Leverage not productivity
How can AI be a tool to increase leverage? Answering this question is the key to unlocking new opportunities and disruption in professional services, healthcare and education.
Reminder: I have set up Project Two to gather stories, observations and frustrations about how you are using AI today. You can share your experiences in any format - text/ audio or video. Use this simple form, message me below or book a call. And I have just added a whatsapp option so you can ping sunstone on +44 (0) 7864 749216
"AI is going to make a lot of productive people work harder..."
Many readers will know I held various leadership positions at PwC Consulting during my career.
It's pretty important when you are running a business that size that you know how that business makes money. In professional services, this comes from four things: rate, margin, utilisation and leverage.
The first 3 are obvious. How much do you charge? How much is your rate greater than your costs? How many hours a day/ week/ year are you able to bill.
Leverage is often overlooked or misunderstood. This manifests itself in the tech press in phrases like "consulting businesses don't scale."
Well PwC has around 370,000 people and generates $55 billion in revenue. And there are consulting/ professional services businesses that are even larger. So clearly scale is possible.
The key to scale is leverage. I made much more money as a PwC partner than I can as a one man business advisory firm. Because I had leverage.
In professional services, leverage means the ratio of staff to profit sharing partners. In PwCs case, this runs at roughly 20:1. So PwC partners make good money because they share in the revenues earned by 20 of the people they employ.
So what?
Leverage is a really important concept for future applications of AI. It's the antithesis of the "which jobs will AI replace" way of thinking.
There is a lot of talk about AI and efficiency - cost efficiency, productivity and so on. These are useful measures but they are inherently limited and static - this is why people see the Jevons Paradox as a "paradox" when in reality its common sense.
Leverage turns this on its head. The question becomes: How can AI be a tool to increase leverage? Answering that question unlocks growth in output and that leads to more revenue and higher earnings.
Watch what people actually do
There are literally thousands of great business opportunities that flow from this mindset. The best way to see these today is to observe how people are using AI today.
The quote at the top. People love to do more. I think almost everyone would love to do more with their time. Just not necessarily at work.
Some industries though are stuffed full of people who love to do more with every hour of work. Professional services, software, creative industries are all good examples.
There is no way to replace these jobs. The type of people I am describing will simply not allow that to happen. We (this is my tribe) will not head to the beach/ bunk off for a few martinis/ improve our golf handicaps just because we have found something that means we can get through our current workload more quickly.
Oh no, we will simply grab any tool offered and find ways to do more and faster and (in our minds at least) better.
So disruptive AI change will come from leverage. That will eventually show in the productivity statistics. But leverage is a much better way to think about what will happen and how.
4 questions
What does that all mean in the real world?
Unfortunately, this way of thinking does not make predictions more accurate than any other method.
For me at least, it does lead to some more interesting questions. So let me leave you with 4 that I find helpful:
AI leverage lowers the cost of delivering many services. Lower cost will enable much greater output of these services. We have never really lived in that world before - Baumol's cost disease means the cost of services keeps rising. So the limitation in many cases will be, how much demand is there for all this extra output (or abundance if you prefer)? I can easily see 100x demand for software. For lawyers or management consultants, not so much.
How might AI transform those industries where there is already massively more demand than there is service capacity? Healthcare for example. Can we truly use AI to increase our capacity to deliver healthcare?
How can you use this leverage to drive revenue in your business? It's fairly easy to see the cost reduction opportunities but you can't cut your way to growth. The real strategic questions for me are about how uses of AI translate into actual business revenue. By changing existing business models or a new wave of startups? Both will have a role.
And at the lowest level, what does this mean for my business? I have been advising tech companies for over 30 years, including a spell as global TMT industry leader for PwC Consulting. AI would enable me to do almost everything I have done in that time differently and better. So how can I apply that to create some leverage and grow sunstone?
I am very much in the foothills with that last question. Project Two is part of the discovery phase and I can't wait to see what emerges from that. Despite the grey hairs and the scars, the possibility of building a new business with AI still gets me excited.