Professional Services

Introduction

This report covers the market for professional services around the world. It encompasses areas such as accountancy, legal services, information technology, property management, architecture, advertising, and management consultancy. While large companies often have in-house lawyers and accountants, many small and medium-sized companies rely on the services supplied by firms that specialize in these areas, or else outsource the work to contractors. Even larger companies will outsource many functions to external suppliers. Management consultancy and services in areas such as architecture, for example, tend to be supplied by external firms or contractors that focus on these areas.

Professional services account for a large chunk of the GDP of many advanced economies, and are among the fastest-growing economic sectors. In the UK, for example, the turnover of the professional-services sector in 2007 amounted to £84.3bn (US$118.2bn), or 8% of UK output—the largest share of any sector—while professional-services firms employed 11.5% of the workforce, according to a report published by the UK Treasury in March 2009 (see More Info). The report added that professional services play a major role in UK trade, accounting for almost £16 billion of the total £29 billion trade in UK services.

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Major Industry Trends

The report written for the Treasury by the Professional Services Global Competitiveness Group, which was set up in September 2008 to look at issues affecting the professional-services sector, also identified various trends in professional services that are taking place not just in the UK, but around the globe. They include:

• Financial stability: Professional-services firms are likely to have an increasingly important role in promoting sound corporate governance when advising client companies, in both the financial-services sector and across the economy as a whole. Indeed, the report said that this advice would be “central to laying the foundations for a more stable and sustainable economy in the future.”

• Innovation: The report said that “the prospect of growing demand for excellence, fierce global competition, and an ever-more-demanding client base” is likely to boost the development of innovative products and services. It added that “global professional-services centers will flourish only if they think and perform effectively and efficiently.”

• Headquartering of international firms: The report said that there was a trend towards international and pan-European partnerships, and that, as a result, professional-services firms “will need to be flexible in order to respond to local business needs wherever they emerge in the global market.” It added: “In the economy of the future, jurisdictions which provide attractive locations for international headquarters are likely to attract further business.”

• Connectivity: “The pursuit of links and synergies between traditional clusters and emerging markets is becoming increasingly significant to the professional-services sector, offering opportunities for growth and innovation,” according to the report. The authors added that “new markets tend to display high levels of innovation and creativity, often using socially responsible products and services as a growth engine.”

Emergence of Global Standards in Accountancy

The drive towards global standards in areas such as accountancy appears to be gathering pace, and has been given added impetus by the global financial crisis. Indeed, more than 100 countries around the world—including the members of the European Union and China—now use international financial reporting standards, or IFRS. Around 85 of those countries require IFRS reporting for all domestically listed companies. Other countries are expected to adopt IFRS over the next few years, including Brazil in 2010, and India and Canada in 2011. The Securities and Exchange Commission (SEC), which regulates financial markets in the US, appears to favor the adoption of IFRS in place of the Generally Accepted Accounting Principles (GAAP) currently used in the country. Many US companies already use IFRS, and convergence could be completed by 2014, according to some analysts. The SEC plans to make a decision by 2011 on whether the adoption of IFRS is in the public interest and would benefit investors. However, the global financial crisis has prompted calls for the adoption of tighter global accountancy standards. Since the onset of the crisis, President Nicolas Sarkozy of France has called for a strict new international framework of accountancy standards, as well as limits on speculation in financial markets.

Legal Firms Face Paradigm Shift, As Well As Impact of Recession

The large legal firms are undoubtedly suffering under the impact of recession and the meltdown in the financial sector, once one of the major sources of income for the legal industry. However, The Lawyer magazine (March 31, 2009) questioned whether the sector was simply facing a cyclical downturn, or instead a paradigm shift in demand for its services. The magazine asked leading players in the industry for their views on the subject. Some said that the industry was simply facing a cyclical downturn. Others believed that firms’ expansion over the past decade into areas such as leveraged finance, high-yield debt, and asset-backed finance, all of which have collapsed during the global financial crisis, meant that the industry was indeed facing a paradigm shift. The Lawyer quoted Slaughter and May senior partner, Chris Saul, as saying: “The explosion of credit we’ve seen over the past 10 years or so, and the deal activity that it has helped to drive means that this downturn has a different quality of intensity about it compared with previous ones.”

The magazine added that, while there might be differences of opinion in terms of the severity of the downturn facing the industry, there was a consensus that the major legal firms would have to adapt to the new world. It quoted DLA Piper’s joint chief executive, Sir Nigel Knowles, as saying: “There will be fewer clients, particularly in the financial-services sector, and the clients will want to pay less. There’s going to be tremendous pressure on fee rates, particularly those rates often charged by the magic circle and charmed circle.” (The term “magic circle” refers to the leading law firms in London).

