Market Updates | 1st October 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.
Delivering a more tangible professional service
Post-crisis, 50% of clients would like to see more consulting work delivered as a managed service—but will this help or hinder the industry’s recovery?
Definitions of what a “managed service” is in a professional context differ widely. Historically, it’s been a variant of traditional outsourcing, in which all—or a significant part of—a business function is handed over to a third party. More recently, the term has been used to describe how conventional consulting work—as well as work done by clients themselves—can be replaced by a combination of software, proprietary data, and deep expertise. Typically, this newer version of a managed service focuses on delivering a specific business outcome (rather than a project output); involves repeating processes that rely on specialist knowledge; and extends over a small number of years (not the decade or so usually associated with outsourcing). A good—and very topical—illustration would be tax consulting: Although tax experts will still be called in for very specific, important issues, clients are exploring approaches that involve the bulk of routine tax work being delivered as software, supported by a team of advisors.
From a client point of view, the attraction of a managed service is that it’s more tangible—both in terms of the way in which the service is delivered, and the results it generates. The last 18 months have only served to increase interest in this model: The mass shift to remote working during the pandemic resulted in more than 90% of clients scrutinising their consulting spend more carefully and paying more attention to a firm’s ability to deliver measurable results. For suppliers, there are two crucial advantages in a managed service: It promises annuity income, rather than time and materials payment terms, and it creates opportunities to replace rules-based processes with software, thereby increasing margins.
Fuelled by interest from both the demand and supply sides, 50% of clients we surveyed across 15 major markets say they expect an increase in the proportion of consulting work delivered as a managed service. A further 34% expect to see more embedding of software tools in the consulting process, and 33% that more consulting work will be automated.
But consulting won’t be the only part of the professional services market that will be impacted by this shift. Focusing exclusively on managed services as we’ve defined it here—the replacement of traditional consulting-style work with a combination of software, data, and expertise, and excluding large-scale, decade-long outsourcing deals—we estimate that around 7% of all professional services revenues are now being earned in this way. Around a quarter of the market is in financial services, where risk & regulatory work clearly lends itself to this style of working, and a further 16% of work is coming from the innovative technology, media & telecoms market.
But the more interesting picture here is around future growth. Based on the research we do with both the demand and supply side of the market, we estimate that the managed services delivery model—once the immediate post-crisis recovery period has passed—will grow at roughly twice the rate of traditional, consulting-style work.
Few people in the consulting and broader professional services sector doubt the potential for growth in the managed services space, but there are four caveats.
First, compared to the conventional delivery model, the absolute size of the managed service market is still quite small: Percentage growth data looks impressive, but some firms will find a better return in increasing their share of bigger, lower-growth, markets.
Second, clients’ intentions don’t always translate into practice. To ensure that clients do, in fact, buy more managed services, professional services firms will have to demonstrate that their managed services offerings are better than traditional ways of working. From the client perspective, the key value of a managed service is that it will be transparent; that their own staff will be more self-sufficient even while they retain the ability to get expert advice; and of course, that it delivers proven, measurable results. Not many of the offerings that are currently positioned as managed services tick all these boxes.
Third is the issue of pricing. This may turn out to be less of a problem than was feared 2-3 years ago, when clients were saying that they’d expect a managed service to be cheaper than conventional consulting work because fewer people would be needed. The pandemic seems to have changed that thinking: Clients we speak to now think that the use of embedded software tools, for example, is a key reason why they’d be prepared to pay more.
Finally—and most contentiously—is the issue of cannibalisation. If managed services (again, using the narrow definition we’ve adopted here) replace existing work then the market as a whole won’t grow: The consulting and wider professional services sector would in fact shrink, much as we saw in 2016-18, when the rapid growth of digital transformation work absorbed significant proportions of other consulting services. For the moment, our modelling suggests that won’t be the case: Both traditional consulting-style work and managed services will grow, our premise being that the innovation that comes with a well-designed managed service will stimulate client demand, encouraging them to replace some of their own, in-house processes with managed services—as is the case with tax services at the moment.
To answer the question we began with: Client interest in managed services is likely to help the market’s recovery. Longer term, the broader professional services market will need to avoid cannibalisation, but that will depend on constant investment and innovation by the supply side.