United States

Business and professional services industry outlook

Volume 7, Spring 2021

Business and professional services firms continue to anticipate what doing business will look like following the pandemic while advising their clients to do the same. This has involved investments in such operational components as technology, digital transformation, data-driven decision-making, virtual on-boarding, employee engagement and increased cybersecurity. This investment also includes time spent reassessing strategic initiatives, targeting end markets and shifting sources of demand going forward. The services firms best positioned for the future are those that are taking advantage of the low real interest rate environment to prepare for the opportunities the economic recovery will bring.     

Key takeaways from the spring 2021 business and professional services industry outlook

  • Law firms are tackling technological challenges the pandemic has forced upon them, including increasing cyberthreats and rising expenditures on potential efficiency solutions.
  • Many law firms do not have processes to teach their attorneys how to productively implement new, beneficial technologies.
  • Government contractors should be prepared to comply with new regulations designed to secure the defense supply chain.
  • As the Biden administration prioritizes environmental, social and corporate governance (ESG), contractors are aligning to those pillars.
  • Workforce solutions providers are anxiously awaiting growth—not just recovery—in the post-pandemic economy.

LAW FIRMS

As law firms look to see if the rate increases they adopted heading into 2021 have staying power in shooting them toward the vaunted top-line growth, many firms are continuing to tackle the technological challenges the pandemic has forced upon them. Law firm leaders are contending with increasing cyber threats, requests for additional expenditures on potential efficiency solutions, and repetitive demands from staff for some sort of shift in the law firm model. They will have to determine which investments make sense right now and which solutions will need to take a back seat. 

Continued cyberthreats

The safekeeping of client data is essential for law firms. Many have access to key client data that in the wrong hands could lead to hugely negative financial impacts for law firms and their clients. Firms have both ethical and legal obligations to protect privileged client data—or face potential fallout from the untold cost of recovering from a data breach.

To be sure, cyberthreats remain imposing: 28% of middle market executives (not only at law firms) claimed that their company experienced a data breach in the last year, according to RSM’s Middle Market Business Index Cybersecurity Special Report, which received survey responses from executives at 284 companies in the first quarter of 2021. That’s the highest annual percentage in the six-year history of the survey and up from 18% a year ago.

More specifically among law firms, we have recently seen two of the Am Law 100 firms affected by data breaches through third-party vendors’ readily exploitable vulnerabilities. And according to the American Bar Association’s 2020 cybersecurity survey, 29% of respondent firms reported experiencing a cybersecurity breach last year, up from 26% in 2019. That underscores why national security leaders since 2016 have warned law firms that cybercriminals are seeking access to law firm networks and the significant amount of data to which they have access. 

However, given the structure of many firms, it is common for numerous executives or partners to challenge whether cybersecurity expenses actually are benefitting the firm and its clients. Of the ABA survey respondents that reported experiencing a cybersecurity breach, 67% reported their belief that no significant business loss or disruption resulted from it—an increase from 62% in 2017 and 65% in 2018 and 2019.

“It is only natural to wonder whether the seemingly positive trends reflect a troubling false sense of comfort in the short term amid the prospect of potentially longer-term harm,” the ABA wrote in its survey report.

On the other hand, consider the results of a Thomson Reuters Law Firm Technology survey that reported the largest concern for law firm leaders around technology is, in fact, the security of the data housed inside the firm.  

Given those mixed signals within feedback from firms, firm leaders must make sure they have the right information about their clients, their clients’ data and the susceptibility of their systems to outside threats to be able to support increased expenditures on security enhancements. All the while, those same leaders have to decide how to walk the fine line between expanding their firms’ digital footprint and determining the interoperability of their current systems.

Invest in technology and people?

Our recent discussions with law firm leaders illuminated a trend in how firms are investing in the productivity of their attorneys. What many firms find upon implementing new technologies—whether it be a new matters management system, new application programming interfaces (APIs) to integrate data streams, or new systems for customer relationship management (CRM) or enterprise risk management (ERM)—is that many of their attorneys barely scratch the surface of the technology’s usefulness. Therefore, attitudes toward technology upgrades take a long time to shift in support of advancements, as the perceived value of the investment is simply not being realized by the individual attorneys.

