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Sector Profiles

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, professional services are critical to the success of the economy, according to PricewaterhouseCoopers (PwC), representing 15% of the country’s GDP, 14% of employment, and 14% of exports.

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Major Industry Trends

Emergence of Global Standards in Accountancy

The drive toward global standards in areas such as accountancy appears to be gathering pace and has been given added impetus by the global financial crisis. Indeed, around 100 countries—including the members of the European Union and China—now use international financial reporting standards, which are principles-based accounting standards and interpretations set out by the International Accounting Standards Board (IASB). The United States-based IASB is the parent entity of the International Financial Reporting Standards (IFRS) Foundation, an independent accounting standard-setter based in London.

However, in March 2014 the Daily Telegraph of London reported that the IFRS Foundation’s role in governing global accounting rules was under threat after European politicians said they were questioning whether the authority was “best suited” to the position. The London-based authority has been severely criticized by members of the European Parliament for poor governance structures, a lack of transparency, and its “close links to the accounting industry.”

Also in March, the European Parliament approved a new £50 million five-year funding program for the IASB. However, members of the European Parliament attached a series of conditions to the deal and warned that if they are not met, the funding could be stopped in a year’s time, the newspaper reported.

The Daily Telegraph quoted a spokesman for the IFRS Foundation as saying: “The Foundation takes seriously any such concerns and has already begun planning its constitutionally-required five-year review of its structure and effectiveness, to be undertaken during 2014, and we welcome any proposals to improve aspects of our work.”

The newspaper reported that in 2013 a group of British investors had written to the European Union’s internal markets commissioner, warning him that the accounting rules were harming shareholders and destabilizing the economy. They argued that the IFRS rules, introduced in the United Kingdom in 2005, had allowed companies—and banks in particular—to hide the build-up of risks on their balance sheets. The European Commission has said that it will launch a review of the IFRS rules, the newspaper added.

UK 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 current UK government is also facing resistance to its attempts to reform the legal system. In January 2014, many courts across England and Wales fell silent as barristers in effect went on strike in protest at the government’s plans to slash legal aid. Following cuts introduced in April 2013, which are intended eventually to shave £320 million from the civil legal-aid bill, the government wants to cut £220 million off the criminal side. Barristers insist that the government’s reforms, notably cuts of 17.5% to most of their fees, will ruin the profession.

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Market Analysis

Impact of the Global Economic Downturn

The economic downturn had an impact on all professional services. However, the global economic recovery is now boosting demand in these areas. PwC’s 2013 survey of the legal profession, for example, said that with the global economy now beginning to recover, UK law firms should be well placed to take advantage of an upturn in corporate activity. However, the survey added that “while this is undoubtedly true for some firms, the challenges in the UK legal market highlighted in our previous surveys have taken a huge toll on others, so much so that their medium term survival is by no means assured. Pricing pressures, effective utilisation of fee earners and cost reduction have all been major challenges since 2008, driven by shrinking markets, new entrants and consequent over-supply for legal services.”

Meanwhile, in the United States a survey by Altman Weil entitled “Law firms in transition 2013” found that law firm leaders are acutely aware of the changes that the profession is facing. These include the facts that the demand for legal work is flat or shrinking in many practices; they face real pricing pressure from clients; they face the competitive forces of commoditization and the emergence of lower-priced, nontraditional service providers; they are coming to grips with the idea that aggressive growth in lawyer headcount may no longer make sense; and, finally, they believe that the pace of change is increasing.

The survey also found that:

  • headcounts and billing rates are still up on average—although by less than would have been the case before the recession;

  • firms use alternative pricing, but in a limited (and usually nonstrategic) way;

  • there is some tightening of partnership admission standards at the top of the pyramid and broader use of contract lawyers at the base;

  • most firms appear to be reacting to external forces and making incremental changes within the framework of the existing business model, rather than pursuing opportunities to meaningfully differentiate their firms in the eyes of clients.

The survey was conducted in March and April 2013 among managing partners and chairs at 791 US law firms with 50 or more lawyers. Completed surveys were received from 238 firms, including 37% of the 250 largest.

Accountancy

The International Accounting Bulletin’s (IAB’s) world survey for 2014 found that the major and medium-sized accounting firms have been making acquisitions to develop their consultancy businesses. It also argued that the forthcoming European audit regulation and directive will prove challenging in the regulatory arena. European measures such as the restrictions on nonaudit services and mandatory firm rotation are not consistent with rules in other jurisdictions.

The survey also reported that 64% of respondents have seen a steady increase in fee pressure in the past three years, and 36% are concerned that fee pressure represents an ongoing challenge to the maintaining of audit quality in their own firms.

Reuters reported in January 2014 that, according to the IAB survey, Deloitte, PwC, KPMG and Ernst & Young (EY), dubbed the Big Four, still dominate the sector with over two-thirds of the market, dwarfing the combined 33% share of mid-tier firms such as BDO and Grant Thornton. Deloitte reported fee income of US$32.4 billion in 2013, just ahead of PwC with US$32 billion. Ernst & Young came third with US$25.9 billion, followed by KPMG with US$23.4 billion.

The IAB survey looked at 50 top firms, which this year included three new entrants, two of which—Shinewing and Key Will Group—are China-linked, a sign of how homegrown challengers are emerging from China. Overall revenues in the accounting sector grew by about 3% overall, but downward pressure on accounting fees increased, leaving firms worried about audit quality—a concern that is echoed by regulators.

Accountants said that the pressure was due to customers struggling to see the value of auditing, undercutting by rival accountants as a tactic to retain auditing work, and bidding by the Big Four for work from smaller customers, the survey said.

Architecture

According to a survey released in February 2014 by World Landscape Architecture, 41% of the firms responding said that they were confident about the year ahead, while 11% were not confident and a further 4.5% were “very cautious.” In terms of performance in 2013, around 35% of firms responding said that they had enjoyed a good performance and 13.6% said that they had a poor or very poor year.

The survey also found that many small and large firms planned on making limited new hires in 2014. Around 46% were hiring 1–3 people, just over 10% 3–5 people, while only 3.35% were looking for more than 20 new hires. Nearly one-third said that they wouldn’t be hiring anybody in 2014.

Advertising

According to a report published in the Wall Street Journal in December 2013, some of the world’s biggest advertising companies are predicting faster growth in ad spending in 2014 than in 2013. However, the newspaper added that concerns about the US and European economies weigh on some of their projections.

Events such as the Winter Olympics in Russia, the World Cup soccer tournament in Brazil, and midterm elections in the United States are partly responsible for the improved outlook. But it is also based on the prospect of increased spending in emerging markets such as China and the increasing role of mobile advertising.

According to the Wall Street Journal, WPP plc’s media-buying agency GroupM forecast growth of spending on advertising of 4.6% in 2014, down from the 5.1% growth it had predicted in August. “The outlook for the global economy remains fragile and has deteriorated fractionally since our summer forecast,” GroupM said. By contrast, Publicis Groupe (now merged with Omnicom Group), the world’s third-largest ad company by revenue, and Interpublic Group, the fourth-largest, are both upgrading their growth forecasts.

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Further reading on the Professional Services industry

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