AI will cost professional services more money than it earns them in 2024
But it will increase fee rates.There are two sides to the unfolding story of AI where the professional services sector is concerned.
Firstly, there’s the extent to which this technology, which suddenly hit mainstream business consciousness early last year, will be adopted by client organisations and thereby generate considerable revenues for professional services firms. Secondly, there’s the growing pressure for professional services firms themselves to be equipped for AI-enabled delivery. The first will increase firms’ revenue; the second will increase costs.
Our most recent data on the first of these aspects—AI’s revenue-generating ability—looks less promising than it did in Q2-Q3 last year.
In the summer of 2023, we found that 85% of clients were experimenting with generative AI to some degree. Even back then, the 14% who said that they were already making extensive use of this technology felt optimistic, but “extensive” is a subjective term and, if one thinks about the long-standing use of AI in some organisations (in financial services, for example), not wholly implausible. What mattered most was the overall message: Many client organisations were investing in this space, and others were watching closely to see how they’d get on.
Fast-forward to data gathered at the start of this year, and the picture looks very different: Just 13% of clients now say they’re starting to experiment or are making some use of generative AI, and none say they’re already using it extensively. By contrast, 88% were in the wait-and-see category, a sixfold increase on the previous results.
What accounts for this significant change? The first question we’d always ask is: Is it the data? The sample composition isn’t materially different, but the responses to other questions were more downbeat than they were in July 2023 and even in an intervening survey in October 2023.
But the other factor that seems likely to have had a negative impact on clients’ perceptions of the immediate value of AI is the recognition that it’s not a simple solution. Last spring, clients seized on AI, and generative AI in particular, not because they understood the technology or its application but because of its promise of being a fast, cheap way to improve productivity. When it became obvious that that wasn’t the case, that the effective use of this technology would require better quality data, which in turn depended on bigger, more accessible data gathering and storage, attitudes shifted. As one senior executive we spoke to summed up: “Now we know it’s not a silver bullet. It’s just another bit of technology.” It’s likely that the pendulum of business opinion will swing back again (think about the ups and downs of early internet adoption), but it seems unlikely that will happen this year.
Which brings us to the other side of AI, the impact it may have on professional services firms themselves. Clients remain enthusiastic about AI-enabled delivery. In the summer of 2023, 88% of clients said they thought ChatGPT and similar tools would replace consulting work to some extent, and 40% to a great extent. We didn’t ask exactly the same question in our latest research, but 71% of clients said they think the use of AI in the delivery of consulting services is at least a nice-to-have, and 30% see it as essential.
The tide of client opinion is already driving consulting and other professional services firms to invest, creating the possibility of a race in which some of the major firms seek to establish a competitive advantage through their use of AI-enabled services.
This is not unrealistic: There have been specific instances in the past where professional services firms have been able to disrupt the industry through their use of technology. For example, in the last decade, the market for due diligence work on behalf of private equity firms has been transformed by better data visualisation and, even more importantly, the ability to make a large dataset easily available.
The good news is that that investment in AI capability should have a positive return, even in the short term. The professional services industry faces huge pressure on its prices. Before the pandemic, just 5% of consulting clients expected fee rates to fall: The equivalent proportion today is five times higher and, if anything, rising. Historically, clients have seen technology-enabled delivery as a way of reducing input time and resources, and, in turn, prices. But over time—and we’ve seen this play out with managed services and the automation of external financial audits—opinions shift, with clients recognising they get a better quality of solution/service and becoming more willing to pay for it. That shift is already happening around AI-enabled service delivery: Eighty-five percent of clients would pay more for an AI-enabled service; 25% would pay significantly more.
In 2024, consulting and other professional services firms will have to invest more in AI than they’re likely to earn in fees from it—but in the not unreasonable hope that doing so will increase fee rates in the short term and create a competitive advantage longer term.