Market Updates | 25th 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.
Operational improvement services
At the heart of the professional services sector is the belief that smart people with specialist expertise can improve the way that organisations work. But is operational improvement in need of improvement?
Historically, the core of operational improvement work, which covers everything from benchmarking to supply chain management, via cost-cutting and process redesign, has been consulting-style work. Even today, operations consulting accounts for US$26bn out of a US$185bn market, or 14% of the total. Only risk and technology are larger markets.
But it’s the forecast growth rate that’s important here. Before the crisis, operations consulting was tracking the market, but—counterintuitively—it underperformed during the height of the pandemic last year, contracting by around 15%. We say “counterintuitively” because, during a crisis, you’d expect demand for this type of work to grow—and it did, but only in specific areas, such as cost-cutting, and growth here was more than offset by the contraction in more discretionary areas. Compounding the problem, the rate of recovery this year looks set to be slower than the market as a whole, at 6% compared to 10%. Other lines of business that saw substantial drops in 2020 are expected to rebound more decisively, partly as a result of pent-up demand, and partly because they’re growing back from smaller bases. Data & analytics work, for example, which many client organisations viewed as a nice-to-have last year given extreme levels of uncertainty, is expected to grow at 11% in 2021, having shrunk by 16% last year. Although we anticipate the growth in operations consulting work picking up further next year (to 10%), we still think that its longer-term performance will lag slightly behind the market as a whole.
What’s behind this malaise, and what can professional service firms do to counter it?
There are three main (and interlinked) causes of below-average performance. The first is the range of different types of professional service firms that claim to operate in this space. Following rapid growth in the early 2000s, operational improvement has been seen as an attractive market that represents a comparatively easy stepping-stone for non-consulting firms to enter the consulting market. Following in the footsteps of the Big Four firms, which even now retain a 15% share of the market, technology firms saw operational improvement work as a logical extension of the implementation of ERP systems, resulting in them gaining an even bigger (19%) share. Strategy firms realised that simply doing strategy wasn’t enough and that more money was to be made from moving “downstream”—a move that has given them a 17% share of the market. But, by and large, these giants of the operational space look set to grow more slowly than the types of firm that bring a more specialised slant to the work. Engineering consultancies and real estate firms, exploiting all the opportunities that are springing up around new ways of working, are both forecast to grow by around 10% this year.
That points to the second cause of below-average performance across the operational consulting market: A chronic lack of innovation. That accusation may stick in the gullet of large firms, and it’s true that they are being innovative in some areas and on some projects. But it’s rare that this activity is scaled up to have a more material impact on demand in the operational consulting space more broadly. Moreover, the lack of new, specialist knowledge has allowed more large firms to enter this space. There’s been a collective—if unconscious—reluctance to fragment the market by creating clearer divisions between different areas of expertise within it. In other words, this market has been attractive to non-specialists precisely because the barriers to entry are low, making it comparatively easy to deploy chargeable staff across multiple areas without significant retraining.
Lack of innovation is an insidious problem: It can be ignored in the short-term because its impact is often invisible. Over time, however, it narrows the gap between what professional services firms and their clients are capable of. Without new tools and techniques, it becomes easier for clients to build up the operational skills of their own staff and makes them more reluctant to pay premium prices to external suppliers. This creates a vicious circle in which low margins deplete professional services firms’ ability and willingness to invest in innovation.
Before this market goes into the same apparently inexorable decline seen in the HR consulting space—where an absence of new thinking has depressed growth rates for the last 20 years—it’s vital that firms offering operational improvement services do a better job of articulating what makes their approach new and distinctive. But given the structural problems that have made it difficult for firms to do this, the key to success in this space will be to change the way they work by finding partner organisations or acquisitions that bring with them new intellectual capital, particularly software tools and methodologies designed to tackle specific issues but on an enterprise-wide basis. Finally, and perhaps most importantly, they need to link what they do to concrete results: It’s ironic that a part of the professional services industry that most obviously claims to improve the performance of other organisations is so bad at demonstrating that’s the case.
