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Breakingviews - AI sets up Kodak moment for global consultants [reuters.com]:

DUBLIN, Oct 24 (Reuters Breakingviews) - Management consultants are getting closer to their Kodak moment. The likes of $155 billion Accenture 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 industry’s dynamics look problematically like that of the camera giant that famously filed [reuters.com] 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 , IBM 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 recently laid off 4000 customer support workers. Microsoft [reuters.com] 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 , 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 [reuters.com] in its 1990s heyday. The risk for the consultants is a similar valuation downer.

Follow Aimee Donnellan on .

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Editing by George Hay; Production by Shrabani Chakraborty

BreakingviewsReuters 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.Sign up for a free trial of our full service at https://www.breakingviews.com/trial [breakingviews.com] and follow us on Twitter @Breakingviews [twitter.com] and at www.breakingviews.com [breakingviews.com]. All opinions expressed are those of the authors.Purchase Licensing Rights [reutersagency.com]

DUBLIN, Oct 24 (Reuters Breakingviews) - Management consultants are getting closer to their Kodak moment. The likes of $155 billion Accenture 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 industry’s dynamics look problematically like that of the camera giant that famously filed [reuters.com] 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 , IBM 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 recently laid off 4000 customer support workers. Microsoft [reuters.com] 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 , 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 [reuters.com] in its 1990s heyday. The risk for the consultants is a similar valuation downer.

Follow Aimee Donnellan on .

Context News

Editing by George Hay; Production by Shrabani Chakraborty

BreakingviewsReuters 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.Sign up for a free trial of our full service at https://www.breakingviews.com/trial [breakingviews.com] and follow us on Twitter @Breakingviews [twitter.com] and at www.breakingviews.com [breakingviews.com]. All opinions expressed are those of the authors.Purchase Licensing Rights [reutersagency.com]

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