Market Updates | 16th April 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.
How fast will the public sector market for professional services grow in 2021?
It’s not a trivial question: We estimate that, globally, out of a total professional services market worth just over US$1tn in 2020, public sector work accounted for around 10% (US$106bn). The public sector consulting market, including systems development and other technology implementation, was worth US$61bn; taking a narrower, advisory definition brings the market down to US$23bn. Whichever way we cut the numbers, it’s one of the most important professional services markets—especially now, more than a year after the pandemic hit.
Outside of technology and security, the public sector professional services market has been viewed as the poor cousin of its private sector equivalent over the last decade. Complex purchasing rules, extreme price-sensitivity, the reliance on contract labour in mature markets, and a schizophrenic attitude to outside help have all contributed to lower-than-average growth in recent years. 2020 changed that perception.
Unquestionably there was far greater use of some firms in some areas. The bigger the firm and the more established its relationships within the public sector, the more likely it was to benefit from huge demand for support in executing COVID-driven programmes of work. Not dissimilar to the situation during the 2008-09 financial crisis, national governments have turned to third parties for help with a whole array of activities they have simply had neither the capacity nor capability to do. Unlike the previous crisis, where most of this activity related to the financial system and its regulation, the pandemic has required a wider range of support. The Big Four firms, partly because of the role they played previously, have benefited the most, but the scale and nature of what’s been required has meant that they’ve had to work alongside other suppliers.
One of the results of this surge in activity is that almost every firm we speak to has very aggressive growth plans in the public sector. We don’t think they’re wrong, but we do advise caution.
They’re right for two reasons. First, the crisis isn’t over and its long-term implications for governments, healthcare systems, etc., haven’t yet been thought through. When that process starts, it’s going to need the input of a wide range of experts, including those in professional services firms. Second, the scope of what’s defined as public sector work will increase, reflecting the extent to which governments have had to step in to support different parts of the economy and may wish to intervene more in the future (mandating diverse supply chains in some manufacturing sectors could be the equivalent of ensuring sufficient liquidity in the banking system post 2009).
Against these arguments will be the pressure public sector organisations will be under to cut costs: Despite low interest rates, the debts racked up by national governments to prevent economic collapse over the last year will have to be paid at some point. In some Western markets, there’s already public disquiet about the extent to which government support may have become a gravy train for the private sector. At best, that will intensify pressure on fee rates; at worst, it will result in explicit targets for reductions in expenditure. Procurement rules that were waived at the peak of the crisis will now be reimposed and strengthened, which will slow decision-making down. Money that’s required to support post-pandemic initiatives will have to be taken from planned projects in other areas.
Ultimately, however, it’s not so much the growth rate of the public sector market that will matter in the next 12-14 months but the types of firms that will benefit from it. Professional services firms tend to see the world through the lens of their own services and by looking at their traditional competitors, but many of the services that public sector clients will need in the future will test such traditional barriers. Our analysis of the market suggests that more than a third of revenue comes from technology-related firms (e.g., systems integrators, technology consultancies, software engineers), followed by audit, tax, and accounting firms, and then legal firms. We expect some of these firms to do better than others: Management consulting, technology, and research firms will all grow more quickly than the public sector average, with legal firms doing especially well.
To return to the question we posed at the outset: Taking all the above into account, we’re currently forecasting that the total public sector professional services market will grow by 7% in 2021, compared to 2020—significantly higher than pre-crisis levels, but still lower than the market as a whole (11%). However, we also think this growth will be unevenly distributed. How fast a firm grows won’t simply depend on the market but on the type of firm it is.
