United States

Business and professional services industry outlook

Volume 6, Winter 2021

Business and professional services firms continue to balance managing cash flow in the short term while preparing for the growth that will result from positive effects of widespread vaccination against the coronavirus. Changes in administration, regulation and workforce preferences will provide opportunities for firms to assist and advise their clients. Firms should take advantage of the opportunity to work alongside their clients to shape how business is conducted in our post-pandemic routine.

This outlook centers on three specific subsectors within business and professional services: law firms, government contractors and workforce solutions. (Workforce solutions are inclusive of staffing solutions, executive search, payroll processing and human capital management.)

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

  • Law firms’ survival could very well depend on whether they seize opportunities to reshape and tailor operations for the post-pandemic environment.
  • Office space and automation are operational components that law firms are examining to increase value for partners.
  • For government contractors, the extensive cyberattack on U.S. government agencies in 2020 underscores the importance of cybersecurity in conjunction with supply chain security.
  • Expect the U.S. Space Force to benefit from investment by the Biden administration, given the administration’s support of technological innovation, research and development.
  • Providers of staffing solutions and executive search have transitioned to long-term strategic planning for a digital ecosystem, hoping to serve businesses that stick with remote operations.

LAW FIRMS

The results are in, and law firm executives are feeling much better about their firms’ operations at the start of 2021. The exhausting December crunch of cash collections for most firms is now in the rearview mirror, and many firms ended the year in a positon that few thought possible on April 1, 2020. Pre-year-end bonuses, salary increases and other benefits have been provided by many firms to timekeepers and administrative staff alike, as firms realized above-budget cash collections to end the year.

But as firms work to understand how 2021 will be affected by increased matters stemming from pandemic-related suits, more market activity and new opportunities (i.e., self-driving technology, cannabis legalization, etc.), law firm executives have an opportunity to reassess many facets of firm operations to ensure they are positioned to take advantage of increasing legal demands and new opportunities resulting from advancing technologies.

Law firm operational shake-up

The pandemic has created opportunities for law firm executives to examine all aspects of their firms’ operations in an effort to build for success in a post-pandemic economy. Employee benefits, employee welfare, compensation structures, partnership structures, growth strategies, expansion and geo-strategies, balance sheet cleanup and expense policies are all areas law firm executives should be reviewing to take advantage of shifting attitudes toward change. There are also many tax-saving and partner profitability solutions that can be identified by taking the time to review how the firm is currently operating.

Geographic and market expansion is one area of firm operations that has paused as the pandemic has spread. However, the industry saw an uptick in geographic expansion through mergers or acquisitions in the fourth quarter of 2020 and early 2021. Many national and multinational firms are looking to expand to the Midwestern United States, as firms see an opportunity to take advantage of relatively low overhead, close business ties and high legal spending by corporations headquartered in or expanding to the Midwest.

For example, Dinsmore added three offices in Indiana as part of a merger with Wooden McLaughlin on Jan. 1. In an article in The American Lawyer, Lisa Smith, a principal at Washington, D.C.-based legal consulting firm Fairfax Associates, discussed how the merger exemplifies the trend.

“For Midwestern firms, consolidating in the region gives them a good platform across multiple states where there are often business ties, so it helps them serve clients and expand their practices in those markets,” Smith told Law.com. “And they may be as large as they can be in their own market, so it gives them an opportunity to expand practices by adding other offices, other markets.”

MIDDLE MARKET INSIGHT

The pandemic has provided major opportunities to change the culture of needing to impress clients with lavish offices and to reimagine legal office spaces, designing them to enhance efficiency and the comfort of client experiences.

Evolution of legal tech

Jack Newton, founder and CEO of Clio, a legal technology company headquartered near Vancouver, British Columbia, recently wrote on the company’s website: “The punctuation that is COVID-19 will drive the speciation of law firms into two groups: those that have rapidly adapted to the new realities of the COVID-19 landscape, and those that are unable or unwilling to change. There will be some law firms that struggle significantly in this new reality, and some that will fail outright. But the law firms that rapidly adapt will be the law firms that not only survive, but thrive in our new legal environment.” This statement echoes sentiments made by law firms, as many look to invest in technology that changes the way legal services are provided and law firms operate. Without looking at both sides of the house, law firms risk not truly understanding their digital footprint and how they can best serve clients—important components of increasing value to a firm’s partners.

