How might Covid-19 affect the business services sector?

Armstrong is working with PE investors and management teams to understand the new normal, identify risks and opportunities, and support management teams navigating this crisis.

This note looks at key themes for investors to consider in the business services sector during this downturn, and the recovery to come. This note follows one already published on Financial Services, (7th April) and on Covid 19, impact, support and opportunities, (19 March). Our next two notes will look at Technology and Industrials.

Summary

  • Tech-enabled services are a key snap-back sector – digital transformation means hybrid models are likely to be more resilient.

  • Move of customer demand to online needs structural shift to online delivery capability.

  • Some sectors will have front-end demand depressed for now but back-end is likely to be resilient (e.g. training), so should be quicker to come back even if pressured now.

Key themes – how investors can generate value from business services during/after Covid-19

  • Each subsector will have specific winners and losers, often depending on host market focus. In the example of training and learning providers, some will prove more resilient, e.g. business-critical and/or regulatory & compliance training, they will be likely to pivot to online delivery where possible to meet sustained demand.

  • The crisis is a spur to digital transformation and greater automation, as remote working has highlighted weakness in firms & sectors where systems typically remained centralised/on-premise. Cloud transformation projects and data analysis/business intelligence projects likely to be key focus for firms (to be covered in more detail in our forthcoming Technology sector note).

  • Online delivery capability is critical. Businesses able to serve their customer base effectively online will fare better through this crisis. This is particularly the case for tech-enabled services businesses, that can be delivered remotely and at scale, e.g. B2B information, BPO providers, as well as tech-enabled services. People-based businesses, e.g. some consultancies, which work on client sites will be disadvantaged.

  • Tech-enabled services are a key snap-back sector with diversified demand, especially where they cater to several industry verticals. Demand likely to be delayed, but purchase drivers will be stronger. Services delivered are typically highly scalable and digital, benefiting from lean-back-end structures.

  • Across business services, front-end demand and revenues are temporarily depressed, but back-end functions are typically robust, with leaner cost structures and less labour-intensive operations than e.g. recruitment & staffing.

Analytical framework - how we modelled the likely impact of Covid-19

The Armstrong Framework model accounts for the likely impact of Covid-19 by grading a sector (and then subsector or company or a portfolio) across a range of key metrics. This allows us to generate an initial categorisation of pressured, resilient, or snap-back. From there, we take a more detailed look at a sub-sector or a company’s dynamics, to generate recommendations which maximise opportunities and minimise risks.

For the business services sector the key metrics are:


Risks and opportunities - how selected subsectors might respond to the challenges

The results of this analysis for selected business services subsectors are as below;

Key;

Red is likely most affected (“underweight”).

Mid green is likely most resilient (“neutral”).

Dark green is most likely to snapback quickly (“overweight”)

Note; We are happy to run specific subsectors and companies through our model and share the output and our insight with you. Please get in touch with our business services sector experts below.

Next steps – how Armstrong can help you and your portfolio companies If you would like to discuss specific companies or subsectors with our business services and technology sector experts, then please contact:


Simon Hemsley, Director

shemsley@armstrong-ts.com

+44 7957 340 534

Financial Services; Business Services


Mike Callow, Director

+44 7894 594 500

mcallow@armstrong-ts.com

Head of Technology

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