically achieved pre-COVID. Legal Services stands out with sales growth forecasts at 50% of historic levels.

Acquisitions, which are generally not forecast, will help fill the gap, but we believe organic upgrades are also coming as Boards become more confident in their ability to deliver against new opportunities. This will in turn support acquisition activity.

Andrew Jeffs, Partner, finnCap Cavendish, comments: “The key theme of M&A in professional services has been focus.  Focus on growth areas where the market for talent is tight and M&A offers an alternative route.  This can be positioning for next phase of the economic cycle like Begbies’ acquisition of insolvency specialist David Rubin or tooling up for the ESG megatrend as with McKinsey’s acquisition of Vivid and Planetrics.  At the same time KPMG have followed the sale of their pensions arm in 2019 by carving out their restructuring arm as Interpath with backing from HIG.  All parties in that deal clearly believing the sum of the parts will be more than the whole with conflicts disappearing.”

The highest average historic sales growth has been generated by Legal Services and Consultants, support by rising staff numbers.

High value-add

Generally, these high margins are forecast to remain at pre-COVID levels, with Consultants earning the highest, with an average EBIT margin of 22%.

While we expect strong sales growth, Professional Services is not a sector with high operational gearing. Generally, additional work requires additional staff, who effectively generate a similar margin to existing staff.

Margins will be supported by lower travel costs for those companies that adopt a more flexible and virtual operating model and, over time, reduced property/office costs for those that match new working practices with a smaller requirement for physical space.

On the negative side, the requirement for additional staff and talent to support sales growth at time when there is a shortage of key skills and rising staff churn post an artificially low period during lockdown is likely to put pressure on staff costs.

However, we believe the high level of value-add will enable additional staff costs to be passed on. With the exception of Engineering Consultancies, this has generally held true in the past.

Guy Hewett, Research Director – Support Services, finnCap Capital Markets, comments: “The pandemic has provided a significant opportunity for Professional Services companies to prove their value to clients, cement ‘trusted adviser’ status and grow their businesses. The team at finnCap is ready to discuss how you can capitalise on this opportunity and support your growth plans if you would like to get in touch.”

This is an excerpt taken from our most recent research note Support Group – finnCap Support Services Quarterly Sector Note, which is available in full to institutional subscribers to our Research Portal.