Our quarterly index of client sentiment suggests a sustained—if still gradual—improvement in confidence. The proportion of clients saying that the macroeconomic situation and political tensions haven’t depressed their confidence in the future rose from a nadir of 16% in Q4 2022 to 25% in Q3 2023, and again to 29% in this most recent research.

Improved confidence has yet to have a material impact on organisations’ ability to invest. Just 16% of clients say that their ability to invest hasn’t been impaired by the polycrisis, and our conversations with clients and professional services firms suggest that clients remain cautious about their expenditure on external support. (If business confidence continues to rise to the end of the year, then we’d expect to see some loosening of clients’ purse strings in the New Year.)  

None of this means that organisations aren’t currently investing: They are, but in a very focused way. As we’ve noted repeatedly in these updates, if clients are spending on one thing at the moment, it’s technology. And if they’re relying on external support in one area, it’s—you guessed it—technology. More than 70% of clients say that their organisation has invested in digital transformation in the last three years. Fifty-two percent expect to be investing even more in digital transformation in the next 12-18 months, more than in any other area. Forty-three percent say that they’re most likely to spend money on external support around technology strategy, and 36% around technology implementation.  

Why prioritise technology? Part of the answer is probably that technology has a tangible, immediate impact, the kind clients tell us they’re looking for when we interview them. Part may lie in a shift we discussed in our last update, whereby clients recognise that growth is as important as cost-cutting and they need to launch new products and services if they’re to keep up with their competitors.  

But our most recent research highlights another driver: People.  

Respondents in our latest survey were 15 percentage points less likely to cite rising costs and falling profits as the reason why economic uncertainty was still undermining their business confidence than earlier this year (25% in our Q3 survey to 10% in Q4). They were also less likely to blame slow decision making by their leadership team and the extent to which their international sales and operations were problematic. Clients were, in fact, more positive on almost all fronts—but the issues in which they’ve seen the least improvement in the last three months are shortages of capacity and/or capability.  

Delving more deeply into these results, we asked clients about the specific people-related issues that were troubling them most and compared those to the previous quarter’s ranking. Clients are now less likely to be concerned about employees’ personal productivity and their unwillingness to change, for example. But as those issues recede, others appear to be becoming relatively more serious. Adapting, in the long term, to hybrid working remains a serious concern for many clients, but the two biggest jumps in relative severity have been around employee turnover and pay rises. That may seem counterintuitive at a time when economic uncertainty might make employees cautious about changing jobs, but some recent staff turnover will have been involuntary redundancy: Around 14% of organisations we surveyed this year said that laying off staff has been one of their top two responses to falling profits. The fact that employees are cautious about changing jobs may make it more likely that they seek pay rises from their existing employer, especially at a time when inflation is outpacing pay awards in many countries. Faced with these challenges, investing in technology may seem to be the solution.

For consulting and other professional services firms, this is a win-win scenario.
Heads: Clients come to them for support of large-scale digital transformation programmes. Tails: Clients use firms to plug the gaps in their capacity and/or capability. What suppliers will need to do, however, is be prepared to meet the challenges that come from having two very different operating models at once: technology support and staff augmentation.