Although the underlying drivers of growth (pressure on clients to invest, shortages of key skills, spending on technology, and a general growing willingness in organisations to rely on external support) remain strong, the market has been weak in the last six months and is likely to remain so for at least the first half of 2024. As a result, we have seen recent rounds of selective layoffs, as professional services firms act to protect profits after a recent period of over-recruitment, while also trying to ensure they’ll be able to scale up when the recovery comes (and recoveries in this industry can happen very quickly).

Predicting the future in this environment is obviously difficult, but the last couple of years suggest that there are four lead indicators we need to pay attention to.

1. Pressure on profits

Client organisations buy external support in two circumstances: When they’re making money, and when they’re not. The more extreme the situation in either direction, the more they’re going to be paying for help from professional services firms, whether they like it or not.

One of several reasons why demand for consulting and other professional services remained resilient for as long as it did is that struggling client organisations were able to protect their margins by increasing prices and cutting costs, thus giving them scope to make much-needed investments in modernisation, especially technology. While the rate of inflation is forecast to be lower in 2024, our latest quarterly client survey suggests that it is still a huge concern for senior executives. Sixty percent of respondents said that high inflation (something they can’t control) was one of their top three worries, compared to just 10% who cited supply chain reconfiguration (something they can control).

From the perspective of professional services firms, clients’ profit margins are both easy to track and slow to change, meaning that firms have time to respond.

2. Shortage of capacity/capability

Client organisations that lack specialist expertise and/or underlying capacity will turn to professional services firms to make up the shortfall. Again, this has been another important reason why the professional services industry has performed comparatively well in the last two years. People issues of all hues remain high on clients’ agendas, with 30% of senior executives concerned, four years since the start of the pandemic, about how well their organisations are adapting to hybrid working, 27% complaining of high staff turnover, and 25% saying that employees have unrealistic expectations around salary rises and that they simply don’t have enough people—factors that are all interlinked.

This data hasn’t changed much over the last two years, and is unlikely to change quickly in the future, reflecting as it does long-term shifts in employment behaviour.

3. Having the wrong services and products

Our first two lead indicators are driven by factors outside the control of a professional services firm, but the third is definitely something firms can address. The pandemic demonstrated the importance of being able to adapt services and products quickly to clients’ inevitably changing needs. The consulting and professional services industry recovered quickly from the pandemic, with demand booming in winter 2020-1. But it could have recovered even more quickly, in the summer of 2020, if firms had moved faster to change their offerings.

We’re seeing a degree of that same behaviour in the market today. It’s clear, for example, that clients want to invest in becoming more sustainable but currently lack the budgets to do so, leading to much sustainability work now being carried out as part of other projects, such as supply chain reconfiguration. Sustainability consulting practices need to find the right balance—and we’re not convinced that any yet has—between emphasising the importance of being sustainable with marrying its services to clients’ most important agenda items, such as productivity.

Having the wrong service at the wrong time can be catastrophic for a firm. But this lead indicator can be predicted, at least where firms are honest with themselves.

4. CxO confidence

This is the most troublesome of lead indicators because of its potential impact and the speed with which it can change. And it’s here that our most recent data is giving us significant pause for thought. The proportion of clients that say that their confidence has fallen as a result of the macroeconomic environment and geopolitical tensions has grown for the first time since Q2 2023. It is up from 70% at the end of last year to 86%—indeed, it’s larger than it has ever been in the last two years.

This dip in confidence is driven by a host of factors, but the most important is that clients don’t think they have the right information about their markets and/or operations to respond to the challenges they face.

Our hypothesis is that, while the situation in the Middle East is unlikely to impact most clients directly (difficulties in global shipping may change that), it’s yet more evidence that the world is in a difficult place. This is reinforced by what we’ve been hearing in client interviews, that most executives’ greatest fear is a further deterioration of the political and economic climate—and that’s exactly what the fighting in the Middle East represents. In other words, it’s emblematic of greater global uncertainty, and it’s the uncertainty that clients are reacting to.

The good news is that this drop in confidence hasn’t had a negative impact on clients’ ability to invest—at least, not yet. The bad news is that, of our four lead indicators, this the one that can change most quickly and dramatically.

What does that mean for consulting and other professional services firms? It makes our third lead indicator especially important: Firms need to be able to turn on a dime.