Sector trends & challenges
We expect COVID-19 to accelerate the trend towards sector consolidation, with new national and international partnerships being created.
Liquidity and cost reduction
COVID-19 has accelerated the shift towards home working and is likely to lead to savings on office rents. However, businesses must adapt their operating models to the technological changes in the market to remain competitive.
Squeeze on margins
Pricing pressure is further squeezing margins amidst the rise of fixed and contingent models for fees. In addition, increased regulation in the form of new SRA accounting rules and ongoing regulatory reform is increasing costs.
Sector rating profile
The Professional Services sector has been fairly resilient to financial stress over the longer term. Individual firm weaknesses tend to result in M&A consolidation activity which has been a continuous theme in both the legal and accounting professions. Wider cost challenges and business disruption stemming from the pandemic are likely to place pressure on fee income and liquidity and we expect to see a similar uptick in financial distress and corporate failures.
We expect COVID-19 to accelerate the trend towards sector consolidation, with regional firms consolidating into national practices and going on to form global alliances. Larger firms will continue to poach key talent.
A significant reduction in revenue has been seen across the sector due to COVID-19, though there have been some pockets of intense activity, namely in real estate. Cash preservation has been critical throughout this uncertain period and we foresee a significant focus on cost and maintaining liquidity. Working capital management is a priority, with a focus on reducing ‘lock up’ and maximising creditor payment terms to support both investment and liquidity. Pricing pressure is further squeezing margins amidst the rise of fixed and contingent models for fees and downward pressure on hourly rates. In addition, increased regulation, in the form of new SRA accounting rules and ongoing regulatory reform in the personal injury sector, is adding further administration.
Whilst the death of the office may be overexaggerated, it’s already evident that greater home working will reduce the need for prime office space into the medium-term. We also anticipate sale of non-core assets and discontinuation of less profitable service lines as strategic objectives are reviewed.
Larger corporates are starting to rebuild in-house legal capabilities, as a way of reducing costs.
The recent focus on ‘cost out’ programmes and process improvements through technology to improve efficiencies could support profitability and cash generation in the longer-term. Locking in these operational savings whilst continuing to invest in IT and innovative services will be a recurring theme in the sector.
Find Your Expert
Rick Harrison is Interpath Sector Lead for 'Services'. This includes Professional Services as one of two core segments. Chris Wise leads Interpath's approach to the Professional Services sector nationally. For a full list of our senior people with experience in this sector use the button below.Our senior team