Market Updates | 12th November 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.

What price recovery?

Previous economic crises, as they’ve played out across the professional services sector, have almost always had a negative impact on average fee rates, irrespective of the strength of the recovery. The signs now are mixed at best.

The pricing of professional services is both simple and complex. In theory, a firm would set its prices based—like a factory—on inputs, although in this context the raw materials are people. A typical firm would have charged out people based on their salaries plus a hefty mark-up, giving them a price point they considered to be commensurate with their status and similar position to those firms they considered to be their peers. There were—as one client we interviewed a decade ago memorably put it—three types of professional services firm: The extremely expensive, the very expensive, and the expensive—and this client, like most, had a very clear idea of which firm fell into which category. However, the resulting rate card was a price anchor, designed to set expectations among the uninitiated, and it was more honoured in the breach than the observance. From the client perspective, the price they expected was determined by prior experience of similar projects: Three-quarters of clients have already decided how much they’re prepared to pay before they issue an RFP—the rest is negotiation. This means that, when professional services firms cut their rates during a crisis, it’s very hard for them to put rates back up when it’s over: Clients’ memories are short and, in any case, the fact that firms have been able to drop their prices is taken as evidence of their margins being too high to start with.

Plummeting demand in the spring of 2020, combined with a genuine desire to help clients in their hour of need, resulted in widespread discounting and pro bono work. And it’s worth noting that, for a discount in professional services to have an impact on client purchasing decisions, it has to be significant, usually around 30%—so the discounts weren’t small. Clients caught on, and many began asking firms for their “best COVID rate”. Increasing demand by the fourth quarter of the year had stabilised the situation somewhat, but the professional services industry was still left with the fallout. There were even tentative indications that clients accepted that the price cuts they’d received were unsustainable, with the proportion expecting a reduction falling from around 70% to around 40%. But that’s where the improvement appears to have stopped. Research we carried out in October 2020 indicated that 38% of clients expected fees to fall; research we’ve just completed this year, puts the figure at 43%. This suggests that, despite the rapid recovery in demand (we’re currently forecasting the total professional services market to grow by 11% this year, more than offsetting last year’s 6% contraction), pressure on prices remains intense.

Our research suggests three reasons for this. First, some suppliers have succeeded in putting their fee rates back up, and that’s provoking a backlash among clients, many of whom are still dealing with the financial repercussions of the pandemic. Second, clients continue to harbour deep concerns about the value firms create—a subject we’ve covered before in these updates—which makes them resistant to the idea of paying more. Third and most importantly, clients don’t yet appear to be linking a general shortage of specialist skills to the prices they have to pay for a specific piece of work. In our recent survey, senior buyers of consulting services were asked to say which two factors were most likely to persuade them to pay a premium price. The most important factor was specialist expertise, cited by 36% of respondents. Asked why they thought prices would fall, 56% pointed to their belief that many firms could do the work involved.

These statistics go, we think, to the heart of the problem facing the professional services sector where post-pandemic pricing is concerned. The aftermath of this crisis differs from previous ones because, while clients have been initially amenable to firms putting their rates back up after unusually high discounts last year, they see no reason to allow prices to return to their previous levels because, they think, there’s a plentiful supply of high-calibre talent. One in five firms is turning away work because they’re too busy and one in three clients (in the US) say that they’ve abandoned projects because suppliers didn’t have the right skills—or, more precisely and quite tellingly, the right skills at an acceptable price point. But the experience of the talent shortage isn’t sufficiently widespread for clients to see a consistent pattern: Indeed, every time they succeed in having a short-list of firms enthusiastically pitching for projects, that constitutes further evidence to them that there isn’t, in fact, a talent crisis.

This doesn’t bode well for the professional services sector. While it may be possible for some firms to push up their prices, and for certain skills (cybersecurity, for example) to be both so important and so scarce that they unquestionably have a premium price point, average fee rates going forwards are likely be less than they were before the crisis. Firms could try to change clients’ views by going public with their lack of capacity/capability, which risks losing work to others, or to put up prices and risk clients buying less. The only effective solution will be greater specialisation, making it clear to clients the precise skills involved and their scarcity/worth—and that will require long-term change and investment.