Challenger firms: How scared should consulting firms be?

In 1990, I published a book with The Economist called Business consulting: How it works and how to make it work. If I were to re-read it now, then one of the things I’d be struck by is the list of the biggest firms. This was broadly the same in 1990 as it had been in 1970 and is broadly the same today, give or take a few name changes. The firms that were big over 30 years ago are still big today.

Why? I’ve used the analogy of the Roman Empire before (here, for example). The big, well-established players are the Romans, occupying such massive swathes of the world that the odd border skirmish with disaffected barbarians may occasionally raise local eyebrows but rarely ruffles feathers in Rome. Like the Roman Empire, the big firms have created rules that maintain their existence. Clients have grumbled about the extent to which consulting firms have “occupied” their organisations—but also recognise they’ve gained from this and continue to hire consultants. Indeed, we rarely interview a client who expects their use of consulting to contract. Moreover, while the empire hasn’t necessarily been a huge source of innovation, it’s been adept at spreading enough good ideas to ward off dissatisfaction and keep clients’ need for larger-scale disruptive change at bay.

But every empire has its weaknesses. Reading Robert Harris’ novel based on the life of Agrippa, a general who played an important but largely forgotten part at the birth of the Roman empire, I was struck by the extent to which construction mattered to the fledgling state as much as destruction. Agrippa didn’t just destroy Rome’s enemies: In his homeland he constructed aqueducts and public buildings; he used a new substance—concrete—to build artificial harbours at breakneck speed; most famously he built the Pantheon, still one of the most breathtakingly beautiful buildings in the world. It was construction—physical, legal, intellectual—that for centuries kept the barbarians at bay.

But how well does this extended analogy stack up in the age of AI? What threat do the new tech Visigoths pose to the established order, and how should industry leaders respond?

A new kind of threat…

One of the biggest fears stalking the consulting industry is that AI-native firms will succeed in taking a significant share of the market in a way that previous challenger firms have failed to do. This fear is based on two assumptions:

1. There’s a huge amount of work that consultants do that could be done better by AI: This is unquestionably true. Billions of dollars have been spent on paying junior analysts at the bottom of the consulting pyramid to research and write reports that have told clients nothing new. This type of work lies at the heart of complaints about consultants taking the client’s watch and telling the time, a source of deep-rooted frustration and resentment among clients. Why did clients accept this? Because it was how things were done: Many saw such studies as the price of getting access to the very senior experts they really wanted to speak to. Generative AI is the perfect substitute for this: It’s no worse than the material produced by inexperienced consultants; it has the same cheery and optimistic tone; and it’s free.But the fact that AI could (and, in this instance, frankly should) replace consultants doesn’t mean it can yet, or should ever do so more widely.Taking the “can” point first. AI can create value when it has access to useful, accurate, up-to-date, and proprietary datasets. These are potential goldmines, and AI’s ability to range across multiple such data sources to find new connections and trends can only improve. So, it makes sense that forward-deployed data engineers, who can dredge the oceans of data, represent a new way to engage senior leadership in big organisations. Combine clients’ in-house data with data unique to a professional services firm and you have an extremely valuable competitive advantage. But as everyone—clients and consultants alike—is finding out, where those useable datasets don’t exist, then AI can do less—and crucially, is likely to be more unreliable.And then there’s the “should” point. The consulting process has always had a problem with accountability. Some clients—we’ve interviewed them—are quite open about the extent to which they’ve used consultants because, if something goes wrong, they had someone to blame. And consulting firms have been willing to accept that risk because they’ve simply offered advice and recommendations and therefore couldn’t have been held accountable for what the client did in practice. This accountability “sink” is one of the unwritten rules that protects empire-style consulting: Senior executives benefit from having convenient scapegoats, and large firms benefit because it keeps small firms at bay (blaming a small firm that no one has heard of would be pointless as the exec’s choice of firm wouldn’t absolve them). AI threatens to replicate this lack of accountability. As announcements from tech firms already make clear, a key narrative of the future will be that no one is responsible for what AI does. If this attitude infects the consulting industry, then it will amplify some of the very worst aspects of consulting work. It will unpick all progress there has been towards consultants doing more and being held responsible for the results they’re expected to deliver—and that shouldn’t be allowed to happen.
2. The speed with which this change happens is so fast that large firms (read old-fashioned, lumbering dinosaurs) won’t keep pace: The professional services industry—the last bastion of craft work, one could argue—has excelled at dodging new technology in the past. Real-time financial audits, in which data required for the external financial audit was analysed on an ongoing basis, were first touted as the harbinger of industry change in the 1990s. So, it’s perhaps not surprising that clients saw the advent of mainstream AI as an almost instant way of dragging an industry that had resisted change for so long into the 21st century. But client expectations have become more muted where consulting is concerned (they remain high where rules-based, data-heavy, regulatory-driven work is concerned). Our research shows that the proportion of people who think that AI will have a significant impact on consulting services has fallen and, of those that do think the impact will be extensive, the proportion who believe it will take place in the next one to two years has also dropped. In other words, clients still expect the consulting industry to change, but fewer of them believe that change will be significant and fast. AI is therefore less likely to be disruptive because the supply side will have more time to adapt and won’t need to adapt as much. Why have client views shifted? Partly because, while many organisations have found specific uses of AI to have a transformative impact on a particular process or part of their business, their own overall adoption of AI has been slower and less extensive than they hoped. And partly because many clients have been underwhelmed by the quality of work done by the AI tools firms have built. Research we did earlier this year suggests that clients who’ve seen examples of firms’ AI tools are more likely to think AI is all hype and no reality than those that haven’t…

