This has been the first crisis to pose an existential threat to the global professional services industry. Familiar with banking and other financial crises, professional firms have historically been able to protect themselves from their economic shocks: Management consulting revenues in the US market barely missed a beat in 2008-9.
But this isn’t a conventional crisis. We estimate that the consulting market contracted by 13% globally in 2020 compared to 2019. Against that backdrop, the 9% fall in the size of the tax services market was modest, especially when we also factor in the extent to which some tax services were growing even when others were shrinking. The astute tax firm will have been able to sidestep the poorly performing markets and focus on the opportunities.
Key to the industry’s performance both last year and in the future is compliance-related work. Our research suggests that, in the early days of the pandemic, clients—keen to conserve their cash—cut back on the use of external help in this area. They believed that the work could be done in-house, only to quickly realise that they had neither the capacity nor capability to do it themselves. By the autumn, demand for compliance had returned to, and in some cases exceeded, pre-crisis levels. That sets the industry up for a strong recovery this year.
But, while that will be a cause for relief, it isn’t an excuse for complacency.
The crisis changed clients’ priorities when it came to using external support, with attributes such as a firm’s responsiveness, flexibility, speed of delivery, and the ability to deliver measurable results all becoming more important when deciding who to hire.
It’s the last one that poses the biggest potential problem for the industry. Research we carried out last year painted a very positive picture when it came to clients’ views of the work done by their tax advisers: Eighty-two percent of the senior executives we surveyed described the quality of this work as “high” or “very high”, similar to the proportion in 2019.
However, when we questioned the same clients about the value those firms had added over and above the fees they’d charged, only 55% said that the impact was worth more than the fees. This doesn’t mean that clients thought they were being ripped off (just 8% thought that they’d paid more in fees than they’d received in value).
However, 37% of clients essentially regarded tax consulting as transactional, that they got what they paid for. We see the same trend in regulatory driven-consulting work in the financial services sector. Clients, because they don’t get to pick and choose what they have to comply with, don’t see this type of work as yielding valuable results to them. An external firm, working on compliance issues, will inevitably find it hard to add value, because the value simply isn’t there to be added.
This has implications for fee rates. Where the proportion of compliance work goes up and the ability to add value goes down, prices fall. Between March and September last year, we saw the proportion of clients who thought that prices would fall jump twentyfold, from 3% pre-crisis to 61%. Although the picture may now be improving, discounts offered during the crisis will have an indelible impact: Clients, having become accustomed to lower prices, aren’t usually prepared to countenance their increase without a very clear justification. The more compliance-related work there is, the harder it will be to make a case to put prices back up again.
Tax consulting may have come through the crisis comparatively unscathed, but it has reached an inflexion point. Without investment, it may see revenues continuing to rise, but margins fall. Our research suggests that there are three things tax firms should be focused on in 2021, if they’re to avoid this scenario.
The first is expertise. The crisis has given clients far cheaper and easier access to the world’s top tax consultants, and this is something clients want to see continued even as the people gradually start to return to their offices. They’re also willing to pay premium prices for it, so actively promoting the skills and experience of your specialists will pay dividends.
The second opportunity is technology. It will come as no surprise to anyone that the crisis is amplifying clients’ expectations about the way in which tax firms use technology. Technology and advanced analytics embedded in the tax advisory process is something else clients are prepared to pay more for. Finally, there’s the conundrum of value itself. Tax consulting firms may benefit from what is effectively a captive market, but that doesn’t mean they should invest in talking to clients about how they add value—or indeed trying to measure it.
Fiona Czerniawska, managing director and Co-Founder of Source Global Research, a research-led consulting firm focused on the professional services industry.