Market Updates | 8th July 2022

Economic uncertainty starts to take its toll

“Never send to know for whom the bell tolls,” said the 17th century poet John Donne. “It tolls for thee.” Our last couple of updates have focused on how an increasingly uncertain economic environment appears to be nudging down the rate at which the professional services market is growing. And to reiterate a point we’ve made in previous columns: We’re still forecasting growth in the second half of this year, but lower than professional services firms have been accustomed to during the pandemic.

We can now put some more flesh on the bones of our argument, based on cross-referencing a variety of our client surveys that ask, among much else: What are the external issues most likely to prevent organisations from achieving their objectives, and thus most likely to result in lower levels of investment? Investment, in its turn, drives how much money client organisations are prepared to spend on external support. However, like most numbers about this complex, fast-moving industry, the results require some interpretation.

The headline news is that the biggest threat to organisations’ ability to achieve their corporate goals is the threat of high inflation: Forty-seven percent of respondents said this is likely to have a negative impact, followed by 44% who pointed to the war in Ukraine. Lest we underestimate the lingering impact of the pandemic, 39% still say this is a significant problem for them, with a further 38% who are battling with the supply chain challenges that are the consequence of COVID. Geopolitical uncertainty and the threat of trade wars are a concern for around a third of clients.

However, there’s another way to look at the underlying data, which is drawn from a range of geographies and was gathered at different times. Across the external challenges we asked about, 28% of respondents in Europe and the Middle East said these could have a negative impact; in Asia Pacific, the equivalent number was 45%. Several factors could explain the difference. One possibility is cultural: Japanese executives were the most pessimistic, with two-thirds saying these factors could be damaging, but over years of doing research in Japan, we’ve often found clients there to be cautious. The responses of executives in China are skewed by the 53% who said that COVID-related restrictions are an obstacle, compared to an average of 37% elsewhere. Japan, China, and SE Asia were all surveyed more recently, as more worrying economic data was emerging and new Omicron variants were starting to make their presence felt.

What of the US, which we surveyed between EMEA and Asia Pacific? The market is important not only because of its size—it accounts for almost 40% of the global market—but because it’s often a harbinger of change. Here, 48% of clients were concerned about the external barriers we listed, second only to Japan, with 54% of clients saying that high inflation was likely to have a negative impact on future investment, and half that the situation in Ukraine, the supply chain challenges they face, and growing geopolitical tensions could also do so.

All of this has a direct impact on expenditure on professional services. Clients turn to external support when two factors overlap: They have money to invest, and they’re willing to invest at least some of it with third parties (to buy, rather than build internally). For growth in demand for professional services to occur, both have to be true, otherwise we have clients who are either investing in doing the work themselves, or willing to use outside help but having little or no budget to do so.

Both factors are still in play today: In the US, 55% of clients say that their expenditure on consulting services will be higher this year than last—and that comes on top of exceptionally high growth in 2021. However, this is down on the 68% who said their expenditure would increase last year. The willingness to use external support remains very high: For example, of the third of US clients who are actively planning major investments in productivity improvement, 81% of them would expect to use consulting support, up from 77% last year. However, at the same time, the proportion of organisations saying they’ll invest in this space has fallen from 41% to 32%, even though—given the macroeconomic environment—we might have expected the proportion investing in this area to go up.

Put all this information together, and it looks as if, in the second half of 2022 and in 2023, clients’ willingness to use external help will remain very high, but their level of overall investment—including money to spend with professional service firms—will be lower. Responding to this, professional firms will need to do three things. They should ensure that they’re rapidly adapting their services to match clients’ changing priorities, as this will be one of the key ways in which they respond to uncertainty. They should be able to demonstrate to clients who might be tempted to use their own, in-house resources why spending money on external support will result in a better, faster solution. And, finally, they must point to their track record of having delivered tangible results in the past. Clients, facing difficult questions of how best to invest, will be looking for all three.

If you are a journalist or work for a news organisation and would like to reference our data, please get in touch with David Pippett at david@proservpr.com