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Those that acted early with reduced pay, required annual leave, or cutting of non-essential spending are coming out better. Early insights show productivity has increased, with less time wasted and more collaboration. But even with this agility, COVID has brought with it the need to leave cash in your business – and the partnership model used by so many professional services firms doesn’t lend itself well to this. Will this mean the end of the partnership model and a move to an incorporated structure for some professional services firms?
Hear from National Head of Professional Services, Ben Matthews, as he highlights how those in professional services have adapted to working remotely, the pitfalls of the partnership model and what 2020 and beyond will look like for the sector.
Welcome to Boardroom.Media. My name is Velvet-Belle Templeman and I'm here talking to Ben Matthews, National Head of Professional Services at Grant Thornton. Ben specialises in professional services including large legal practices, engineering, advisory and recruitment firms, architectural practices and service organisations. Today we'll be talking about how this sector has adapted. As the professions providing services to other businesses, they need to be adaptable not only to market conditions but also to their clients. Thanks so much for joining us today, Ben.
Thanks Velvet-Belle, good to speak to you.
Ben, to set the scene for everyone. How was the professional services sector faring before the pandemic hit?
I think the sector was pretty buoyant. It was going very well. If we look at legal and recruiting, a lot of those firms were having record years and really enjoying, I suppose, a buoyant economy. Architects and engineers perhaps operating under a different cycle, although infrastructure was certainly very busy and those firms involved in infrastructure activity were enjoying the fruits of those.
So they were coming from a pretty strong base in that case. Was there an immediate impact on your clients when the restrictions and closures came in?
Well, it was a massive change in the physical, no-one had ever seen anything like it, just a complete lockdown. So physically just incredibly unusual and challenging circumstances. I think financially a lot of firms continued with the momentum that was there pre-COVID. Certainly, legal firms had a lot in the pipe. Architects and engineers, their timelines were a bit different. They're often at the front end of a project, so they may still have been busy. But yeah, legal had just continued on. But the question for the legal was, well how long was COVID going to last for, and how long was this momentum that they were enjoying going to be around for? So they were busy but didn't know for how long. I think some firms against that background acted early in terms of financially acted early. They reduced pays encouraged staff to purchase leave.
There was forced annual leave, there was a cutting of nonessential services and spending. There was discussions with landlords around reduced rent. They just didn't know how long this pain was going to continue. So some of those firms thought, well, we better act early because cash is king and we need to find a way to preserve it for as long as we can. One of the pleasant outcomes that they saw was a massive reduction in travel costs, which obviously went straight to the bottom line. So that was a pleasing outcome. But yeah, it was some big change changes for sure. But we found, I think, the more agile the company, the better placed they were to, I suppose, ride the storm and to adapt quickly to the change in circumstances.
So Ben, from what you've described, it sounds like there is still work, but perhaps a redistribution of the kind of work.
I think if we look at legal, that's right. So real estate and construction that had slowed a bit, but that was a cyclical thing rather than a COVID thing. Mergers and acquisition activity had certainly slowed dramatically as a result of COVID because the financial markets just were sort of haemorrhaging. But then with every crisis brings an opportunity. So firms are still looking around for appropriate targets and I've had some discussions with firms that are looking to buy businesses that might be suffering as a result of the current climate. Then legal workplace relations, infrastructure restructure groups, they're all ramping up. Some have ramped up quickly in particular, workplace relations, something like restructure, it’s a longer tail, but they certainly see a lot of activity and obviously are building up towards that.
We're also seeing tenders. It's an unusual market to be going to tender, but we're seeing clients win tenders and their clients are just going to tender in a different way. They're seeing that they've got a need and want to change advisors or new work arises and tenders are being won, but just differently to how you'd win them before. So I think COVID, in most people's minds is hopefully a short season and whether it's a U- or a V-rebound, I think clients want to be ready for when we come out of it.
So looking at professional services as a business, and maybe let's focus on law firms for now, what impact has the COVID-19 crisis had on their operations? I imagine social distancing must be hard in a large office?
Well it's working from home. Most firms have had little choice but to have all their staff working from home. All face to face meetings, whether they be internal or client facing have all been cancelled. All communication is done remotely. The firms that I speak to, only about 5 per cent of their staff are working from the office and that's really through necessity where their personal circumstances don't allow them to work from home or their internet's poor or they need infrastructure in the offices. Some of the surveying and architectural firms that have got large printers and things like that, they need to sort of rotate and cycle through the office to get access to that infrastructure.
But in the main, people are having to work from home and it has been quite an impact. Social distancing, well, everyone's at home, so the offices are skeleton, a lot of receptions have closed and clients, I think, are understanding of that. The clients that we speak to and their clients are understanding that this is not a firm decision, this is an international decision that's been made really, and forced upon them and so they've had no choice, so they're quite understanding.
Ben, the general perception is that office workers were really ideally placed to move to remote working. Has it gone seamlessly for your clients?
Well, I think those firms that have invested in technology early on and perhaps encouraged some sort of agile work environment, they were well placed. Obviously saw a massive shock, but their systems and processes were there. They had to ramp them up. We were talking to some firms early March and against, I suppose, a thought that there might be some sort of shutdown, they were bench-testing their systems and encouraging all their staff to work from home for a couple of days just to make sure the systems stood up, and therefore their transition to working from home was as seamless as it could be.
