While the pandemic has severely affected most businesses, each sector has experienced different challenges, specific to their industry. Andrew Hosking, head of professional practices, looks at trends in the professional services sector, and explains the impact of coronavirus on its firms, and what action they can take, to address the issues facing their business.
Industry trends
The use of data analytics − digitisation − to improve working practices has been influential in the industry. Also, the growing trend of higher global incomes and the need for more insurance and legal services is having a positive impact.
Cross-border activity is essential for this sector, as the UK is a net exporter of professional services, helping offset its deficit in goods. We expect a stable growth rate of 5% over five years, and it is one of the few industries that will surpass its pre-crisis peak by 2023 - a full 18 months or so before the economy as a whole. The industry includes insolvency practitioners, accountants, lawyers and other professionals who will be fully occupied due to the aftereffects of the pandemic.
There is the question of whether some of the exports of professional services will be impacted by Brexit in the medium term. The UK has not been granted 'equivalence', where the EU provides market access to foreign firms if it agrees its rules are equivalent or sufficiently like theirs. This means the EU will treat it as a 'third' country (a country which is not a member of the EU and whose citizens do not have free movement within the EU). Professional qualifications will not be automatically recognised, and so some business may migrate.
Instructions down, costs up
The pandemic has left its mark on most businesses and the professional services sector is no exception. While there have been some positive trends, instructions are down, so turnover has declined, with the likely impact on profitability.
At the same time, fixed costs have stayed fixed. Professional-services firms typically have a large office infrastructure, so you would normally have staff going into the office, whether in London or in a regional location. But due to the pandemic, these offices have been largely unused. However, restructuring of leases can’t be done overnight; it can take some time. This means that it will take years for the fixed-cost base to be regeared and restructured. There have also been significant changes to the way firms work. Many have had to get to grips with remote working, which has posed the challenge of setting up IT systems.
If that were not enough, renewing professional-indemnity (PI) insurance has been a headache for professional services firms too. We’ve seen a hardening in the market and costs have increased. Insurers are requiring much more information than before. In some cases, they have declined to provide cover; we’ve been advising some businesses facing these circumstances. One of the reasons for this is that some PI claims brought last year arose as a result of staff working from home. Insurers are a bit more nervous about providing cover, because in this working-from-home climate there is a greater prospect of claims being brought for negligence.
More challenges
Most firms have taken Coronavirus Business Interruptions Loans (CBILS) or have deferred taxes. In some cases, businesses have deferred rent too. The problem is that while most firms should be sitting on cash, the repayments for the CBILS will be starting this year. Also, landlords will be able to start enforcing rent payments from 1 April, when restrictions will lift, unless there’s an extension to the current moratorium.
However, despite the impact of the pandemic, the need for professional services firms is not going to disappear. People still need their services. For instance, accountants will still have clients requiring audits, accounts preparation and advice on ongoing trading. Law firms’ services will be required too. There is also still an extremely high demand for conveyancing, but this could evaporate if the government doesn’t extend the stamp-duty decreases at the end of March. So, any firms that rely heavily on income from conveyancing will need to look at whether they’re going to have a significant decline in turnover from April.
It’s important to keep an eye on trends in the market and identify the impact these might have. Firms should also look at the possibility of diversification. For instance, do they offer just one type of service, or do they have others they can develop, to deal with peaks and troughs over the next year?
Priorities for progress
Firms that have invested in IT systems and remote working over the last few years have adapted better to managing the lockdowns. Staff are used to working from home and all the necessary systems are in place. Firms which haven’t invested in such IT systems are finding it harder and there is a substantial cost involved in getting things up to speed now. Have they got the cash resources to do so? Another key consideration is the need to move online and move operations to the cloud, so IT is going to be a high priority – firms who don’t embrace this are going to struggle, and have probably been struggling over the last 12 months.
So, what actions can the sector take, to survive and thrive? As well as focusing on IT, cash-flow management and forecasting are high on the agenda too. We would strongly advise that any firm in this sector should have a plan, encompassing both cash-flow forecasting and general forecasting. The forecasting needs to be detailed and cover at least 12 months so that firms understand their cash cycle and where the peaks and troughs are; and where the negative cash flows are and how they are going to be funded.
Building financial fortitude: more support for advisers and businesses
For more information, insight and support on the key issues businesses and professional advisers are facing please go to our Building financial fortitude hub at www.quantuma.com/fortitude. There you will find a series of video interviews, articles, and further support from experts across our firm.
This article constitutes general advice and should not be acted upon without taking specific advice. Neither the authors nor Quantuma Advisory Limited accept responsibility for any actions based upon this general advice.
