May 18, 2024

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How will professional services handle the Great Stagnation?

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Two years ago, the City’s professional services firms couldn’t hold on to their staff. Now, they can’t get rid of them. 

In 2021, a post-pandemic boom in demand for the services of accounting, legal and consulting firms combined with the so-called Great Resignation — where workers took stock of their careers and opted to quit or move in their droves — to create a white-hot market for corporate advisers.  

Both trends have faltered. Business isn’t dire: despite a dearth of deals, and a decidedly shaky UK economic outlook, consultancy revenues are expected to grow 11 per cent this year, according to the Management Consultancies Association, before slowing to 9 per cent next. This is a return to earth from the post-pandemic peaks, but not desperate times.

The change in staff behaviour has been more dramatic. Attrition rates among the UK’s consultants topped 20 per cent in the hiring frenzy after Covid-19, far in excess of the sector’s long-term average of about 12 per cent. This year, movement has decidedly slumped, with attrition falling to perhaps 5 to 7 per cent, according to sources around the sector.

This is a problem for firms that, particularly the Big Four, rely on hoovering up vast numbers of graduates to churn through work, and then steadily winnowing their number as people depart for competitors, clients or through burnout. High attrition rates, plus business lines that rally in a slump, usually help these firms pick their way through downturns without drastic restructurings. But in recent weeks, each of the Big Four has launched UK redundancy rounds, while some firms have delayed offers to new joiners due to arrive to start their careers.

What is distinctive about this cycle, argues Tim Morris, emeritus professor at Saïd Business School, is that firms appear to be moving faster and more aggressively to match staffing to client demand, to protect profits per partner — the industry’s benchmark figure for performance. 

This may be because moves at partner level picked up notably in recent years, particularly in certain areas as new entrants snapped up previously loyal top earners. Even in the current freeze, firms remain on the lookout for senior hires who come with an established network and record for business generation, says Chris Eldridge, head of UK, Ireland and North America for recruiter Robert Walters. 

But protecting the top ranks more assiduously risks exacerbating the sector’s already boom-and-bust tendencies when the recovery does inevitably come. Cutting from the very bottom, yanking job offers from graduates who have the least ability to manage an unexpected change, is both unfair and unwise.

Given firms’ reliance on graduate recruitment, keeping an unblemished reputation on the milk round is crucial. Cutting from the lower-paid bottom and leaving a top heavy structure of underemployed juniors just doubles down on the problem.

It may be that some firms are — almost certainly prematurely — rethinking their staff needs at junior levels given the transformational effect (or so they keep telling us) that AI will have on everyone’s business: research by Bain put professional services at the head of the pack in terms of labour time that could be automated by AI, at 41 per cent.

Regardless, the instinct to cut where it seems easiest should be resisted. The sector is already grappling with the disruption that Covid-induced isolation, and the rise of flexible working — particularly among partners — has had on a business model reliant on well-remunerated leaders mentoring and training the juniors.

Another oddity of this cycle, says Laura Empson, professor in the management of professional services firms, is that the shortage of bodies in the post-lockdown booms kept some advisers doing junior work for longer, rather than shifting up to doing more business development and client management work. 

That risks a shortage of bodies in the lower ranks and a lack of experience winning business further up the hierarchy as the cycle starts to turn. The aim should be to avoid another bout of panicked poaching when, eventually, the moment comes.

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