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Professional services set to lead the pack

By: Robert Bryant
12 March, 2010

The past year has seen the professional service sector – spanning accounting, architecture, law, engineering and management consulting – navigate a tumultuous and rocky road. Business sentiment fell rapidly in 2009, leading to excess spending being cut from tightening budgets and any service not viewed as mandatory placed at risk of removal.

A serious threat arising from the downturn, and one which IBISWorld expects to continue well into 2010, is the cancellation of major contracts by large clients. Even the deferral of such contracts can create large holes in revenue and cause substantial cutbacks.

However, as consumer sentiment and private consumption continue to grow, companies will move to take advantage of surging domestic and global economies – calling into use various professional business services. Indeed, the outlook for the sector is positive, with the sector forecast to grow by 1.5% in Australia in 2009–10.

Below, IBISWorld outlines which professional services are expected to post the strongest recovery and why. In particular, we show that professional service firms will be subject to powerful international forces in the coming years, such as the globalisation of firm operating models and responses, and the importance of international issues such as financial regulation and climate change.

With global revenue contracting by 3.1% in 2009, and projected to stabilise in 2010 (0% growth), it seems the engineering sector was far from prepared for the financial crisis. Falling from the heights of around 7% growth per year on the back of incredible growth in Asia and a booming global mining industry, engineering is expected to experience a slower recovery.

The demand for industry services essentially rests on performance of the domestic economy and, in particular, investment into local non-residential construction, mining and manufacturing markets.

Asian growth has, and will continue to be, the sector's saving grace, with China expected to grow at more than 6% per year, and Indian investment in infrastructure expected to remain strong.

In Australia, IBISWorld expects the engineering industry to contract by 5.1% in 2009–10 and a further 6.2% in 2010–11, due to projects being wound back in the resources market (although these will remain at near-record levels). The Australian energy sector is projected to rebound strongly from 2012, averaging 2.5% annual growth over the outlook period.

Larger firms are expected to continue to generate revenue from work on international consulting contracts, notably in the South-East Asian market, and competition between large-scale Australian, European and North American consultancy firms will remain intense. The increased globalisation of the industry is expected to pose threats and opportunities for all industry players, with the principal threat being increased penetration of foreign firms into the local market, or perhaps more importantly, the increased reliance by local ‘branch’ firms on the global resources available through the foreign parents.

Conversely, this globalisation may stimulate industry growth prospects as foreign parents use their local subsidiaries by directing international contract work towards them. This trend towards globalisation provides local operators with improved financial and technical resources but may dilute the relationships established with major local construction contractors and property developers.

Management consulting
In Australia, consultants had a very mild 0.2% contraction in 2008–09, and are set to bounce back quickly, with growth forecast to reach 1.2% in 2009–10, increasing to an average annual growth of 4.4% for the next five years. Within developed economies such as Australia, the US and UK, management consulting is increasingly focused on providing end-to-end services – from advising and development to implementation and assessment.

Consolidation has become a key trend across the sector and large, globally linked companies continue to develop strategic alliances with other companies in IT, finance and other industries to offer a wider range of services to clients. IBISWorld expects this trend to continue as medium-sized firms continue to merge their operations with larger firms.

This will see the environment remain highly competitive, requiring larger management consultancy firms to compete with larger specialist firms, and those spun off from large chartered accountancy firms, on both an international and domestic basis.

As an offshoot of the global financial crisis, clients are expected to continue to demand increasing value from consultancies – requiring realistic, practical recommendations that provide exemplary results. Clients will increasingly expect consultants to assist in the implementation and monitoring phase of projects, which will mean, in some cases, actually assisting with the organisational change, and sourcing finance. In this regard, the development of strategic alliances with other specialist firms in other industries will continue.

In Australia, growth over the past year has largely been protected by the move towards cost minimisation, with clients taking on consultants to assist in restructuring in the face of the financial crisis. This has led to restructuring on the part of consultants themselves, requiring more staff with HR-related skills.

In the US, over the five years from 2009 to 2014, IBISWorld expects industry revenue to rise at an annualised rate of 4.7%, increasing from US$303.3 billion to US$381.9 billion. As small business becomes more inclined to employ outsourced consultants in order to increase revenues and profits, increased growth in the number of smaller, geographically specific and niche market consultancies is also expected. However, this will be mitigated somewhat as small firms begin to charge more in order to pay the wages of talented staff.

Despite being a global growth industry, the difficulties faced by the US financial services sector mean that the industry's largest client, in the industry's largest market, is likely to defer consulting spending until more promising economic conditions prevail, restricting global industry growth across 2010. Europe is expected to experience similar difficulties to the US market, with many European nations experiencing a severe downturn in 2009.

The vast bulk of growth in management consulting is expected to occur in the North Asian and Indian regions, which are forecast to experience annualised growth of 9.5% and 10.2% in 2009 and 2010, respectively. In these developing economies, the market is a great deal newer and services revolve around establishing a successful business in the Asian framework.

For example, in China – where the management consulting sector is forecast to grow by about 12% per year for the next five years – foreign countries are required to enter into a partnership with a Chinese firm. Consultants play an integral role in this process.

Due to the above it is expected that the industry will face a period of increasing consolidation. Major management consultancy firms are expected to look overseas for expansion opportunities and to purchase medium-sized firms both in the US and internationally to try and accelerate their revenue and profit growth to 2014.

There will, however, always be opportunities for smaller niche firms, which are closely linked to their clients and/or particular industries. The industry will remain reliant on growth in North America, Europe and North Asia, as those three regions comprise 98.9% of total global industry revenue.

Architects took a fairly severe hit in 2008–09 and are forecast to feel the same in 2009–10 (2.7% and 3.7% annual revenue contractions, respectively). This followed the slowing of building markets around the world. The industry has been booming for some time, and is set to continue its growth beyond 2009–10, averaging 6% per year from 2011.

In Australia, architecture revenue will fall 3.1% in 2009–10 and another 1.8% in 2010–11 before rebounding to grow by 4–5% per annum over the next four years. In the past year, office fit-outs and refurbishment have emerged as a major growth area, and internationally, construction continues apace, with fierce competition among major architectural firms for contracts in developing countries – although minor contracts tend to go to local firms.

IBISWorld expects the industry will continue to segment into areas of specialisation, as traditional architect firms are financially squeezed at the top end by more general building services firms and at the lower end by low-cost architectural draftspersons. As a result of this trend, many architects have associated themselves with wider building services companies, or are now providing a broader range of building services within their own company to ensure they can provide a fuller range of services to clients.

This will force architects to develop a more professional approach in practice management. This may require a non-architect with strong management and finance expertise to head the company. As companies try to move away from the general fee-based competition, it will become more important for companies to investigate new areas to generate income, such as contingency fees for projects.

The full report is available from IBISWorld.

Source: IBISWorld