Market Updates | 20th August 2021

The pandemic is accelerating the pace of change right across the professional services sector, amplifying pre-crisis trends as well as triggering entirely new ones. We’ll be keeping tabs on these over the coming months: We’ll be reporting back on what clients are telling us and how we see different segments of the professional services sector perform, as well as highlighting emerging opportunities and challenges. As always, we’ll be taking a fact-based approach. Our market sizing data comes from our unique model of the professional services sector, with more than $1tn of revenues broken down by sector, geography, and capability. Our forecasts are constantly updated to reflect the latest market data we have available from firms and their clients. Client data comes from our rolling programme of quantitative research and interviews.

The post-pandemic financial services market

The financial services market (which in our definition comprises banking and capital markets, insurance, investment and wealth management, and private equity), generated around 27% of all professional services revenues globally in 2020—US$286bn out of a US$1,066bn total. Such a sizeable market inevitably has an influence over the professional services market as a whole. Trends starting here have reshaped other markets in the past—but will that be the case in the future?

The dominance of financial services goes back 20 years, and has been fuelled by successive waves of new regulation that have required both specialist skills and extra pairs of hands to implement. What began as a capability-driven market for most professional service firms (they had the expertise to interpret the regulation and work out what client organisations needed to do) rapidly converted into a capacity-driven one. As time passed, financial services clients increasingly wanted to redirect their senior executives’ attention and budgets towards other activities, which were aimed at helping their organisations grow and/or become more efficient. And they were happy, as a result, to leave the bulk of the implementation of regulation to third parties.

The financial crisis of 2008-09 created new rules and breathed yet more life into this market: Throughout the last decade, the financial services market for professional services firms has consistently performed better than the market as a whole. But, even before the events of 2020, signs of change were on the way: Clients we spoke to were frustrated at their inability to invest more in digital transformation—insurance companies in particular were woefully behind this specific curve. They were also trying to contain their burgeoning compliance-related bill by forcing fee rates down. What they’d liked to have done was to automate more of this work, but the amount of work to be done simply keeping their heads above the regulatory waterline meant that the opportunities to take a step back were few and far between. As a result, demand for professional services in the financial services market grew by 9% in 2019, just one point above the global average.

The irony is that it was this same regulatory burden that prevented the conversion of pre-existing client frustration into swinging cuts during the pandemic. Financial institutions may have hated spending money on external support around regulation—but they couldn’t afford to stop. Their spending on professional services only contracted by 1% in 2020, compared to a global contraction of 6%.

But the big question is, what is next for this market? A better performance in 2020 means we expect less of a bounce-back this year, with growth not quite returning to pre-crisis levels: 8% against an overall professional services market that’s now forecast to grow 11%. 2022 promises to be slightly better, with financial services performing in line with the market as a whole (10%), but thereafter we anticipate that its annual growth will be slightly below average.

We would attribute this lacklustre performance to three factors.

The first and most obvious reason relates to risk & regulatory work, which is a hugely important part of the professional services market in this sector, totalling US$38bn in 2020—and that’s just the tip of the iceberg. Regulatory change has also been a very significant driver of other types of professional service work: A further US$45bn went on legal services and US$96bn on technology work, some of which will have a regulatory component to it. Indeed, it’s not untypical for clients we interview to say that around 80% of the external help they buy is driven, directly or indirectly, by regulation. This crisis hasn’t triggered the same wave of financial regulatory reform that past crises have—and it only takes a small reduction in regulatory pressure to have a material impact on the size of this professional service market.

The second issue is a lack of innovation. It’s tempting to blame regulation here, too, because it not only limits the amount of headspace any senior executive is likely to have, but because it also creates barriers to entry that lead to complacency. The prospect of crossing a threshold that would make new fintech companies subject to greater regulatory stricture has been a very effective deterrent, discouraging those fintech companies from taking on bigger institutions. Moreover, regulation meant most financial services companies weren’t subject to the same level of “forced innovation” than many other sectors were. As a consequence, their senior executives have missed out on a once-in-a-generation chance to make radical change at an accelerated pace. All this is in stark contrast to the pharma and healthcare sectors where we expect innovation—in combination with risk & regulation—to drive up the use of professional services. Our research suggests that the gap in future performance between executive committees that seized the pandemic as an opportunity to innovate and make change, and those crippled by uncertainty, will be huge.

And this leads me to my third and final point, that the financial services sector, especially in banking and capital markets, is likely to be a less homogenous professional services market going forwards. It’s likely that a minority of institutions will seize this moment to push through changes—and that these will be by far the biggest spenders on external support.

Professional services firms will be able to enjoy higher-than-average growth in this sector, but only if they build the right relationships.