Business and Professional Services Industry

There are many opportunities on the horizon for the business and professional services industry, as it has been identified as a key high-growth sector primed for significant future investment. These companies operate in a rapidly changing marketplace that is becoming both more international and more digital, making mergers and acquisitions more cross-border and cross-sector.

Small and mid-size professional services firms have been in a solid position to take advantage of strong interest from strategic buyers in add-ons. Buyers often prefer that they acquire a business to expand capabilities quickly rather than try to grow them organically. Buyers also know that professional services companies usually have strong operational outlooks, which correlates to increased value.

Management Consulting Services Market

Globalization is having a significant impact on the management consulting services market. Many clients are expanding globally, therefore needing more sophisticated, internationally focused services. The industry is seeing growing demand due to continued rapid growth in the Internet, automation of processes, and advancements in data security. This trend is expected to lead to more joint ventures, foreign investments, mergers and acquisitions, and multinational companies moving into high-growth areas. More and more companies are forming joint ventures with firms in other countries, and some are seeking acquisitions of established companies in new markets to lower risk. Also, many domestic firms are entering into new markets, teaming up with foreign groups to provide services in more countries.

Many companies aim to cut costs and boost efficiency to allow them to pass cost savings on to their customers, enabling them to survive in a highly competitive market. Because of this, there is an increase in the demand for consulting focusing on operational efficiency and business process improvisations.

The United States is home to the world’s largest revenue-generating consulting service market and top global consultancy firms. The US market is also playing a significant role in expanding technological consulting services to the global market.

Government Contracting: A Key Area for Acquisitions

Government contracting is a significant moneymaker, especially in the United States. These firms rely on the needs of the government and the availability of financial resources for public investments. Government spending is often used to stimulate the economy during a slump.

The middle market in government contracting comprises several small, technically specialized service providers that offer high growth opportunities for larger companies seeking more capabilities and specific contract access. Private equity firms seek stable cash flow streams, and government contractors are relatively insulated from recession, making them a solid target for strategic investment and bolt-on acquisitions.

Cybersecurity is paramount for government contractors for obvious national security reasons. The US Department of Defense developed the Cybersecurity Maturity Model Certification (CMMC) to build upon cybersecurity best practices from established industry standards to reduce cyber risk among its contractors and better safeguard DoD information. Other government departments will likely do the same, prompting contractors to prepare for it in advance.

The big commercial tech companies typically draw the top tech and cybersecurity talent, making it challenging for the government and its contractors to attract talent and offer competitive salaries. Government contractors need to find ways to attract young, tech-savvy talent.

Business Process Outsourcing (BPO)

The business process outsourcing industry is valued at around $1 trillion. Technology has greatly expanded the capabilities in this sector, as it is not uncommon for companies to have virtual contact centers where employees work from their homes or offshore centers where support staff work from another country or continent. It is less efficient for companies to have functions performed in-house that require overhead costs. This is a major growth driver in the BPO industry and represents a relatively still-untapped opportunity in many countries that use little outsourcing.   

A large and growing segment of this outsourcing is office administration. Essentially, any company in operation has administrative tasks that must be accomplished to keep the day-to-day operations running smoothly. Administrative functions that are often outsourced include payroll, accounting, human resources, data management, employee benefits, insurance claims management and client support.

As the use of BPO services becomes more common worldwide, the M&A activity surrounding them increases, with a large concentration in the middle market. There is a tendency for customers to prefer fewer vendors with more diverse service offerings, motivating BPOs to use M&A to diversify and increase customer wallet share.

 

In this highly competitive market, BPO companies typically acquire target companies to gain:

• More capabilities for broader service offerings
• Exposure to higher-growth end-market verticals
• Broader geographic reach to offer more global services
• Economies of scale to lower the proportion of fixed costs

Conducting due diligence for a merger or acquisition is always a time-consuming undertaking, and this is especially true when the target is a BPO company. Location analysis of the target company should be performed for any potential acquisition to help form an accurate purchase price and avoid costly post-closing issues. It assesses site location, economic development, competition, real estate markets, workforce issues, saturation levels, historical attrition rates, recruitment, and retention viability. Partnering with a specialty company broker who has this type of experience is advised.

Recruitment Process Outsourcing (RPO)

RPO companies emerged from traditional recruiting needs but are designed to work differently. All or part of a company’s recruitment processes is assigned to an external service provider. RPO services differ from those of staffing companies in that they do not simply find candidates to fill job openings. They focus on the overall improvement of a company’s recruiting process as more of a strategic, consultative partner. They study factors such as turnover rates, technology, scalability, and how much time it takes to fill a position.

Many companies choose RPOs to improve recruitment efficiency, reduce cost, make hiring more scalable, improve the quality of hires, meet the talent needs of short-term projects, and improve workforce analytics and planning.

The industry sectors with the largest market shares are technology, telecom, finance, insurance, healthcare, biotech, pharmaceuticals, and medical equipment.

RPO companies are becoming increasingly globalized as a result of mergers and acquisitions. To be successful in this growing market, RPO providers have found different ways to distinguish themselves.

• They specialize across geographic regions, vertical markets, related jobs, and buyer segments.
• They offer value-added and technology-based services, such as analytics and mobile recruiting.

For an M&A deal to succeed, sellers should conduct an all-encompassing assessment of their value proposition and how it aligns with the buyers’ interests.

Law Firms

Human capital remains the single biggest asset for law firms. Investing in programs, technology, and other ways to support staff is more important than ever. Talent must know they are valued and connected to the firm’s success.

Security and privacy remain major issues for law firms as they often deal with sensitive, private information. A digital security strategy is key. Once security is implemented and established, the focus can shift to maintaining client relationships and creating revenue growth in the future. Investment in mentoring programs and staff empowerment can help grow the business and identify new opportunities to support firms.

Finance and Administration

Companies operating in these areas are impacted by economic circumstances and activity, which affect payroll spending and other outsourcing services. They are also impacted by the health of credit markets with regard to debt financing and a business’s ability to meet its liquidity needs. This includes payroll processors, office suppliers, accounting, legal, and consulting firms.

Commercial Services

For commercial service businesses that focus on areas such as document storage and security, revenue drivers include:

• Regulatory requirements that create the need for a certain level of document maintenance
• Litigation risk
• Longer sales cycles 
• Capital expenditures that generate more documents and more need for storage
• Customer retention
• Real estate prices with regard to physical storage space

Additional Trends Impacting the Sector

• Continued digitization and digital integration
• Artificial intelligence and automation of data
• Increased recruiting efforts and crowdsourced talent amid labor shortages
• Regulatory changes increasing the need for consulting services
• Demand for fail-fast methodology
• More strategic partnerships
• Hybrid work models
• Multi-sourcing modes
• On-demand consulting services
• Consulting firm selection processes
• Continued education
• Improved sustainability efforts

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