But for those firms that hadn't invested in technology that perhaps had an office full of desktops rather than laptops, they were in a world of pain and that pain came upon them very, very quickly. Almost overnight we saw laptop and printer sales booming in places like Officeworks. You couldn't get a printer for anything. I think those firms that had invested and they’d invested just because that was the way they wanted to do business, were well-placed as a result of what had happened.
I think we’ve seen productivity increases across our clients. I think that the clients are saying that there's less wasted time, less travel, more collaboration happening. Staff are becoming, I suppose, experts in Zoom, BlueJeans, Skype, Google Hangouts, different ways to collaborate and different ways to touch base with each other. I think from a learnings perspective though, I suppose that there's some things that you just can't achieve when you work from home. And certainly, training is one, where online training can still be done, but it's not the same as face to face, especially for the more junior staff members and those that are perhaps in a traineeship type of mindset. Mentoring is often a bit more challenging too when you try to do that remotely. But that being said, you just do it differently.
And then what are some different strategies and initiatives that you've heard of to address these challenges?
Think just people reaching out to each other in a different way than what they did before. I think we're finding when we talk to our clients that their staff seem to be more relaxed at home, more relaxed in an environment they feel quite comfortable in. And so, whilst they're working hard, the feedback is, there's a different level of connection that doesn't happen in the office. When you're having a Zoom or a Skype call with someone and you hear a pet in the background or a spouse or a child, it just tends to break down walls.
So we’re finding that there's lots of activity going on, but it's a different sort of connection to what was in the office. In terms of, I suppose the collaboration piece and just trying to connect with your different members of staff, we’re seeing online trivia, random Zoom calls, where we're seeing firms just pull together their staff lists and randomly connecting up people to have a Zoom call just to get to know each other. And that wouldn't happen in the office because you're in your teams and you're just working away. So we're seeing things being done differently and I think that's a good thing.
Now we were talking beforehand and you mentioned something very interesting and that's that the partnership model, so common in professional services, isn't necessarily the best business model during a recession. Why is that?
Yeah, it's interesting, Velvet-Belle, we talked about cash being king and many firms are coming off a really strong period of performance with 2020 perhaps being record years for a lot of these firms. But what does 2021 look like? If there's a downturn, firms will want to leave cash in their business. Cash they generated from the 2020 result. Well, a partnership model doesn't really encourage partners to leave cash in a business because the partnership profits are paid out to the partners. They pay tax at the top marginal rate, 47 cents on the dollar, and if cash needs to be retained in the business, the partners need to put that money back in and that's something that they're disinclined to do.
So you look at a company or an incorporated model where a company is paying tax at 27.5 cents in the dollar or 30 cents in the dollar, there's additional funds there that can be retained in the business on which the partners haven't paid the top marginal rate of tax. That creates a war chest of cash that can be used to ride a storm, whether it's to retain your teams and pay your people or pay rent or whatever else you might need to keep the business intact during a period of downturn.
The corporate model actually encourages that retention of cash and an ability to ride the storm. But the classic partnership model does not, and I just think that whilst during a period such as we're going through is not a time to restructure, I think at the back end of this, some firms will have a long, hard look about their structure and think, well, the partnership model didn't work well for us here and for a number of reasons, now's the time to be thinking about doing a bit of a restructure and thinking about what can we do better from a structural perspective.
So short term, say in the next six to 12 months, what do you see happening in the sector?
Well, I see 2020 the rest of the financial year, 2020 still been quite strong for firms, pre-COVID momentum and a lot of activity, will see 2020 sort of finalise in a good way. As we move beyond that, I think if we look at legal, the recovery teams will become increasingly busy. The M&A teams will start to see some improvement as capital starts to free. Albeit, though that might take a lot longer than six months. Some of my colleagues are saying that it could be sort of 12 to 18 months before the capital markets sort of free up and M&A activity starts to increase again. But one part of the firm might suffer, another part might improve. So we've talked before about workplace relations, infrastructure teams, restructure teams, they will all become increasingly busy as time goes on.
Work wise, I think people will return to work slowly. You might see people cycle through the office. I don't think our workplace will quite be the same again. A lot of these firms had probably never encouraged agile working from home arrangements, whether that was because they just felt that it didn't work for them or collaboration was suffering, but it's been thrust upon them now, and I think they've come to accept that it actually works. It works for the business; it works for their people. So I don't think we're going to see a return completely to what we had before and it will become a bit of a hybrid where there'll be people working from home on a regular basis, perhaps all the time and others working from home in the office, from time to time.
You mentioned a hybrid as a possibility, longer-term at 12 months and beyond what do you see happening in the sector?
I think a lot of organisations are going to look at their space and how much space they need to conduct their business. Certainly, the legal firms really encourage people to be in the office and they work together as a team. I think now they'll reconsider that and so when their leases come up for renewal, they might have a good hard look at how much space they need. I've spoken to some firms who have said, look, we might need 20-25 per cent less space than what we've currently got. So that is very much a significant change to where they were before. So I think there'll be some rent savings, there'll be tech increases. Some of the learnings from, I suppose, the COVID lockdown will filter back into the workplace so that the working from home environment is perhaps more seamless than it is now because obviously there'll be time to refine it. So there certainly will be some changes.
Ben, thank you for your time.
Thanks Velvet-Belle, good to speak to you.
