Market Updates | 11th June 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.
Important lessons from Australia
Early into the crisis, early out of it: What does Australia’s professional services market tell us about future trends?
We estimate that the total professional services market in Australia was worth just under US$28bn in 2020; small in relation to the global total (just over 3% of the worldwide market), but high in proportion to the size of the Australian economy as a whole. A swift and rigorous response to the pandemic, aided by geographic isolation, a willingness to accept unprecedented internal controls, and prolonged lockdowns in some cities last year contained its economic impact. We think Australia’s professional services market shrank by 7% in 2020, compared to an average global contraction of 13%. Growth this year is expected to be higher (8%) than its historic norms as Australian firms leverage solid domestic growth with improving economic growth in neighbouring geographies.
Compared to pre-pandemic levels, we’re forecasting significantly higher growth in Australia’s healthcare and public sectors, and in retail. There’ll be stronger growth, too, in the primary resources sector—still a disproportionately important market despite recent diversification.
However, investors in the Australian market will need to pay at least equal attention to the trends at the line of business level, as it’s here that we think the biggest opportunities—and challenges—of this market become apparent.
Just under a fifth of revenues in the market are generated by technology work (including cybersecurity), and this market is expected to grow this year and next in the region of 13%. Australian private and public sector organisations were already investing heavily in digital transformation in 2017-19, a trend that’s only been amplified by the upheaval of 2020. The pandemic and the bushfires that preceded it in late 2019 mean that risk and ESG-related services, which account for a further 12% of the market, is also likely to grow at above average rates. We also expect high growth—around 14%—in the deals space. Deals will also stimulate demand for some tax and legal services, but there are other parts of these services that are being commoditised and automated, which will pull down their overall growth rates.
Services such as strategy, operations, and HR & change consulting, which have traditionally been the sole preserve of consulting firms, are now being offered by other types of firms, attracted not just by the high margins traditionally associated with this type of work, but also the ability to exert greater influence over the upstream leadership agenda. We estimate that these services account for approximately 8% of the Australian market. Overall, we think that they’ll grow at about 8% this year and next, but that headline figure masks higher growth in strategy—partly the result of higher transactions activity, but also of clients revisiting their business and operating models in the aftermath of the crisis—and somewhat lower growth in operations, as clients who invested heavily in this area at the peak of the crisis seek to consolidate the lessons learned and build up their own in-house capabilities.
But this last comment hints at the factor most likely to limit growth in the Australian market.
That clients should prefer to be self-sufficient isn’t a new phenomenon: It’s not untypical for organisations that have made especially extensive use of external support to experience a certain amount of professional “fatigue”. But client self-sufficiency puts extra pressure on the labour supply, making it harder for professional service firms to maintain their competitive advantage—having and keeping better people than their clients. The rapid pace of technology change is exacerbating this, creating acute skills shortages in specific areas for both clients and suppliers alike. So, too, does the fact that some highly qualified people, fed up with constant Zooming, may decide not to return to the workforce. Moreover, the “war for talent” was already especially intense in Australia before the crisis, with many Australian nationals seeking work experience abroad after university, and professional services firms highly dependent on employees from other parts of the world choosing to base themselves in the country for two to three years. Clearly, travel restrictions have prevented Australians from travelling abroad to work, but this isn’t enough to offset the loss of overseas workers now that demand is growing. Finally, as clients expect more in-person engagement and with many other major professional markets, such as the US, seeing rapidly-rising demand, we should expect to see more “protectionism”. Branches of professional firms in local countries will become less willing to help their colleagues in other parts of the world.
Australian professional services firms can (and some already are doing so) invest more in the education system, increasing the number of people entering the workforce with the types of skills needed. But this will take time. Greater automation of the more routine tasks still performed by junior people is already underway and will certainly help a little, though it won’t help with the shortage of experienced people the Australian market is currently experiencing. Increasing fee rates would allow firms to offer more money to potential recruits, but the salary inflation will start to spiral upwards. Acquisitions can provide scarce capabilities, so we should expect to see more large firms snap up smaller firms than they might have considered in the past—McKinsey’s acquisition of 40-person strong Hypothesis being a good example—and may pay more for the privilege of doing so. Ecosystems of partners may create some structural flexibility, but most alliances aren’t exclusive. With all this in mind, a better and more likely short-term solution will be to change the nature of work; developing tools and innovative processes that reduce the amount of time required. Clients would love this: Many organisations have emerged from the crisis with the belief that they can do more, and more quickly, than they had imagined. But it would be better for professional services firms, too, as it would allow them to meet demand without compromising their margins.
And, as other geographies start to experience the same constraints on growth that Australia does, it’ll become the model elsewhere, too.