Business services industry outlook

Artificial intelligence dominates headlines, but for business services firms—especially those in staffing, workforce solutions, facility services and waste management—AI is just one of the disruptive forces transforming the business services industry. The evolution of the workforce, increased regulatory pressures and private equity developments are equally disruptive—and cannot be overlooked.

Every industry is currently poised for a massive labor adjustment as the tail end of the baby boom generation, those born between 1946 and 1964, approaches retirement age.

Approximately 4.2 million people in the U.S. will turn 65 each year for the next five years. The upcoming wave of retirements is leading to concerns about continuity, succession planning and maintaining a skilled workforce. This mass exodus will disproportionately affect the business services industry, as it has a higher concentration of workers over 55 when compared with the overall U.S. workforce. These issues are mirrored in Canada.

Business service firms are operating in an uncertain economy. The one aspect that is certain to be crucial is the workforce, as labor is critical to business service firms. So determining how to best use the workforce is key. Companies are embracing technological innovations, which can lead to significant benefits, but this requires careful management to ensure employees are supported and upskilled to adapt to new roles.

A dynamic workforce continues to be crucial to success for marketing and advertising firms, particularly given the uncertain economic environment. One factor is the ongoing discussions around tariffs. While advertising firms are less likely to feel a direct impact from tariffs given their service-based offerings, the effect of tariffs on consumer spending and the economy will affect advertising spend from companies. One of the first cuts a business may choose to make is its advertising budget. In a sector that is already so closely aligned to the U.S. gross domestic product, any additional economic pressures will limit growth.

Marketing and advertising firms, environmental and facility service companies, and workforce solutions companies are concentrating their efforts on strategic growth initiatives. They are also emphasizing technological advancements to foster long-term viability and efficiency.

Three key themes have emerged for marketing and advertising firms, according to Bloomberg Intelligence:

• Dealmaking
• Generative AI
• Economic conditions tempering the ad-spending outlook

Each of these themes will directly affect the value of marketing and advertising firms, which have underperformed the MSCI World Index for multiple consecutive quarters. The index measures the performance of large- and mid-cap companies across developed markets worldwide.

The Federal Reserve’s September rate cut of 50 basis points, to 4.75%−5%, will provide a lift for the marketing and advertising industries. Not only will their clients’ and prospects’ cash flows increase, but these lower interest rates will reduce borrowing costs for advertising and marketing firms themselves, thus releasing pent-up demand and potentially improving profitability. While the first rate cut is significant, additional rate cuts on the horizon may further boost the industry.

Advertising agencies’ revenue depends heavily on client marketing budgets, which typically equal about 10% to 15% of sales. Reduced borrowing costs will increase cash flow for companies. These prospective clients can redirect their additional liquidity toward marketing and advertising efforts, which typically see pullback when cash flows tighten.

The staffing industry, while facing economic uncertainty and a 12.5% drop in employment in 2023, holds optimism for 2024. Economic conditions have historically influenced staffing firms, and while new job creation slowed in 2023, firms must become more agile, innovative, and data-driven to navigate geopolitical and macroeconomic challenges.

Adopting advanced AI technologies is crucial for recruitment efficiency, with AI enhancing applicant tracking, task automation, and workforce specialization, particularly in cybersecurity. A focus on improving worker productivity through AI is expected to boost the industry's effectiveness. Staffing firms are also prioritizing employee experience, emphasizing work-life integration and providing upskilling and reskilling opportunities. 

Middle market staffing firms must innovate and implement digital strategies, including AI, to remain competitive. Failure to do so could result in losing market share to more technologically advanced competitors. Adapting to new technologies will enable staffing firms to revolutionize both employee and customer experiences, providing greater value to their clients.