Fully managed legal matter solutions are on the precipice of changing how law firms serve clients. By learning about the data that firms have about their clients and their matters, these solutions streamline the client service process from identification of target clients and winning new business to management of client matters.

“Any technology that changes the one-to-one model of lawyers to allow lawyers to serve a much larger market will be a game changer.”
Lori Gonzalez, CEO of RayNa

At the same time, law firms must continue to focus on automation of the administrative tasks that keep their firms afloat.  Firms can often sink thousands of dollars into operational redundancies that strip profits out of their partners’ pockets. Lori Gonzalez, CEO of RayNa, a legal administrative solutions provider, offered her perspective in an article on Clio’s website. “While less sexy than things like AI and blockchain, the legal industry remains bogged down by work performed by people that is better handled by good technology,” she told the site. “Any technology that changes the one-to-one model of lawyers to allow lawyers to serve a much larger market will be a game changer.”

MIDDLE MARKET INSIGHT

Law firms must continue to focus on automation of the administrative tasks that keep their firms afloat.

Brick and mortar challenges

Another aspect of firm operations that has continued to come under attack is the need for legacy brick and mortar offices.  Whether law firms are challenging their need to maintain space in the same format they have historically utilized, or whether they are actively restructuring current leases, firms are facing challenges of a workforce that remains in a remote environment.

In the near future, while the pandemic continues, many firm clients will continue to be reluctant to meet in person, and many attorneys also prefer to avoid in-person interactions. While office spaces are not being used to their full capacity, firms with lease agreements up for renewal may opt for the cost savings of either canceling or at least reducing their physical space commitments.

However, firm leaders should continue to ask: “What will the future of physical office space look like for lawyers?” The pandemic has provided major opportunities to change the culture of needing to impress clients with lavish offices and to reimagine legal office spaces, designing them to enhance efficiency and the comfort of client experiences. In workplaces that were once built around large private office spaces for lawyers or legacy administrative tasks, there is an opportunity to prioritize shared meeting rooms that still allow for private communications when needed.

GOVERNMENT CONTRACTING

Government contractors continue to answer the call, providing products and services needed to operate the federal government, protecting the United States from nation-state threats and responding to the coronavirus pandemic. With this heightened opportunity to serve the government in 2020 also came a greater focus on cybersecurity, the shoring up supply chains, compliance with unique contract vehicles and an M&A strategy focused on strong business fundamentals.

Other transaction authority contracting  

Federal government acquisition strategy continues to evolve, as critical needs require agility, innovation and affordability. Nontraditional contract vehicles, most notably other transaction authority contracts (OTAs), are in vogue with the Department of Defense, Department of Homeland Security and, most recently, the Department of Health and Human Services.

OTAs attempt to bring a commercial style of purchasing to federal government acquisition. OTAs are not formally subject to the typical Federal Acquisition Regulations (FAR) but can be highly customized and negotiated to include or exclude key terms as needed. The goal of OTAs is to cut contract delivery times and promote rapid cycles of technological innovation within the federal government.

The DOD is the primary user of OTA contracting, as the rapid and streamlined nature of OTAs aligns with the department’s need for rapid technological advancement in the defense and intelligence sectors. OTA use is expected to continue in the defense arena—particularly as artificial intelligence and machine learning applications develop and multiply. The new Joint Artificial Intelligence Center is the official focal point of the DOD’s AI strategy that seeks to promote government innovation alongside industry and academic stakeholders.

Another meaningful user of OTAs in 2020 was HHS, thanks to vaccine development as part of Operation Warp Speed.

We expect public-private partnership and nontraditional contracting methods to continue so that the U.S. government can continue to tap the nation’s brightest minds and agile innovators in an economical manner.

