In our first insight, as the Government imposed lockdown, we explored the immediate action all firms should take to protect themselves financially. In our second insight, we looked at the lessons to be learned so far from the impact of the pandemic on professional services firms. In this insight we look further ahead, assessing the potential longer-term consequences.
During the early stages of lockdown, we were reminded that the UK economy was in a robust position before the pandemic hit and therefore there was a reasonable expectation that it would recover promptly once this was all over. However, more recently the mood music has changed with a warning that the economic impact could be felt for much longer. Getting the economy moving again is going to take longer that we all originally thought and there will have been some permanent damage. Some businesses are already going into administration and others are putting plans in place to downsize their operations dramatically.
Traditionally, professional services firms grow in the same direction as GDP but at a faster rate. However, when GDP growth is negative, professional services firms contract at a faster rate. Another point to bear in mind, is that the transition period for the UK’s departure from the EU ends in just over six months’ time.
Who is paying for all this?
While the speed and generosity of the various UK Government support schemes has been welcome and the professional practices sector has taken advantage more than might have been envisaged at first, the now record levels of UK Government borrowing will need dealing with at some point. Will the UK Government - not wanting to risk a nascent economic recovery - decide to take advantage of record low interest rates, simply kicking the debt pile down the road? Alternatively will it look to increase tax rates? (Not something historically associated with Conservative-led administrations). Where would these tax increases be felt most? The burden of any increases might be felt disproportionately by partners in LLPs: Rishi Sunak has observed that the self-employed currently pay lower levels of National Insurance than employees and “If we all want to benefit from state support, we must all pay equally in future”. If National Insurance rates are aligned, the benefit of being an LLP versus a company will shift.
Those firms that have furloughed staff will have to work out when and how to re-engage with people that have been disengaged for a lengthy period of time. Only a few months ago the war for talent was one of key challenges for all firms, but with the expected decline in activity levels, the need for people will reduce. However, will those who have been furloughed, or had their pay reduced, remain loyal to firms for keeping their job open or will they feel hurt by the experience and look to move to more financially sound firms? Recruitment will no doubt be closely watched over the next few months or years, so expect a shortage in qualified professionals in, say, five years’ time, when the economy will be growing again.
More positively, we have all learned how to work remotely and it hasn’t been as bad as some had feared. However, before we all claim that offices won’t be needed going forward (big real estate savings there) we need to take a closer look at what we might lose in a more remote working environment. Working remotely can work effectively when everyone is remote, but how does it work when some are and some aren’t? Which tasks are done more efficiently when working remotely, which are less efficient and how can we structure our workforce to deal with this? As the more mundane of our tasks become automated, the benefits of engaging a professional services firm will come through the collaboration they can provide with the enhanced problem-solving that many minds achieve over a single mind. We therefore need to think how people collaborate and whether our infrastructure (both physical and IT related) enables it to happen successfully.
Ultimately humans, unlike some species, are a sociable race and enjoy the connections they make with their colleagues. I don’t hear of many leaving speeches where people say they will miss the quality of work they did – I would suggest it is always their work friends and engagement with them in the office place that is their biggest loss. We need to think carefully how we plan our offices of the future if we are not to lose out when the war for talent returns.
However, if there is one thing the pandemic has demonstrated is that the more financially sound firms have been better placed to deal with the uncertainty. If there is one legacy that I hope firms will adopt, it is the need to have a stronger balance sheet in future. The solution is there, staring partners in the face, in the form of their unpaid bills. If firms could halve the time it takes for clients to pay to, say, 60 days (that is still two months) the financial security of firms, their ability to invest longer term, the reduced anxiety of partners would all be positive legacies of the 2020 pandemic.
“Never let the future disturb you”
― Marcus Aurelius, Roman Emperor (121 – 180 AD)
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.