Professional Services: Is AI starting to bite?
Professional services firms are under pressure. Are we seeing the impact of AI? Or is it some combination of whiplash and a flat economy? What does AI mean for the legacy business model?
Project Two update - now analysing 152 inputs - happy to take last minute submissions.
There is something going on in the professional services world.
PwC just announced their latest round of job cuts, 175 junior trainees in the UK audit business. Most of the previous cuts by the big 4 have come in consulting and tech advisory roles.
Accenture led the way with 19,000 workforce reductions announced in late 2023. Yet their results are still under pressure as the Economist reported this week.
At the other end of the consulting spectrum, McKinsey is not immune with 10,000 roles to go according to the press. We have also seen smaller but significant job cuts from top tier law firms.
Is this the advent of AI? Maybe.
Most of the coverage I have seen calls out AI as a reason. Then again, those commentating have a vested interest in using AI as a hook for their stories.
My sense is that it is a little early for AI to be the main cause. Although, a couple of AI specifics are interesting:
There seems to be a wider trend for AI initiatives to get stuck in the pilot or trial phases. Perhaps, consultants experienced a boom in these early phases which has not converted into the larger projects they were expecting?
The Economist article mentions some of Accenture's big software partners (Microsoft and SAP). Is the traditional symbiosis between enterprise tech and consultants/ systems integrators about to break down?
Even if these points are relevant, there must be other factors. Two possibilities:
Whiplash
Business grew like crazy for a short period after the pandemic. In a 19th hole conversation, someone told me the US arm of one of th big 4 was 40% down on headcount during this boom. Everyone recruited like mad. Only to be left overmanned when the sugar rush faded. Part of what we see now is a correction. Possibly even an over correction.
The world is flat - at least in some places
Economies in the developed world are curiously flat. Even where there is growth, the overall feel is an absence of dynamism. (note: the picture in the rest of the world is different - India, SE Asia, the middle east and Africa are all much more dynamic.)
We can see this in some of the statistics. Although overall employee turnover is higher than pre-pandemic, the rates in professional services have fallen sharply in 2023/24. PwC in the US even referred to "historically low turnover" in one of its announcements. (Don't shed too many tears - low staff turnover is great for partner profits.)
In a different measure of change, over 40% of private equity investments have now been held for more than 4 years. These stats are harder to pin down but that is probably up from c 25% 10 years ago.
All this matters because change. Change is what drives revenue for professional services.
So circling back to AI. I do believe AI will lead to significant change for professional services. At the same time, AI will drive wider change. I expect that to create a spike in demand.
Unlike most experts, I don't think the pace of change is or will be unprecedented. This will take time - 5-10 years to make a significant shift. Change is likely to unfold over a similar timescale in other parts of the economy. Within that there could be disconnects where the pace is misaligned between clients and services firms.
Food for thought
Reflecting on the current signals in the market, 4 things to ponder:
Business model change - towards the end, the Economist mentions Palantir as an outlier. A firm whose value is six times what is worth a year ago. Based on public sources, the Palantir model seems to be software led. They start by identifying specific problems and building bespoke code to bring clients immediate benefits. Behind the scenes, there is an impressive architecture to integrate all of this and drive more strategic change. In an AI world where spinning up small pieces of code to solve well defined problems is already easy, this feels like it may be the future. Does Palantir signal a key part of a wider shift in business models?
“This reveals AI's first constraint: demand inelasticity.When AI makes something essentially free, we don't suddenly want infinite amounts. There's only so much text to generate, images to create, routine tasks worth automating.”
Balance of change - how will the upside from the increase in demand caused by AI compare with the impacts of greater productivity? How might that hit headcount and revenues? Are we about to see the share of our economy in professional services fall? If so, this would reverse the underlying trend of at least the past 40 years.
Use cases - the enterprise use cases for AI are really unproven or at the margin for most organisations. There is plenty of evidence that individuals are using AI regularly for certain tasks - Project Two will pick this up. How will this translate into real, organisation and economy wide solutions?
Context. AI matters but the impact depends on how the world is changing. There are plenty of things happening that could cause rapid and challenging change in the global economy - demographics, climate, conflict and the retreat of democracy/ rise of nationalism, unsustainable debts and welfare systems in the developed world. Take your pick. AI is important but the bigger it becomes, the less it stands in isolation.
I am happy to talk about these trends and the real world impact of AI for your business. If you are interested in talking about AI in your business, I would love to hear from you. email me kenny@sunstonecommunication.com whatsapp +44(0) 7864 749216 or book a call
Thanks for the insightful article Kenny!
Especially the points on 'Whiplash' and 'Flat economy in the developed West'. The latter will certainly play a part as companies scrutinise those annual rate hikes from their consulting suppliers.
4 thoughts.
- We hear about the cuts, but not the context around them or where hiring happens. E.g., Firms may also be hiring more contractors/niche boutiques. Or upskilling/ transferring more talent. Which we don't hear about.
- Big SW companies have a) built up their own consulting teams, and b) have numerous partnerships (with all the big firms, plus many small ones). I remember how hard it was in PwC to make the partnership with one of the big Indian SIs fruitful. It requires a lot of effort and 'selling' internally. On both sides. Which isn't often appreciated where it needs to be.
- Generational shift. People who joined Consulting between 2008-2010 as grads are now venturing out as their own boutiques. Adding to the swell of boutiques, freelancers and in-house Tx teams that grew from the previous generation.
- Productivity. I am currently in a dubious mind as to what this really means and entails for most companies. For so long productivity has just meant 'production', a hollow shell of the original definition which was to be able to produce something of value. "We mistake motion for progress".