Supply chain security and section 889

One pertinent supply chain security issue for contractors relates to compliance with section 889(a)(1)(B) of the 2019 National Defense Authorization Act, made effective Aug. 13, 2020. This interim rule seeks to prohibit the federal government from extending or renewing contracts with an entity that “uses any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.” More specifically, this refers to equipment produced by certain Chinese entities deemed a threat to national security, such as Huawei Technologies Company and ZTE Corporation. Subcontractors are tasked with making a “reasonable inquiry” that their supply chains are compliant.

Contractors scrambled to comply with the interim rule and seek additional clarification, given the heavy burden associated with full compliance and the limited window provided for industry input. Although section 889’s purpose and intent generally garner bipartisan support, the interpretation of the guidance and waiver policies are still at play.

National security will remain paramount in federal contractor operations, particularly in light of the extensive cyberattack on U.S. government agencies that was widely publicized in December after taking place over much of 2020. This monumental hack emphasizes the importance of cybersecurity in conjunction with supply chain security, and it underscores the DOD’s push for increased cyber hygiene through the rollout of its Cybersecurity Maturity Model Certification (CMMC) this year.

MIDDLE MARKET INSIGHT

We expect public-private partnership and nontraditional contracting methods to continue so that the U.S. government can continue to tap the nation’s brightest minds and agile innovators in an economical manner.

Mergers and acquisitions

Despite a freeze in transaction activity at the height of the pandemic, calendar year 2020 deal counts through mid-December were sturdy, all things considered. Diligence teams have adjusted to social distancing and virtual meetings, allowing market consolidation to continue and private equity investors to remain active.

While the fear of tax rate increases may have spurred some M&A activity in other sectors, government contractors have quite a few other attractive features that fuel the transaction environment. Most notably, government contractors provide a transparent cash flow stream to investors looking for diversification in a volatile market environment. Increased government spending under a Biden-Harris administration and reallocation of that spend to different agencies relative to the prior administration also compels strategic acquirers to remain active. We expect M&A to continue in the first quarter of 2021 as contractors continue to position for future success, aligning with agencies and capabilities in vogue.

Action at the intersection of government contracting and health care took the form of some large transactions in 2020. Most notably, the spinoff of DXC’s state and local health and human services business to Veritas Capital to form Gainwell Technologies, and Gainwell’s subsequent acquisition of HMS in December. We expect this to continue as uncertainty around the future of health care and federal health programs continues to evolve. We also expect similar trends where government contracting overlaps with the life sciences sector and businesses poised to participate in infrastructure investment.

Launching into space

U.S. defense strategy has evolved over time from land to sea, to air, to cyber, and now to space. While the federal government continues to invest in ground vehicles, ships and aircraft platforms (albeit at a declining rate), space is a new frontier requiring attention as satellites proliferate and the newly created Space Force advocates for investment in space.

The federal government’s investment in space is twofold—space exploration led by NASA and defense led by the Space Force, the latter of which is currently positioned within the Air Force. The National Space Council (NSC) seeks to integrate a variety of space programs spread across DOD agencies, the National Oceanic Atmospheric Administration, U.S. Geological Survey, Federal Aviation Administration, Federal Communications Commission and NASA. However, the existence and role of the NSC remains uncertain considering the change in administration.

NASA, via the Artemis program, seeks a moon landing in 2024 with the goal of reaching Mars thereafter. NASA requested a record $25.2 billion in the fiscal year 2021 budget. Investment in space exploration provides the United States firm footing in zero gravity and promotes technological evolution and innovation. Lockheed Martin’s acquisition of Aerojet Rocketdyne in December illustrates the industry’s investment in the space market, competing with commercial businesses like SpaceX and Blue Origin.

The Space Force requested $15.4 billion in the fiscal year 2021 budget for national security launches, global positioning systems, and space-based overhead persistent infrared systems. The request is less than 10% of that requested by the Air Force in total ($169 billion) but will grow over time. We expect the Space Force to remain in place under the Biden administration, given the Biden-Harris platform’s support of technological innovation, research and development. In addition, abolishing the Space Force would require an act of Congress.

