DUBLIN, Oct 24 (Reuters Breakingviews) – Management consultants are getting closer to their Kodak moment. The likes of $155 billion Accenture (ACN.N), opens new tab made their mark by charging corporate clients way less than what they would have had to pay to provide IT, cyber protection and offshore call centres themselves. Artificial intelligence is making the $1 trillion, opens new tab industry’s dynamics look problematically like that of the camera giant that famously filed for bankruptcy protection in 2012 – after having its lunch eaten by digital competition.
As the AI boom develops, consultants are in a tricky spot. The pandemic, inflation and economic uncertainty have encouraged many of their big clients to tighten expenditure. The U.S. government, one of the biggest spenders, has been cancelling multiple billion-dollar contracts in an effort to conserve cash. In March, 10 of the largest consultants including Deloitte, Accenture, Booz Allen Hamilton (BAH.N), opens new tab, IBM (IBM.N), opens new tab and Guidehouse were targeted by the Department of Government Efficiency to justify their fees. As a result, the largest listed players’ shares have collapsed by up to 30% in the past two years, against the S&P 500’s 50% jump.
AI is, in some respects, a boon. In September, Accenture said it had helped it cut 11,000 jobs, and CEO Julie Sweet is set to augment that with staff that cannot be retrained. Salesforce (CRM.N), opens new tab recently laid off 4000 customer support workers. Microsoft(MSFT.O), opens new tab has halted hiring in its consulting business.
Unfortunately, big clients are cottoning on to the advantages too. One finance chief of a large UK company outlined the issue for Breakingviews via an illustrative example. Say an outsourced project costs the client $1 million to do themselves, and Accenture and the like have historically been able to do the same job for $200,000. With the advent of machine learning, companies can do the same work for just $10,000.
This gives clients considerable leverage. If consultants won’t lower their prices to near the relevant level, the client can find one who will. Or just do the job itself.
With a revenue cliff on the horizon, management consultants have a few options. They can try and improve their AI offering by scooping up smaller AI players like $6 billion EXL (EXLS.O), opens new tab, which helps financial services and healthcare clients with AI transformations. These kinds of deals could help accelerate the pace at which they complete projects. Alternatively, they could seek to merge their whole companies.
But this is unlikely to deliver much in the way of synergies. Consultancies make their money deploying their best people on big projects. A tie-up could potentially lead to an exodus of talent.
Either way, none of this will stop clients demanding knockdown prices. Kodak did emerge from bankruptcy protection in 2013 as a smaller company that is now worth around $500 million – a far cry from the $30 billion-plus it fetched in its 1990s heyday. The risk for the consultants is a similar valuation downer.
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Editing by George Hay; Production by Shrabani Chakraborty
Breakingviews Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Aimee joined Breakingviews in 2017 and writes about pharmaceuticals, consumer goods groups, retail and insurance. She is also co-host of the Breakingviews podcast The Viewsroom. Based in Ireland, she previously spent three years at The Sunday Times as banking correspondent. Prior to that, she was a senior reporter covering the bond market at IFR, a financial trade publication published by Thomson Reuters. She holds a degree in English and History from the National University of Ireland, Galway, and a diploma in journalism from the London School of Journalism.