However, as we inquired further about the firms’ ability to train or upskill their attorneys on the exponential growth in technology that has transpired over the past five years, many firms acknowledged they simply do not have the processes in place to teach their attorneys how to productively implement new technologies that would increase their teams’ overall productivity. Firms whose digital strategy includes an implementation team (comprised of attorneys and information security professionals) will equip their attorneys to serve clients as efficiently and effectively as possible, regardless of how complex the new technology is.  

The aforementioned Thomson Reuters Law Firm Technology survey found that only 44% of those surveyed provide formal project management training that could teach attorneys how to effectively manage their projects. In addition, when surveyed firms were asked how many attorneys are actually trained in project management, 53% responded that no more than 20% of their attorneys are trained in effective project management.

How might law firms fill this large void? They can collaborate with staff attorneys, especially those who have recently graduated and are looking to make an impact at their firms, on how to effectively implement technology and fully benefit from their firm’s investment.

In fact, as is the case with students graduating from accounting and finance programs who are trained in data interrogation and manipulation, we see a huge opportunity for firms to separate themselves in the marketplace by attracting law school graduates that possess data skill sets that many more experienced attorneys simply don’t have and, as is often the case, don’t have the desire to learn.

As long as the firms can effectively implement a process by which the partners work with, seek feedback from and listen to these staff members, the results could be game-changing in firms’ efforts to attract top talent. So, as firms are looking for ways to increase attorney productivity to increase profits, there should be a mechanism in place to ensure their attorneys are trained in successful project management, especially as legal technology continues to offer new solutions at an exponential pace.

GOVERNMENT CONTRACTING

Government contractors continue to position the federal government for the future, whether objectives are related to space exploration, digital transformation, managing smart and secure supply chains, or pushing forward ESG initiatives. The federal government continues to lean on its partnership with private, commercial businesses to tap into the brightest minds with the flexibility and agility to innovate in an economical manner.

SPACs in space

High growth areas in government contracting are not missing out on the special purpose acquisition company sensation. Virgin Galactic charted an unusual path in October 2019 when it went public via a SPAC called Social Capital Hedosophia. Fast forward to Q1 2021, and many space businesses are seeking financing for their expensive endeavors via SPAC transactions. While Sir Richard Branson’s goal to make everyone an astronaut screamed “Expensive!” in 2019, space exploration and defense can also have large addressable markets, high growth expectations and significant up-front investment, making a SPAC a viable option for raising capital.

Six notable SPAC transactions were announced in Q4 2020 or Q1 2021, all with estimated valuations exceeding $600 million. These businesses spanned the space applications spectrum: AST & Science is building a space-based cellular broadband network; Astra and RocketLab are developing small launch vehicles; Blacksky is providing satellite imagery and geospatial intelligence; Spire is operating satellites; and Redwire is manufacturing space infrastructure. Space Acquisition Corp. also filed its Form S-1 on March 3, 2021, and intends to “focus on a prospective target business in the ‘space economy.’”

April subsequently brought a slowdown in SPAC IPO activity and an SEC warning that some special purpose acquisition companies may have improperly accounted for warrants issued or sold to their investors.

Securing and innovating the defense supply chain

The defense supply chain is a central focus as the federal government looks to mitigate risk in light of the hot geopolitical climate and additional exposure resulting from the coronavirus pandemic. The Biden administration set a resolute tone in its first 100 days by issuing two executive orders focused on reshoring and shoring up U.S. supply chains, particularly those that affect defense and national security.

Govini conducted a survey that examined the supply chains of over 1,000 Department of Defense contractors to better understand how the U.S. defense supply chain is geographically dispersed. The summary table of their results illustrates the increasing foreign involvement in the defense supply chain as it progresses into the various tiers of the supply chain. The presence of Chinese firms begins in tier 2 and increases to approximately 9.0% by tier 5.

Per Govini, Chinese firms have the greatest presence in a handful of industries, including specialty chemicals, major diversified chemicals, telecommunications equipment and electronic components. Reshoring efforts will likely be focused in the areas where Chinese firms have the largest footprint and demand is expected to increase.

Government contractors should be prepared to comply with new regulations and be poised and ready to help the federal government reshore, simplify the complexity and mitigate the risk embedded in the current procurement structure.