WORKFORCE SOLUTIONS

Among the variety of workforce solutions providers, a narrow focus on staffing and executive search firms shows a subsector heavily affected by pandemic-induced hiring freezes at the companies they serve. The staffing and executive search companies that were able to weather the storm in 2020 have transitioned to long-term strategic planning to establish how they can best position their services in a digital ecosystem and serve businesses that make permanent many of last year’s shifts toward remote operations.

"Access to talent is no longer limited to time zones and geographies.”
M. Keith Waddell, president and CEO of Robert Half International Inc.

Casting a wider net

The rapid shift to remote work required immediate agility and investment in technology for businesses across the globe. This shift also unlocked the network effect, as staffing and executive search firms can now leverage a wider pool of candidates and data analysis to make higher-quality placements. De-emphasizing an employee’s physical location expanded talent pools and promoted diversity in hiring practices. By having access to larger pools of candidates, employment and placement services have more options to choose from while matchmaking.

M. Keith Waddell, president and CEO of Robert Half International Inc., noted as much during the company’s third-quarter earnings call: “Remote and hybrid working models will continue long after the pandemic ceases to require them. Access to talent is no longer limited to time zones and geographies.”

Waddell also noted that larger firms are amenable not only to employees being off premises, but also being outside of their local market. Small and medium-sized businesses, on the other hand, have shown they are willing to embrace off-premises employees but aren’t as quick to look outside of their local markets.

To maximize the increase in options, employment and placement firms will need to build or acquire technology tools that analyze talent pools efficiently. This will also involve upskilling their workforce to use available data and technology tools to best serve their clients, as opposed to leaning purely on their local relationships.

MIDDLE MARKET INSIGHT

To maximize increased candidate pools that are less constrained by geographic location, employment and placement, firms will need to build or acquire technology tools that analyze talent pools efficiently.

Upskilling

Workforce solutions providers, while weathering the short-term storm of high unemployment and hiring freezes, are positioning themselves for longer-term consequences. Specifically, employment and placement firms are looking for ways to upskill individuals in order to address current needs in the pandemic and longer-term needs that align with digital transformation trends.

According to the World Economic Forum’s Future of Jobs Survey 2020, the top five positions with decreasing demand include data entry clerks, administrative and executive secretaries, accounting and payroll clerks, accountants and auditors, and factory/assembly workers. The top five positions with increasing demand, on the other hand, are data scientists, AI and machine learning specialists, big data specialists, digital marketing and strategy specialists, and process automation specialists. Businesses are faced with the task of upskilling the former to the latter.

The World Economic Forum surveyed employers to determine the perceived barriers to adoption of new technologies—55.4% of respondents identified skills gaps in the local labor market as the primary barrier.

ManpowerGroup Inc., for example, is addressing this issue by leveraging data to identify adjacent skills, assess, coach and upskill via its MyPath program. As Manpower Chairman and CEO Jonas Prising explained on the company’s third-quarter earnings call, this initiative has afforded the company the ability to “shift and reskill people from declining to high demand sectors during this pandemic.”  

Not only is Manpower upskilling its job candidates, the company is also upskilling its talent agents to be expert in data-driven assessment and recruitment. This results in improvements in reassignment rates, utilization rates and client satisfaction rates. Data-driven assessment and recruitment is a prime application for AI, given the amount of data these firms collect around candidates, companies, jobs and people.

Serving state and local governments

Workforce solutions providers are beginning to see heightened opportunities serving the public sector, specifically state and local governments. State and local governments have been inundated with needs from their constituents since the pandemic began and are struggling to address those needs, given lower tax income and growing budget deficits. Specifically, states are attempting to continue normal operations despite lockdown restrictions while juggling increased volumes of unemployment claims, housing assistance needs, reeling school systems and phones ringing off the hook at call centers. These needs provide opportunities for support services related to hiring (both permanent and temporary), processing support, technical support and other business services that workforce solutions providers are looking to bundle.

RHI’s Waddell noted in the third-quarter earnings call that there is likely “bulge demand” for these services to state and local governments related to COVID-19 disruptions. However, he believes “their processes could use some optimization” that “lives past this bulge period.”


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