Professional Services Industry

Introduction

This report covers the market for professional services around the world. It encompasses areas such as accountancy, audit, 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. Big global 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 United Kingdom, for example, the turnover of the professional-services sector in 2007 amounted to £84.3 billion (US$118.2 billion), 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 United Kingdom, 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. Brazil adopted IFRS in 2010, and India and Canada in 2011. The Securities and Exchange Commission (SEC), which regulates financial markets in the United States, appears to favor the adoption of IFRS in place of US Generally Accepted Accounting Principles (GAAP). 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 Profession Resists Change

The large legal firms have suffered from the impact of the global recession and the meltdown in the financial sector, once one of the major sources of income for the legal industry. However, in many ways the legal profession is one of the last bastions of practices that conspire to keep fees high and prevent consumers from benefiting from the competition and flexibility that so many other industries have been forced to introduce over the past 30 years. In the United Kingdom, for example, barristers have a virtual monopoly on presenting cases in court, while only properly qualified solicitors registered with the Law Societies of England and Scotland are allowed to deal directly with the public.

Former prime minister Margaret Thatcher, who reformed so much of British industry in the 1980s, attempted to get rid of this demarcation but failed, underlining the power of the legal profession to resist change.

The Consumers’ Association in the United Kingdom (popularly known as Which?), which campaigns on consumer issues, says that, “in 2004, we asked people who had had a problem with solicitors to get in touch to tell us about their experiences. Key issues were excessive delays, negligence, making mistakes, poor communication, including not being informed of delays, and many bills coming in much higher than the original estimate with no prior warning. One person told us: ‘His estimate … was £4,000 to £5,000. In the event, the fees were in excess of £30,000 … after two years we could no longer afford to fund the case.’ Mrs P told us in 2004: ‘We were drawn into litigation that we couldn’t afford, and would not have started if we had been honestly and fully informed.’” Yet, the Consumers’ Association goes on to say, “the professional rules for solicitors in England and Wales state they should give an estimate at the outset, but more than half the people in our survey said they received no cost estimate at all, and only about a quarter said they had one in writing.”

The Scottish government pushed through an extensive reform of its legal system in 2010 in the face of considerable resistance from the country’s lawyers. Edinburgh wants to allow supermarkets and other commercial organizations to provide legal services and the Legal Services Scotland Bill was all about the establishment of new business structures within the legal services industry in Scotland. The ultimate aim is to liberalize the legal services market and to create a more flexible and modern regulatory framework for legal services, with improved access for all to high-quality legal services.

The Office of Fair Trading backs the law change, as it believes it will increase competition, and mean lower costs and wider choice for customers. The main impact of the Act, namely the removal of restrictions on lawyers going into business with non-legal firms, came about after a “super-complaint” by Which? to the Office of Fair Trading. The Scottish Law Commission is now in its eighth program of law reform, designed to run from 2010 to 2014, so the reform process is set to continue.

The consumer group claimed the current regulation of Scottish legal firms restricted choice for consumers, and prevented alternative business structures being formed. However, traditional models for law firms will still be an option for lawyers. The bill also proposes a new regulatory framework for the legal profession. The Scottish government will appoint approved regulators for the new business structures.

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Market Analysis

Impact of the Global Economic Downturn

The economic downturn had an impact on all of the areas covered by this report. Clearly, as the corporate sector shrinks, demand for professional services also contracts. However, suppliers of professional services have also been adversely affected by the corporate sector’s focus on cost-cutting during the downturn. Firms either renegotiated fees downwards, or simply moved more work in-house in areas such as legal services. However, there are signs that the global recovery is driving a pickup in demand in 2010 and 2011. In April 2010, for example, IDC predicted that European IT services expenditure would increase in 2010 and 2011, with IT outsourcing being the main driver behind this growth. IDC said that need for IT services would be most prominent in 2010 in the United Kingdom, Germany, and the Nordic countries.

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

• Major law firms made staff redundant in 2009, which was described as one of the worst years for the profession in many years. However, signs of stabilization have emerged in 2010, and some analysts believe that US firms will step up recruitment in advance of the expected upturn in the economy.

• Accenture, a global management-consulting, technology-services, and outsourcing company, reported in March 2010 that while economic conditions remained challenging, it was “seeing increasing momentum in many areas of our business, as clients are starting to look to the future.”

• Sir Martin Sorrell, chief executive of WPP, one of the world’s major advertising groups, said in March 2010 that the company, which put in place a hiring freeze in 2009 as part of deep cost-cutting measures, had started hiring staff again in January 2010 in growth markets such as Asia, and in its digital division. Sorrell said that after the nightmare suffered the previous year, when WPP initially forecast a 2% like-for-like revenue increase but ended it 8% down, this year the company would be very conservative with predictions. The company said that the second quarter of 2010 was on target to show top-line growth on a like-for-like basis, the first time for six quarters that WPP has had in a return to budgeted growth.

• The four major global accountancy firms—KPMG, Ernst & Young, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers—all announced layoffs in 2009. However, this area also appears to be picking up in 2010. KPMG said in April 2010 that it would be accelerating its recruitment in 2010, while recruitment firms that specialize in the area say that their business is accelerating.

• The economic downturn hit architecture firms around the globe, with many architects losing their jobs. However, there were signs of recovery in 2010, although the picture does vary markedly from one country to another. In April 2010, for example, the number of architects out of work in the United Kingdom fell for the seventh month in a row. However, in the United States, there were reports that 48% of architects remained out of work in North Texas in April 2010. In March 2010, economists in the United States predicted that architecture in the country might not revive until 2011.

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