May 21, 2024

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2024 Strategic Forecast for Professional Services Firms

5 min read

Like most businesses, the professional services industry is navigating digital disruption amid a challenging economic environment. The combination creates increased demand for professional services firms and the specialized expertise they provide. As a result, the industry experienced a healthy 6% compound annual growth rate (CAGR) in 2023, with the growth projected to continue through 2026.

Adapting to evolving market demand requires resilience and a constant focus on the future. We explore key trends and opportunities facing professional services firms in the year ahead.

Digital transformation is paramount.

Artificial intelligence (AI) tools have the power and potential to transform how firms operate, from data analytics and predictive modeling through enhanced collaboration and automation of routine tasks. Integrating the right tools can generate efficiencies and cost savings in the short term and accelerate innovation in the longer term.

Advancing digital technology is also changing client expectations. One in three professional services firms projects that at least 75% of the firm’s revenue will come from digital technology by 2025, driving investment in AI, machine learning and advanced analytics capabilities.* Still, many firms feel like they’re falling behind. Fifty-seven percent of industry leaders say the gap between their business today and where it needs to be to compete in the future is growing. And only one in five is confident that their digital strategy will enable them to keep up with business demands.

Recruiting and retention remain top priorities.

With office attendance remaining 30% lower overall than pre-pandemic rates, professional services firms are at the forefront of defining hybrid work culture. Firms are looking to strike the right balance between in-person and remote work. Employee recruiting and retention are key factors.

The good news for the industry is that job openings and turnover rates have been relatively steady in recent years. The U.S. Bureau of Labor Statistics also projects incremental job growth for the professional services industry through 2032. Still, as roles and skill requirements evolve, firms often find positions difficult to fill.

Looking ahead, firms can leverage the industry’s hybrid work strategies and flexible work schedules to attract younger workers with the skills they need. Equally important, they should invest in improving employee retention. Today, burnout is a top reason professional services employees leave their jobs, making efforts to improve work-life balance crucial. In addition, reskilling and upskilling programs are a powerful way to keep employees engaged and prepared for the firm’s future needs.

M&A activity ramps up.

With the industry expected to continue its growth, new firms are joining the mix and competing with established firms for market share. To optimize growth, as well as technology, staffing and revenues, many firms are considering mergers and acquisitions (M&A).

After record-setting M&A activity in 2021 and 2022, deal volume slowed slightly in 2023 as inflation and interest rates made dealmakers more selective. However, indicators point to pent-up demand and an uptick in M&A activity for 2024 as firms look to accelerate technology transformation and increase market share.

Preparing for a possible merger or acquisition is a smart business strategy, even when a firm isn’t actively pursuing a deal. Strategic preparation helps professional services firms respond to unexpected merger or acquisition opportunities and navigate management turnover, financing needs and regulatory changes.

Cybersecurity risk continues to rise.

The average cost of a data breach – $4.45 million – reached an all-time high in 2023. Since 2020, the average cost per breach has increased 15.3%. In reality, the liability for damages and long-term impactson brand and reputation push the costs considerably higher.

Seven in ten businesses see cybersecurity as a significant risk. However, with the ever-evolving threat landscape, knowing which strategies to prioritize and where to invest can be difficult. The Cybersecurity and Infrastructure Agency (CISA) and the National Security Agency (NSA) have released recommendations to help organizations avoid top cybersecurity vulnerabilities.

Another best practice is conducting regular cybersecurity penetration tests. Penetration testing simulates real-world attacks to identify vulnerabilities within a specific workplace technology, such as an organization’s network, website, applications, software, security systems or physical assets. Typically conducted by an impartial IT firm, the tests help businesses strengthen defenses, improve incident response and safeguard sensitive data.

Tax incentives provide opportunities for savings.

Optimizing tax incentives and credit opportunities is always important. For professional services firms, the primary business elements are client receivables and compensation costs. For client receivables, firms need to explore charge-off methods to accelerate bad debt deductions. The firm’s overall method of accounting comes into play. The cash method, which can defer income recognition, is available for all businesses other than C corporations, partnerships that have a C corporation partner or tax shelters. For smaller firms with gross receipts below $29 million, there’s an exemption available for C corporations.

For compensation costs, professional services firms can still claim the Employee Retention Tax Credit (ERTC) to recover costs of maintaining their workforce during the pandemic. The ERTC equals 50% of qualified wages paid from March 13 through December 31, 2020 and 70% of qualified wages paid from January 1 through September 30, 2021, with a maximum credit per employee of $5,000 in 2020 and $21,000 in 2021. All claims for 2020 must be submitted by April 15, 2024.

Due to the level of fraudulent claims, the IRS has announced a temporary moratorium on processing new ERTC claims through at least the end of 2023. However, previously submitted claims are being processed, and new claims can still be submitted. In addition, the IRS recently announced procedures for withdrawing illegitimate claims. The procedures give employers that filed an ERTC claim but haven’t yet received a refund an opportunity to withdraw their submission and avoid the possibility of getting a refund for which they’re ineligible. Withdrawal also avoids future repayment, interest and penalties.

The professional services industry experts at CBIZ can help you optimize your firm’s strategies with insights and guidance tailored for your unique situation. Connect with a member of our team and gain access to more resources here.

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