Professional services firms holding steady as competition intensifies
Confidence in the professional services sector is holding largely steady, despite growing competitive pressures, according to the Future Business Index (FBI).
The June quarter FBI found that forecasts for business conditions and revenues among mid-market services firms remained largely unchanged from three months earlier. The services category includes legal practitioners, accountants and other professional services firms, along with more general business services, such as IT and advertising.
Over a third of services firms said they expected conditions to improve in the second half of 2014, down from 36% in the March quarter. Similarly, 44% expected their revenues to increase, down from 48%. As a result, the overall confidence index for the sector eased from 7.8 points to 4.6.
Competitive pressures mount
According to the FBI, intensifying competition is a key driver of the sector’s cautious outlook for the next six months. Almost half of the services firms say they expect domestic competition to increase in the second half of 2014, nine percentage points higher than the average across the midmarket. One third also said international competition is likely to rise — yet another indication of the increasingly internationalised outlook of many firms.
For legal and accounting practices, these competitive pressures have continued to impact charge-out rates and fee revenue, with a growing number of clients seeking alternative charging models and fixed fee arrangements.
As a result, strengthened cost controls, outsourcing and improved productivity through technological and process innovation will remain very much on the agenda. According to the FBI, 52% of services firms intend to increase their investment in technology over the next six months, while 49% are planning to focus on service innovation.
Meanwhile, developments such as the entry of PwC into the legal services market (a reprise of similar experiments by various accounting firms a decade ago) reflect a determination to maximise the potential of each firm’s client base and create new revenue streams, at a time when organic growth is difficult to achieve.
Looking forward to 2015
Despite this short-term caution, there are signs that the outlook for the sector could improve in the new year. The June quarter Commonwealth Bank Legal Pulse Report found that, on balance, Australia’s top and mid-tier law firms believe business conditions will be more positive in 12 months’ time — and overwhelming more positive within the next two years.
Anecdotally, our conversations with professional services firms across the country also indicate an increasingly optimistic outlook. Of course, much will depend on developments in the broader economy during that time.
The FBI is an analysis of the views of financial decision makers in companies with a turnover of $10m – $100m, measuring their outlook on business conditions, investment plans, business challenges, projected revenue and how prepared they are to navigate conditions for the six months