The economic recession may also spell the death knell for the legal profession’s practice of charging by the hour. The clients of some legal firms are reportedly demanding alternative billing as a way to better predict their expenses. The American Bar Association has been urging law firms to move away from the practice for years. The New York Times (January 29, 2009) reported that the city’s largest law firms are considering alternative billing as a way to maintain or increase revenue during the downturn. The newspaper said: “Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model.”

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Market Analysis

Impact of the Global Economic Downturn

The economic downturn has had an impact on all of the areas covered by this report. Clearly, as the corporate sector shrinks, demand for professional services will also contract. However, suppliers of professional services have also been adversely affected by the corporate sector’s focus on cost-cutting during the downturn. Firms are either renegotiating fees downwards, or simply doing more work in-house in areas such as legal services. Despite this, some companies are benefiting from the downturn. For example, Andy Green, chief executive of the Anglo-Dutch computer-services company, Logica, said in March 2009 that demand for large outsourcing projects in the IT sector is expected to increase in 2009, as companies look for new ways to squeeze costs.

The impact of the downturn from area to area is highlighted by the following developments:

• Major law firms are making staff redundant. In January 2009, Clifford Chance announced that it would lay off up to 80 attorneys in London, while in March it laid off 24 transactional attorneys in New York. The London-based Clifford Chance also said that it was deferring the start dates of 50 law-school graduates, and paying the prospective employees’ stipends during the furlough period. In March 2009, Boston-based Edwards Angell said that it was making 25 lawyers and 35 staffers across six offices in the US redundant in response to declining legal work during the recession. The Lawyer (March 31, 2009) summed up the prevailing mood among the big law firms, saying: “If last year was bad, the first three months of 2009 have been even worse. The weeks since 1 January have been extremely challenging for the world’s largest international law firms. Certainly, for the thousands of lawyers and staff laid off by their cost-cutting firms, the first quarter of 2009 is already infamous.”

• Accenture, a global management-consulting, technology-services and outsourcing company, reported in March 2009 that demand for its consultancy services shrank during the second quarter of its fiscal year (the three months ending February 28, 2009). Chief finance officer, Pam Craig, was quoted as saying: “There has been a noticeable change in the demand environment, as clients grapple with how a macroenvironment full of continuing economic challenges impacts their priorities.”

• Martin Sorrell, chief executive of WPP, one of the world’s major advertising groups, said in March 2009 that the company was prepared to make thousands of job cuts this year in order to counter declining revenues. Sorrell said that WPP would cut a percentage point of the 112,000 global headcount for every percentage fall in revenue. During the same month, the credit-rating agency, Standard & Poor’s, revised its outlook on WPP from stable to negative, and said: “The outlook revision reflects our view that the significant deterioration of economic and advertising conditions worldwide may lead to significantly slower-than-expected deleveraging at WPP, and even to increased leverage in the short term.”

• The four major global accountancy firms—KPMG, Ernst & Young, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers—have all announced layoffs during the downturn. The companies have also encouraged staff to adopt flexible working options, such as voluntarily reducing their hours or taking sabbaticals. In January 2009, for example, KPMG offered its 11,000-strong workforce a sabbatical. The group said it was trying to avoid compulsory redundancies because it wanted to be in a strong position when the recession ended. Staff are by far the biggest expense incurred by accountants, and are an obvious target for cost-cutting measures. However, the major firms have been moving relatively cautiously in terms of job cuts, for they know that, having made significant layoffs in previous downturns, they could face difficulty in coping when the economic recovery leads to an upturn in the volume of work.

• The economic downturn has hit architecture firms around the globe. In March 2009, Business Week reported that “architects from Berlin to Bonn say small practices are shutting down or on life support.” In the same month, the BBC reported that 400 jobs in architect practices in Northern Ireland had been lost over the previous 12 months. The figure represented 20% of the workforce. In the US, the impact on architects has been particularly severe. The San Francisco Chronicle (March 31, 2009) reported that, while the city’s national architecture convention attracted 27,000 participants in “rosier times,” this figure was likely to fall to just 20,000 at the upcoming convention in April 2009. Government fiscal measures aimed at stimulating economic growth—which are often focused on infrastructure projects—could prove the saving grace for the architecture sector. President Barack Obama’s multibillion-dollar economic recovery plan includes vast sums aimed at rebuilding America’s highways and other infrastructure.

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