Services show their limits as economy shrinks

February 20, 2024

Notwithstanding the potential boost to exports of a relatively weak pound (on a 10-year view, anyway) for the UK’s manufacturing and assembling activities, the service sector still accounts for 81% of GDP and 83% of employment. It’s therefore unsurprising that it was marked falls in services output that tipped the UK economy into recession after two consecutive quarters of shrinking GDP.

Of course, ‘services’ is a wide sector. The overall 0.2% fall in Q4 2023 was driven by larger falls in wholesale and retail, motor repair, and education. Professional, technical and scientific services, which include most forms of large-scale consulting such as accounting and law, held up comparatively well, but were little more than flat. That is worrying.

Job cuts and scaled-back graduate schemes in the professional services sector are well documented over recent months. Many large firms are scrambling to preserve their profit margins against a background of lower client demand.

The people-based, consulting revenue model brings with it financial features and associated challenges that are unusual in many other sectors: relatively low levels of borrowing; disproportionately high staff and office costs; a highly competitive market for income-generating senior practitioners; and client relationships that are often too closely linked to individuals, rather than to the firm itself.

It’s also a landscape that’s changed dramatically in the last 20 years, marked by diversification, blurred boundaries and new disciplines. Professional Services no longer means firms of formally qualified advisers in areas clearly defined over generations. The changing needs of businesses and individuals in the 21st century has widened this sector considerably to include all sorts of people-based businesses, with revenue models based largely on consulting fee income or commissions: smaller advisory or ‘agency’ businesses – marketing, public relations, recruitment, design and several disciplines that did not exist when the Magic Circle lawyers or Big Four accountants began life as Victorian partnerships.

In ‘new’ professional services, in particular, barriers to entry for operators may be low, partly a result of fewer formal qualifications, lack of official regulation and debatable ‘professionalism’. For these reasons, such businesses are wrongly assumed to be low-risk and relatively easy to manage. In reality – especially in a weak economy – lack of heritage combined with somewhat elastic demand for their services compound perennial challenges of differentiation from competitors and a need for regular reinvention to appeal to clients.

Operationally and financially, SMEs in business services are just as capable as ‘old economy’ companies of getting into serious difficulties. Some problems are obvious, but remain unaddressed year after year: poor business development skills among practitioners who don’t like selling; the comfort zone of advisers who think they have enough clients; little or no formal mentoring or coaching; poor succession planning; unexecuted marketing plans. Ironically, these may even be some of the issues for which stricken services firms offer advice. The road to failure is then signposted by flaky or unenforceable contracts – if there are any at all – and metrics for success that are all too vague. These quickly translate into slow paying clients, poor cash flow and bad debts, usually with no asset backing in the business.

Turnarounds in business services are often possible when management is helped to focus more sharply, improve basic processes and secure better cash outcomes. Owners in these sectors easily forget they are business people as well as advisors to other business people. It’s rarely too late to ask for help, but the sooner existential problems are addressed, the easier it is to move forward successfully.

Written by Professor David Fordham, Consultant at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.



How can we help you?

We offer initial free confidential advice without obligation.