Four factors to help forecast in a challenging market

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.