Market Updates | 09th July 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.
Pharma & life sciences: From strength to strength
It was the fastest growing sector for professional services during the pandemic, but will it continue to grow once the crisis is over?
Small but perfectly formed would be an apt description of the professional services market in the pharma & life sciences sector (in which we also include medtech). It accounts for around 4% of the total market (just over US $35bn) and is significantly smaller than the healthcare market, which is worth US$54bn.
There are, however, other differences between these markets, interconnected though they inevitably are. As a professional services market, pharma grew in 2020—by around 16% we estimate—whereas the healthcare market shrank in revenue terms. That may seem counter-intuitive to the large consulting, technology, and outsourcing firms that experienced very high levels of demand in the healthcare sector during 2020, but our numbers take into account three significant factors: First, that the lion’s share of new work generated by the crisis went to large firms with the resources to make large-scale change happen quickly; second, faced with an unprecedented crisis, most healthcare organisations cancelled discretionary work to focus on the matter in hand; third, a proportion of the new work generated by the crisis was done either probono, or at a price point significantly below the already low rates typical of this sector.
By contrast, pharma was under immense pressure to innovate rapidly and saw an influx of investment. As a cash-rich sector with vital skills in scarce supply, professional services fee rates rose, and discretionary projects were repurposed to support the efforts around finding, producing, and distributing vaccines. The sector’s exceptional growth was fuelled by technology, which accounts for around a quarter of all expenditure on professional services in this sector. On top of this, more than US$1bn was spent, we estimate, on cybersecurity which has grown 50% against the previous year, and is a testimony not just to new, remote ways of working for many staff, but also concerns about the extent to which drug companies could become targets for cyberattacks. In an industry where intellectual property ownership is pivotal, the amount spent on legal services rose by a third, to around US$3.5bn; a further US$2.5bn went on forensic services. Demand for strategy consulting grew by a fifth, as pharma companies sought to rethink their business models at breakneck speed, but without compromising their future ability to deliver shareholder value.
From an investment point of view, the key question is whether this surge of spending on professional services will continue once the immediate crisis is over. Our modelling suggests that it will, for three reasons. But we also foresee one significant potential risk.
This was one of the fastest growing sectors before the crisis, with typical year-on-year increases in the region of 9-10% at a time when the total professional services market was averaging 7-8%. This was driven by a perfect storm of issues: increasingly onerous regulation; price pressure on products that was creating pressure to keep costs under tight control; the urgent need for new products, coupled with the crippling costs of innovation; and the impact of technology, especially around drug delivery, remote patient monitoring, and telemedicine. Although a very different business, there were important parallels here with the financial services sector, especially in the level of non-discretionary risk and regulation work. The latter accounted for a significant amount of the growth in demand for professional services in the financial services sector in the aftermath of the financial crisis of 2008-09, growth from which the Big Four disproportionately benefitted. Prior to the crisis, we saw evidence of the same happening in the pharma & life sciences sector. If anything, the crisis will amplify this trend going forward: Any industry that becomes more valuable (in a social as well as economic sense) attracts regulatory attention.
A second reason for expecting growth to continue is the level of innovation in the pharma & life sciences sector—and here the situation is very different to that in most financial institutions. As we’ve written about previously in these updates, the professional services sector has a strong record in helping scale innovation, even though it doesn’t excel in idea origination. That will play out well in this sector: With investors looking for opportunities and a likely influx of high-calibre people, inspired by what they’ve witnessed during the pandemic, there’ll be no shortage of client-side innovation. Where clients will need help is in monetising their efforts.
Take both of these points together and we get a third reason to expect recent above-average growth to continue, which is the mix of suppliers at the moment. Unsurprisingly, technology consulting and legal firms have the biggest share of the market—around 19% and 13% respectively. A further 12% is spent on external research support. Risk and regulation makes its presence felt in terms of the 11% of the market that we estimate goes to the Big Four firms. Public relations, critical from a reputational perspective, is over-represented in this market. However, this supplier base reflects only our first driver of growth; these may be, but aren’t necessarily, the firms best placed to help with strategic decisions around which innovations to back, for example. That means that a third source of growth in this market will be the attention and investment made by professional service firms keen to increase their share of a critical market by developing new services that stimulate demand.
And the one significant risk? The market’s size. The reason why the pharma and life sciences sector represents just 4% of the total professional services market is that demand-side consolidation has resulted in a small number of very big companies, which between them account for most expenditure on professional services. The crisis may have created extraordinary opportunities for a new generation of specialists and start-ups, but these don’t buy much in the way of professional support. The ambitious growth plans professional services sectors are already making to grow will need to be tempered by the recognition that they won’t all be able to grow.