From fintech to contech?

By Fiona Czerniawska

Fintech is the buzz of the moment. "There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking," Jamie Dimon, CEO of JP Morgan, wrote last month. "The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting.” Two years ago, Dimon would have been laughed at by his competitors; five years ago, no one would have understood what he meant. Today, according to recent research by Goldman Sachs, $4.7tn of revenue in the financial services sector could be displaced by fintech firms.

Could consulting go the same way? Is there a hidden revolution out there which we haven’t yet put a name to, of tech start-ups able to push aside the established consulting behemoths? A thousand and one small start-up consultancies are telling us they’re going to revolutionise the industry, but are they right?

The first thing to say is that banks (let’s use them as a convenient example, but our comments could apply to other parts of the financial sector) aren’t vulnerable to the fintech revolution because they’re banks but because they’re technology companies. They provide an increasingly technology-based service to businesses and consumers that just happens to involve money. Moreover, automation is a function of industrialisation and standardisation; both drive transparency – and all contribute to an environment in which it’s possible for small firms to identify and focus their efforts on very specific opportunities. Fintech firms aren’t banks: they’re highly-specialised bits of banks.

By contrast, consulting firms aren’t technology firms, and they haven’t been through the years of industrialisation and standardisation that banks have. That makes it harder for wannabe competitors to spot the opportunities and develop more efficient business models. Consulting firms’ profitability is opaque even to themselves, so what hope is there for potential investors? Moreover, replacing people with technology isn’t something clients are going to embrace: consultants are often used when the requirements are vague and the solutions necessarily bespoke. The vast majority of those start-ups-posing-as-revolutionaries are simply competing on price. They’re either using more flexible employment conditions, software tools which reduce the dependence on more expensive, senior resources, or charging for their services in a different way: they’re not re-imagining the nature of the consulting business model.

So where, if anywhere, might we expect to find contech firms emerge?

A few years ago the answer might have been around the supply of people at the analyst level. In the past, this organisational layer was often the most profitable part of the consulting pyramid; displacing junior staff with clever software would make it even more lucrative. In practice, this has become a simple efficiency gain: companies such as Wikitrat and Evalueserve are interesting but are essentially a chance for clients to get some of the services provided by a consulting firm at a cheaper price. That’s useful but not revolutionary – it’s also complicated by the fact that clients, already refusing to pay such comparatively high fees for junior staff, think they should pay even less when the latter are replaced by technology. The profits have collapsed more quickly than the revenues have grown.

Conversely, consulting firms are now (generally) making more money at senior levels, where fee rates have held up better. A tech start-up could drive a wedge into this business by providing databases and other tools which would help this valuable group of people to work more efficiently, thus allowing them to work on more projects and clients at any one time. But the obvious buyer for such tools are the consulting firms themselves – and they’ll use them to earn more money from this group to offset against falling profits elsewhere. Tech start-ups would be supporting the consulting industry, not undermining it. Additionally, the start-up would want to sell its tool to all firms – to the advantage of no one in particular.

A more logical place to look for start-up opportunities is where more power could be put in the hands of the consumer, the buyer of consulting services in this instance. And the key to the revolution could be getting better, not cheaper, people. Matching people to jobs is an area where consulting firms have invested in technology, but the real challenge here isn’t matching people to projects, but in gathering unstructured information about individuals (the kind available only internally within consulting firms and, even then, usually informally) and presenting this in such a way that clients can make more informed choices about who they want on their team, irrespective of the firm they’re nominally attached to.

Contech, when it emerges, isn’t going to be about efficiency, but intelligence; it’ll be about value, not cost.