Brexit and looming economic crisis hit financial services optimism

21 January 2019 Consultancy.uk

The levels of optimism among the UK’s financial services sector remains at a worrying low, according to a new report co-authored by the country’s representative body for business interests. The document blames the slump on regulatory demands and uncertainty surrounding the UK's impending exit from the EU, as well as concerns that the global economy may be heading for a period of crisis.

The effect of Brexit negotiations – which continue under a cloud of uncertainty in the face of cabinet and parliamentary negotiations – have more than made their mark on the collective psyche of the business community. Most recently, this was illustrated by Chief Financial Officers at UK companies remain wary ahead of the finalisation of Brexit in 2019. With the end of Brexit negotiations nigh, a survey of British CFOs revealed that their confidence in business outcomes had collapsed to a net of -30, the lowest level since the aftermath of the initial referendum result.

Now, another study has found that the financial services industry is similarly cowering from the potential aftermath of Brexit, along with a myriad of other pressures impacting the UK market. Optimism in the financial services industry now rests at an even lower level than at the end of 2017, according to the latest research from PwC and the Confederation for British Industry (CBI). According to the industrial barometer, December 2018 saw a minor bounce on the ultimate low seen in September, but net confidence among financial services executives is still languishing at -24.

Q1 Optimism vs three months earlier

Over the duration of the two years following Brexit, the confidence of financial services players has struggled to pick up, as negotiations between Brussels and the UK Government have floundered repeatedly. In the period following the infamous Brexit referendum, the self-assurance of the sector has ventured into positive territory just once, before the triggering of Article 50 at the end of March 2017. Meanwhile, the confidence of the sector plunged to lower levels than seen during Britain’s last recession, in 2012. That saw net levels of corporate buoyancy sink to -30.

This plummet in confidence came in spite of the fact that most sub-sectors saw profits rise or remain unchanged in 2018. However, analysts suggested this is partially as weaker profitability was widely reported among investment managers and general insurers. Overall profitability is also expected to fall in the lead up to March, for the first time in over three years, reflecting a widespread deterioration in expectations.

The PwC/CBI joint study suggested that when taking an individual industry perspective, optimism appears split, with insurers being more upbeat than bankers and investment managers who expressed a steep drop in optimism. Investment managers in particular are painting a gloomy picture this quarter, fuelled by more immediate market changes, such as a falling stock markets, political uncertainty and regulators’ pressures. However, when it came to what issues were the most important moving forward, respondents were broadly united behind a few key themes.

Ranked as the number one concern by banks, building societies, general insurers and insurance brokers, and the number two concern for investment managers, by far the most important challenge facing financial services firms over the year ahead is macroeconomic uncertainty. This is to say, how the aggregate economy is behaving is a major cause of concern for financial services institutions at present.

A potent blend of Brexit pressures, the threat of trade wars between the world’s largest economies, and shrinking wages hampering consumption, led stock markets their highest volatility since the global financial crisis ten years before. This has led some leading economists to warn of an ominous ‘correction’, and with leading economies like Germany reportedly teetering on the brink of recession, this is far from unthinkable.

Top challenges for the year ahead

For UK financial services firms, local issues were also top of the list though. More than 20% cited regulatory compliance as an important challenge, with landmark changes in data governance likely to continue taking the harsh lead of the GDPR in future, and UK-EU laws governing financial services likely to see a rapid overhaul in the event of whatever outcome for Brexit emerges. Brexit itself was also cited as an important challenge by many firms, with preparing for the impact of the lengthy divorce also registering anxiety from more than 20% of respondents.

Commenting on the findings, Andrew Kail, Head of Financial Services at PwC, said, “Continued economic and political uncertainty means last year ended on a more pessimistic note than previous quarters for many working in UK financial services. It's a broad industry, meaning optimism varies between sub-sectors and companies, but this survey shows that investment managers, who have been more immediately impacted by volatile stock markets, are gloomiest heading in to 2019.”

When asked where the greatest levels of competition come from for financial services firms in the coming year, the majority of respondents named new entrants as the key threat. According to researchers, more than half of firms in general insurance and investment management agreed with this, making it the most anxious subsector regarding this matter. This is partially because building societies and life insurers were also the most concerned about rivals entering the market from other sectors, while the vast majority of firms saw competition arriving from their own market segment.

Rain Newton-Smith, CBI Chief Economist, explained, “Financial services are a bellwether for the wider economy. The persistent weakness in optimism and the deterioration in expectations sound a warning for the outlook… It’s clear the sector is grappling with a number of other challenges too, from using data to improve customer experiences, to new entrants to the sector. However, with new risks and demands come opportunities. Insurers in particular are pulling ahead, many of whom are moving into areas such as asset management outside of their traditional markets.”

Related: Confidence of executives in crisis management vastly exceeds actual readiness.