In addition to remaining compliant with government regulations, contractors should also look to embed innovation within the defense supply chain. Charlie Prow, CEO of Vectrus, noted in the company’s fourth-quarter earnings call: “Our clients are going to expect us to operate facilities and supply chains in a much more instrumented and predictive way.” He also highlighted his company’s focus on converged infrastructure that shifts from traditional operations and supply chain management to using targeted, integrated, innovative, smart, secure and energy-efficient technologies. Some of those technologies could include 5G-enabled smart warehouses, robotic material moving, Internet of Things automation, environmental sensing capabilities and more.

Aligning federal operations with ESG goals

ESG initiatives are in vogue in government with the Biden administration ensuring every major federal government decision considers the related impact on the environment and social justice issues.

First, the Biden administration campaign platform targets to triple the federal government’s contracting goal for small, disadvantaged businesses by 2025 (increasing from 5% to 15%), highlighting the new administration’s focus on empowering disadvantaged groups via government procurement benefits.

From an environmental perspective, government contractors are planning and positioning themselves accordingly. During Parsons Corporation’s Q4 2020 earnings call on Feb. 25, Chief Operating Officer Carey Smith highlighted their “alignment with the Biden administration’s focus on sustainability” and said they are “well postured for smart, sustainable infrastructure priorities.”

Additionally, ICF International CEO John Wasson, on an earnings call Feb. 25, referenced the Biden administration’s “overarching goal of decarbonizing the U.S. economy,” citing the effort to rejoin the Paris Climate Accord and the U.S. Treasury Department’s establishment of a climate hub. Wasson sees this as an opportunity for ICF to provide related analysis, expertise, tools and coordination to achieve this goal.

Finally, L3Harris published its inaugural sustainability report that highlights goals and actions across the pillars of ESG considerations. Specifically, environmental considerations include reducing greenhouse gas emissions, signing renewable power purchase agreements, conserving resources and preventing pollution. Social initiatives include diversity hiring goals, COVID-19 safety procedures, STEM (science, technology, engineering and math) education, and community enhancement. Governance encompasses enterprise risk management, strategic oversight of ESG matters and compliance, and expanded ethical and compliance review boards.

While ESG initiatives can provide additional compliance and reporting burdens on government contractors, they also provide contractors great opportunity to help the federal government achieve its environmental and social goals. We expect the Biden administration to incorporate ESG matters into procurement practices in a meaningful way going forward.

WORKFORCE SOLUTIONS

Among the variety of workforce solutions providers, a narrow focus on staffing and executive search firms shows a subsector recovering from pandemic-induced hiring freezes at the companies they serve. Payroll processing firms are hoping for an economic recovery that supports small and medium-sized businesses in a way that allows them to not just survive, but thrive. Overall sector performance is driven by employment and business growth. Therefore, these firms are anxiously awaiting federal fiscal stimulus and policy decisions to translate into a lower unemployment rate and increased business confidence and investment.

Employing the employers

The number of U.S. employees on employment services payrolls is gradually approaching pre-pandemic levels after a cliff drop-off in April 2020 when total employment bottomed at 2.5 million, approximately 1 million lower than the lowest period in the last five years (3.5 million in May 2016). This signals that business confidence in the economic recovery is increasing enough for employment services firms to rebuild or expand their workforces. However, success is likely experienced in industry pockets and depends on how the pandemic is affecting the end market served by each firm.

We need the American dream

U.S. corporate profits (total profit earned across all industries) correlate with revenue for payroll and bookkeeping services providers, as companies look to outsource administrative tasks as they scale and achieve profitability. U.S. corporate profits dipped in 2020 as a result of the pandemic, with industry revenue following a similar pattern.

Payroll and bookkeeping service providers also benefit from U.S. entrepreneurship and increased business formation. The greater number of businesses, the greater the potential client pool. Per IBISWorld, payroll and bookkeeping industry revenue has correlated tightly with the number of U.S. enterprises in recent years.

However, small, early-stage businesses typically aren’t a primary target, as workforces are lean and accounting needs are relatively simple. As the companies grow and mature, outsourcing payroll and related administrative activities become a more feasible option. Therefore, this sector is reliant not only on a macroeconomic recovery that lifts small and medium-sized firms back to health, but also the growth of those firms.

To put it another way, if small and medium-sized businesses remained shuttered—or are never started in the first place—the effects will continue to ripple through the services economy, hindering growth and profitability. Payroll and bookkeeping service providers need policy decisions and recovery efforts to support and promote the small and medium-sized businesses that underpin the U.S. economy and spark the American dream.


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