A Real Economy publication

Business services industry trends: Fall 2022

Oct 06, 2022

Business services trends key takeaways

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In a recession, look for business services firms to lay off employees and decrease hiring.

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Given the unpredictability of economic factors, remaining agile is crucial for all subsectors.

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It’s an opportune time to explore new revenue streams, such as managed HR or IT services.

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Economics Business services

Firms that can weather economic headwinds could find opportunity in new services

Business services firms must plan for an uncertain future. With a collection of supply, demand and energy shocks resulting in increased prices and decreased growth in real gross domestic product, the economy could be in recession by the first quarter of 2023, or possibly sooner. It’s vital that firms don’t overreact under these conditions. Instead, an understanding of business cycles will enable them to develop sound short- and long-term plans to address challenges and work through this period of uncertainty.

Firms in subsectors such as workforce solutions must ask themselves if they can continue to pass on rising costs to their customers, or if it is more viable to scale down expenses—specifically, employee costs—to preserve their target margins. 

Rising prices and employee costs

Labor and outsourcing

In recent years, and particularly since mid-2020, business services firms have experienced a spike in employee costs as they have invested in new and creative ways to recruit and retain talent. Meanwhile, we’ve seen many firms pass on those costs to their customers.

How might that dynamic change in a recession?

After the housing bubble burst in the second half of the 2000s and helped send the country into the Great Recession, we saw massive employee layoffs in business and professional services firms, coinciding with a steep decrease in hirings. Also, in past recessions, wages have been suppressed, and prices for services have decreased. Expect similar trends if we enter a recession in the near future. 

Business and professional services employment strategies around the Great Recession 

If economic conditions cause layoffs to increase and hiring to decrease, we can expect business services firms to counteract that by outsourcing back-office functions, such as accounting, billing, human resources and more.

Martin Mucci, CEO of Paychex, a human capital management firm, affirmed that prediction in a June 29 earnings call. One of three leading indicators of a macroeconomic recession, he said, is an uptick in nonprocessing clients, meaning clients buying managed services or outsourced services. The other two indicators are a decline in employment levels at existing clients and a slowdown in sales activities.

“We … have not seen any signs of deterioration at this time,” Mucci said. “These indicators continue to trend in a positive direction.”

Recession-proof?

Some business services firms have positioned themselves well to withstand the shock of a recession. Waste management firms, for example, are considered essential businesses due to the volume of curbside pickup needed throughout the country.

During the Great Recession of 2007-2009, we saw waste management firms maintain and even grow revenue in certain instances—evidence that this subsector is essential and relatively well positioned to handle an uncertain future.

In WM’s earnings call on July 27, President and CEO Jim Fish cited the “recession-resilient nature of our business” in reaffirming the full-year outlook that executives provided in February.

“I just feel like we're in a great industry to weather the storm and, ultimately, with some of the things we're doing with technology (automation) and reducing our labor dependency, come out of this thing better than anybody else,” Fish said.

Mucci of Paychex conveyed similar confidence, citing the company’s financial performance during the initial stage of the pandemic.

“If … the economy is going fast, and you need to hire and you need growth and you need help with your HR, we're there to help you with the technology and the people to support you,” Mucci said. “If things turn and it's a recession and you’ve got to manage people out or cost down, we have the products, the technology and the people to help you do that as well.”

Other business models, however, may not lend themselves as strongly to weathering a recession—for example, firms providing services that companies may view as elective, such as marketing or advertising.

If such firms are healthy enough to invest in technologies and other capital projects while they experience a decrease in demand, it could pay dividends eventually with increased productivity and enhanced service offerings. Although the Fed is undertaking a series of increases to the federal funds policy rate, the rate still is historically low—lower, for example, than it was for about half of the 2000s.

For workforce solutions firms, relying only on staffing placements when most companies are trimming their workforce would be risky. Some firms are ahead of others in this transformation of business and strategy, but now is as good a time as any to begin exploring new revenue streams, such as managed HR or IT services, as both short- and long-term solutions.

Looking ahead

Business services firms should focus on establishing sound short-term and long-term plans. Those may include workforce management strategies, outsourcing of back-office functions, expanded service offerings and even full business model transformations.

Different subsectors will face different challenges and will require different plans of action. One thing is certain: Given the unpredictability of numerous economic factors, remaining agile will be the most valuable trait of firms’ leadership.

RSM contributors

  • Cameron McMillian
    Cameron McMillian
    Business and Professional Services Senior Analyst

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