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Project management industry adds £156 billion of value to UK economy

15 April 2019 Consultancy.uk

Project management has grown into one of UK’s largest areas of business over the past decade, amid the increasing ‘projectification’ of work. With the gross value added to the UK economy by project management estimated to be £156 billion, this trend is likely to continue in the coming era.

Despite the huge success of project management in recent years, until now there has been relatively little data available on the size of project activity. As a result, there has been a great deal of debate on things like the number of people involved in the sector, the number of projects, and how it contributes to economic output. Due to this need for clarity, APM, the UK’s professional body for project management (the largest organisation of its kind in Europe, with 28,000 individual members) commissioned economists from PwC to shed light on the industry's economic impact.

The research concluded that the profession makes a more significant contribution to the UK economy than the financial services sector. 2.13 million full-time equivalent workers (FTEs) were employed in the UK project management sector, generating £156.5 billion of annual gross value added (GVA). In comparison, the financial services sector contributes £115 billion, and the construction industry adds £113 billion.

Gross value added to UK economy

Commenting on the discovery, Debbie Dore, Chief Executive of APM said, “Project management runs as a ‘golden thread’ through businesses, helping to develop new services, driving strategic change and sector-wide reform.”

Who is a ‘project manager’?

To reach these estimates, PwC’s researchers used detailed models to map out the value of project management activity. They ultimately defined relevant ‘projects’ as “temporary, non-routine endeavours or rolling programmes of change designed to produce a distinct product, service or end result… [with] a defined beginning and end, a specific scope, a ring-fenced budget, [and] an identified and potentially dedicated team with a project manager in charge.”

Building on this, they then went on to define what the act of project management actually is. The job consists of applying “processes, methods, knowledge, skills and experience” so that clients can meet their objectives and bring about planned outputs or outcomes. The analysts added that this includes “initiating the project, planning, executing, controlling, quality assuring and closing the work of an identified and dedicated team according to a specified budget and timeframe.”

Importantly, it should be noted that the profession is not exclusive to only roles explicitly labelled as ‘project manager’, but to any role where specialist project management skills are used. This means that across sectors these roles can have very different titles, from the self-explanatory contract managers of procurement, or the campaign managers of advertising, to the likes of festival co-ordinators in the events sector, and many more. The roles in question also span all strategic levels of the profession, from strategic to tactical and operational positions.

Gross value added of project management profession

From a sector perspective, the financial and professional services, construction and healthcare industries make up almost two-thirds of the total project management GVA. At the same time, understandably, the UK Government has a huge project portfolio, which further drives the size of the GVA the sector contributes, thanks to megaprojects like HS2 and Crossrail.

Commenting on this to the report’s authors, Oliver Dowden, Minister for Implementation remarked, “Project delivery is at the heart of all Government activity, whether it’s building roads and rail, strengthening our armed forces, modernising IT or transforming the way government provides public services to citizens. Getting these projects right is essential if we are to ensure that we build a country that works for everyone.”

Throughout 2019, 26 major government projects were delivered, representing a fifth of the overall Government Major Projects Portfolio (GMPP) of 133 projects. According to the IPA annual report 2017-18, these represented a whole life cost of £423 billion. In addition to this were a plethora of smaller scale projects, and those in early development.

Elsewhere, with the increasing digitalisation of the economy impacting entities of all shapes and sizes, IT and digital transformations tended to dominate the projects of the UK scene alongside new product development projects, with a respective 55% and 46% of organisations in the research sample having undertaken these types of project in the past year. At the same time, this varied across sectors, and unsurprisingly, in the construction and local government sectors, fixed capital projects were the main project type undertaken.

Outlook

Looking to the future, 40% of business leaders expect project management will grow in the coming years due to the increased use of projects – or the ‘projectification’ of the UK. In a trend that has been witnessed elsewhere, organisations have to rapidly and continuously change in the digital age of business, driving the need for project management.

Outlook for project management services

An increased focus on value over cost – especially in the construction sector – and a forecast increase in the number of international projects are predicted to be key drivers of growth, according to the expert contributors. However, this will not happen in the absence of challenges; more than half of organisations expressed concern over the perceived impact of political uncertainty in the UK. Skills and capability shortages were also cited as a potential barrier by a third of organisations.

With regard to budgets, meanwhile, a third of those surveyed by PwC said they expect the size of project budgets will increase in the coming three years, while 40% anticipate a growth in project size. As the profession continues to mature, and as the recognition of the importance of good project management grows, it is expected that a greater proportion of project work will gain more distinct attribution to the profession itself, giving more recognition and appreciation to the role of the project manager.

Speaking on the findings of the study, Sandie Grimshaw, a Partner at PwC, concluded, “The project management profession is relatively new compared to some other professions, such as lawyers, teachers and doctors. However, as project management is a core competence vital to organisations in the UK, the profession is critical and will continue to grow in stature.”