Market Updates | 26th 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.
The leading sectors for professional services firms in 2022
The professional services sector has continued its rapid recovery from the pandemic in 2021, and is forecast to grow by 10% in 2022, but where is this growth likely to come from?
For the last decade, the fortunes of professional services firms have largely depended on growing demand from financial services clients, fuelled by a combination of regulatory compliance and the need to respond to fintech-led disruption. In 2019, the financial services sector accounted for 25% of the global professional services market and was growing at a rate of 9%, slightly down on the years that immediately succeeded the 2008 financial crisis, but still 1-2 percentage points above the market average. However, three factors suggest that this sector has been growing less quickly than the market (8%, compared to 11%) in 2021. The first is that, because the sector only contracted by around 1% in 2020, there’s less pent-up demand here; the second is that the pandemic crisis, unlike the financial crisis of 2008, hasn’t given rise to a new wave of regulatory change, so clients aren’t being forced to spend more on external support on compliance in the way they were after the global financial crisis. Finally, recent research we’ve carried out suggests that only 13% of financial services organisations think that life has returned to normal, and 40% say they’re still having to respond to the challenges of the pandemic.
Taking those factors into account, we think that 2022 will be a better year for the financial services market. A—hopefully—receding crisis will create more space for leadership teams to plan for the future and re-engage with their long-term need to invest more in technology and transformation. Growth in this market is expected to be around 10% in 2022, in line with the market average. Moreover, the sheer size of this market means that that rate of growth will translate into a significant volume of new work for professional services firms—about US$32bn in 2021, we estimate.
But if the financial services sector is unlikely to see the highest growth next year, which sectors will? A glance at the high-level numbers suggest that growth will be strongest in pharma, retail, services and manufacturing—but each of these comes with a health warning.
At 14%, the forecast growth in pharma is the highest of any sector, but this is a very small market and was worth just US$39bn in 2020; which is only slightly more than the incremental growth in financial services predicted for 2021-22, so the dollar value of new work here next year will only be around the US$6bn mark. This is also a sector dominated by a small number of large players: Professional services firms already entrenched in this sector, and those with deep relationships at senior levels and strong M&A skills are likely to do best, as a wave of post-crisis investment creates an array of new options for large and mid-sized clients.
The services and retail sectors are bigger, worth US$90bn and US$77bn respectively in 2020. At around 12-13%, growth here will result in US$25bn in revenues across both sectors in 2022. These levels of growth look better than they actually are, however. In the services sector (which, in our definition, includes airlines and leisure), demand for professional services fell by 21% in 2020, so much of the work here is being driven by the need for services companies to recover ground lost in the immediate past rather than because they’re anticipating future opportunities. As a result, the 16% growth rate we’re forecasting for 2021 is likely to slow to 12% next year. The picture in retail is somewhat brighter, with the mass shift to online shopping forcing clients to adapt their business and operating models to changes in consumer behaviour that are likely to endure: We expect this year’s forecast growth of 15% to come down but remain at a very respectable 13% in 2022.
Demand for professional service support in the manufacturing sector was worth US$188m in 2020, second only to financial services. Historically, this market has seen lower growth rates than the financial services sector, but we’re predicting a slightly better performance (11%) than the latter in 2022. Consumer packaged goods clients remain keen to build direct engagement with customers, and both they and their counterparts in industrial manufacturing face significant challenges and opportunities around climate change and the wider sustainability agenda.
Where should professional services firms focus in 2022? The scale of the financial services sector means that it has to be on the list next year, and for the foreseeable future, but investors will find growth slower than it was 5-6 years ago. The forecast growth in pharma makes it look like an especially attractive market, but it’s one in which incumbent suppliers will do best. If your focus is on the short-term, then there’s a high-growth window of opportunity in the services sector, but better long-term bets will be retail and consumer packaged goods manufacturing, where the opportunities around leveraging new technology are likely to keep growth rates relatively high.