Market Updates | 6th May 2022
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 outlook for professional services by sector in 2022
More than four months into 2022, the growth patterns by sector are becoming clearer.
We’re currently forecasting the global professional services industry to grow by 10% this calendar year, taking the total market to fractionally over $1.2tn. This overall growth is one percentage point lower than in 2021. Although the annual pace of growth remains faster than it was pre-pandemic, that slight softening of demand stems from a variety of causes. Last year’s exceptional growth was partly fuelled by pent-up demand from during the pandemic—and that’s starting to tail off. The ‘Great Resignation’ means that client organisations have fewer people to run special projects; staff absences remain high, leaving stressed and exhausted workforces. Concerns around political and economic uncertainty, epitomised by the Russia-Ukraine war, make long-term planning and investment more challenging. The higher fee rates professional services firms are trying to charge clients to combat their out-of-control salary inflation are meeting resistance in many quarters—the proportion of clients who think that prices should/will fall, although lower than it was six months ago, is still around six times higher than it was before the pandemic. Over time clients will, of course, adapt to higher prices, but growth in demand, which is reaching the limits of its elasticity, is likely to slow later this year.
However, these trends play out across different sectors in different ways. At one end of the scale, demand in the pharma and life sciences sector remains strong, with very little sign that the exceptionally high growth of the last two and a half years will give way to a period of consolidation as client organisations look to assimilate the work done by professional services firms. At 14% forecast growth this year, this will be the fastest growing sector. It is not, however, the largest sector in volume terms—a point we’ve made before in these updates. At $47bn, it represents just 4% of the total professional services market. A combination of needing to adapt to the post-pandemic reconfiguration of online/traditional shopping and coping with supply chain unpredictability means that the retail sector is likely to be the second highest area of growth this year, at 12%. A much larger market than pharma, that will translate into around $10bn more being spent with professional services firms this year.
But around 44% of demand for professional services comes from just two sectors: financial services and manufacturing. The financial services market will, we forecast, be worth just over $310bn this year, an increase of 9%—one percentage point higher than in 2021. Demand is being boosted by faster growth in both the banking and insurance markets, much of which is technology-related as financial institutions finally manage to clear some much-needed space to shift their focus from regulatory driven work to customer experience and digital transformation. But our financial services numbers also include private equity, a market that is now larger than pharma and which is predicted to grow by 14% globally this year. The picture in manufacturing is somewhat different, as the pace of growth is expected to slow slightly here in 2022. Much of this change is due to the tapering effect of pent-up demand. For example, the aerospace and automotive industries both suffered steep drops in demand for consulting during the height of the pandemic in 2020, only to bounce back in 2021. This year’s forecast growth rates—10% in the aerospace sector and 9% in automotive—remain higher than their historic averages before the crisis. This pattern, repeated in other parts of the manufacturing sector will result in growth slowing from 12% last year to 11% this year.
The greatest uncertainty surrounds growth in government and public services, and in healthcare. The rate of growth in government and the public services sector is forecast to be around 7%, which is approximately 1.5 times the level of growth in the run-up to 2020. However, many of the largest professional services firms we speak to on a regular basis are more bullish in their predictions. Our caution stems from three main factors. The first is that much of the “growth” seen in this market during and since the pandemic was a growth in activity more than revenues. Many firms, especially the largest, played an important role in helping governments and other public institutions around the world cope with COVID; some of that work was done for free, and much was heavily discounted. Thus, while the government and public sector is a very busy part of the market, it’s one of the least profitable. Second, much of the work here, both pre- and post-pandemic, is staff augmentation. This is either because there’s a chronic shortage of qualified people locally—the Gulf region being a case in point—or because the public sector has underinvested in its own staff. Either way, the prevalence of staff augmentation will make it difficult for professional services firms to increase their prices. Third, we expect to see some backlash to the heavy use of professional services during the pandemic, especially in mature economies. Hiring apparently expensive outside help at a time governments need to recoup furlough and other pandemic-related costs looks bad to electors.
Prospects for growth in demand for professional services in the healthcare sector ought to be strong: There’s much work to be done in the aftermath of the pandemic, not least for the potential to change the way services are delivered and the use of technology. That’s resulting in many conversations between healthcare organisations and professional services firms, but it’s not yet clear whether those will translate into the very large-scale transformation programmes badly needed in this sector. Privately-funded healthcare has scope to attract significant investment, and it’s likely that this part of the market will see exceptionally strong growth. But healthcare regimes that are dependent on public funding may face cutbacks and witness a failure by politicians to seize this moment to “Build Back Better”. Professional services firms that are well established in this sector are likely to fare best, but others may find it hard to enter and, in some cases, it may not be worth the effort to do so.
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