… A familiar opportunity

Is that it then? Can the “empire” firms implement token change to the way they work and carry on largely as before? They could: Rome didn’t fall in a day any more than it was built in one. But they would be wrong to do so.

The fact that clients were so fast, four years ago, to make assumptions about the impact of AI on the professional services industry was testimony to the level of pent-up demand there is in the market. As client organisations have struggled their way through crisis after crisis since 2020, two things have become clearer to them. First, they need more help from consulting firms than ever before: The problems they’re trying to solve are vastly more complex than a decade ago, and they don’t have the specialist expertise or technology they need—and both those are changing so quickly that it’s impossible to keep up.

But, second, clients can’t afford the support they need. This isn’t a bit of short-term price pressure; rather, it’s a more deep-rooted response to tighter budgets, price hikes by firms in 2021–22, and long-term concerns about value consulting firms deliver in practice. To ignore the opportunity AI represents to cut fees in larger firms by reducing the level of manual work traditionally required will result in the consulting industry ending up in a race to the bottom. Clients need a solution that works and that they can afford, otherwise they may stop buying from “empire” firms. The Visigoth firms’ AI solutions will become the norm, not because clients want them, but because they don’t have any choice. Think of a world in which everything an organisation does has been outsourced to the lowest-priced, almost completely AI-enabled providers. This wouldn’t so much as disrupt the consulting industry as destroy it.

But this threat is also an opportunity. Consulting firms have been here before.

Take data & analytics (D&A). This field of consulting grew out of the global financial crisis, which saw financial services companies having to collect and analyse huge amounts of data, and was aided and abetted by technology that made data warehousing an affordable reality. Like AI, consulting firms recognised that there was a very sizeable market in helping client organisations gather, cleanse, and use their data, but also feared that this evidence-rich approach to decision making might challenge some of the “softer” areas of advisory work. (And they were right: One of the reasons underpinning the decline of HR & people-related consulting, for example, was that it wasn’t based on hard data.) Firms set up centres of D&A expertise, which were designed to both help clients and to embed analytical techniques across their business. When it became clear just how long this would take, they went shopping, buying up and assimilating a myriad of innovative, D&A-focused startups. The best of those acquisitions brought in software and/or data assets that could be deployed immediately.

And that should surely be the strategy today. Just as the Roman Empire perpetuated its existence by learning from the countries it overran, the consulting empire won’t fall if it recognises that the threat from AI natives comes from dissatisfied clients and identifies challenger firms which it can use to change itself.

What can firms do next?

To discuss how AI-native firms are set to disrupt the markets in which your firm operates, get in touch with our industry experts today. We can also introduce you to our AI impact model, which combines client insight with data from our global market model before mapping it to your organisation and quantifying the potential impact of AI on specific lines of business in your firm.