The market has been telling us that AI is the future and services are worthless. Is that really true?
33. That’s the spread between the market’s valuation of a typical services firm (~ 1x revenue) and its valuation of OpenAI (~ 34x revenue when it closed its July funding round).
Yes, you read that right. Your consulting firm that’s been laser-focused on serving clients, consistently delivered 7-8% annual growth for decades and dropped 20% of that growth to the bottom line is worth 33x less dollar-for-dollar than an AI chatbot that is amazing at quick research, hallucinates a lot and may destroy humanity.
The market and the world have been telling us for over four years that services are yesterday’s news. Apparently, enterprise AI adoption will be friction-free and practically immediate. Companies will bypass their advisors altogether and just use agents to do anything and everything they might have turned to a services provider for in the past.
AI is not the End of Services
I guess someone forgot to tell the consulting industry, which, according to Source for Consulting, will grow another 6% to over $350B this year. No. AI will not be the end of consulting nor professional services.
But AI is forcing every firm to change how they operate on at least 3 key dimensions.
#1 – Expertise
Historically, expertise was something a firm acquired and developed. It was solely provided by people, whom we’ve all coined “subject matter experts.” A firm, after all, was nothing more than a collection of experts. Clients hired firms for their expertise to assess and solve fuzzily defined problems. Clients searched for expertise. They short-listed firms based on their demonstrated expertise (thought leadership and case studies). And they selected firms based on a small window into how that expertise might be applied, as evidenced through their sales conversations.
Now, clients can largely work with their preferred LLM to develop a fairly accurate assessment of their unique problem. They can develop a “best practices” playbook for solving that problem by aggregating the collective, published guidance of all the experts everywhere. And they can identify all the firms and individuals most qualified to apply that remedy in less than 3-5 minutes through a chat. The expert now needs to show up prepared to present their unique POV on where conventional wisdom is correct and where it’s flawed without discovery. Immediately.
#2 – Value
Historically, there’s been a generally understood expectation of value underlying virtually any consulting relationship. The equation might vary a bit depending on the nature of the service delivered and the type of value being created, but I often hear consultants say they expect to deliver 5x-10x value for the fees they charge. So, a client investing $1M in a consulting relationship would expect to receive between $5M- $10M in value (cost savings or revenue gains) from the engagement.
This is changing as well. AI is massively reducing implementation costs across many aspects of the consulting relationship. Requirements gathering, primary research, documentation, coding, software integration. Tasks that used to require hundreds of person-hours can increasingly be done (or at least started) by an AI tool in days or minutes. The consultant faces two choices — drop their price to reflect the massive drop in person-hours required to solve the problem or find new and different ways to create much more value for the original fee.
#3 – Speed
This one is, of course, impossible to ignore. As an example, my 16-year-old son is interested in developing and opening his own small restaurant concept. My wife and I have been helping him think through how he might do it. Yesterday, I helped him research expected rents for a vendor spot in a local food hall. Because the food hall’s rents aren’t public, I turned to ChatGPT.
In the time it took me to set the table for dinner, ChatGPT didn’t just estimate the rent costs for the business; it built the entire profit-and-loss statement with underlying assumptions, including start-up costs, average customer baskets, labor costs, food costs, and targeted profit. Oh, and it did this in five different scenarios. A task that would’ve taken us a few days of research and a few hours with a spreadsheet took 2 queries and less than 1 minute to prompt.
Firms Need to Adjust
While every firm is different, it’s important to think along these three dimensions. Take a few moments at your next leadership retreat to talk about what your clients expect from your firm across these three dimensions:
- Expertise – What IP investments are you making to ensure your expertise is worth paying anything for? Do you have a compelling POV that separates your firm’s expertise from that of your peers and the generic advice any LLM can render easily?
- Value – Are you clear on the value your clients expect from a relationship with your firm? Are you seeking out new ways to create value so that you can sustain or even grow your fees?
- Speed – What are you doing today to accelerate your clients’ path to results? If you had to, how could you solve the problems you solve in 1/10 the time?
