A Real Economy publication

Professional services industry outlook

Aug 07, 2023

Professional services industry key takeaways

Midsize law firms have taken a very different strategy when it comes to hiring as compared to their larger counterparts.

Productivity is key to profitability in this inflationary environment and tight labor market.

Firms are looking inward to assess how technology could help them do more with less.

Professional services trend #1: Midsize law firms employ a new strategy

Midsize firms have taken a very different strategy when it comes to hiring as compared to their larger counterparts.

As the Am Law 100 and midsize firms continue down separate paths strategically, key elements to watch are whether productivity improves among the Am Law 100 during a hiatus in hiring, and whether midsize firms will withstand the margin squeeze as they continue to hire valuable staff.

Regardless of firm size, and despite the unknowns regarding economic growth, all firms can benefit from utilizing AI and conducting a cost/benefit analysis of outsourcing to further bring down expenses and prop up profit margins.

Professional services trend #2: Looking to AI and M&A for help

As signs of economic cooling continue, the professional services industry has started to feel the impact of an uncertain economy.

Clients are less likely to commit to large capital expenditures quickly, and they tend to delay any spending they feel is discretionary until there is more certainty in the economic outlook. For law firms, specifically, two major trends we will be watching through 2023 are exploring growth opportunities through mergers and acquisitions to bolster decreasing demand and propping up dismal productivity metrics with investments in artificial intelligence (AI).

Professional services firms are in for an unsteady beginning to 2023, as demand growth lessens with economic uncertainty. However, persistent expenses and wavering profits will encourage firms to take action on driving revenue and productivity growth through mergers and acquisitions, and with investment in AI. When investing in AI, it’s critical that firms understand the effort required to structure, cleanse and prepare data for build-and-teach useable models.

Professional services trend #3: Profitability and productivity

Productivity is a priority of every professional services executive.

The professional services industry has experienced a luxury that many others throughout the pandemic have not—stability. Amid a competitive labor market, however, inflation and increased expenses are eroding the industry’s relative shelter from public health disruptions and supply chain constraints.

As pandemic fears wane, challenges of protecting profit margins are top of mind, given how persistent inflation and resource constraints are contributing to speculation about a recession. Traditional strategies of cutting costs to protect profit margins prove to be especially difficult in times of heightened inflation, and billing rate increases have not been enough to offset the sharp increase in direct expenses driven by a tight labor market.

Instead, productivity is a priority of every professional services executive. The focus now is to invest in strategies and technology that will help drive productivity so firms can devote precious resources to high-value, billable hours.

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