How Professional Services Firms Dodged Disruption

Professional services firms have been threatened with disruption for a long time. In 2015, Richard and Daniel Susskind foresaw that technology would cause a “steady decline in the need for traditional flesh-and-blood professionals,” while more recently, CB Insights said that “a tectonic disruption is hitting management consulting.”1 Even earlier, Clayton Christensen and colleagues warned, “Although we cannot forecast the exact progress of disruption in the consulting industry, we can say with utter confidence that whatever its pace, some incumbents will be caught by surprise.”2

But things have not played out as predicted. In consulting and law, the established firms are as influential and profitable as ever.3 Many potential disrupters have come along. Some have failed, some have gained strong niche positions, but none has challenged — let alone toppled — the existing order. Most established leaders have used a wide range of strategies and tactics to adapt quickly to the threats.

As is the case in many well-established industries, professional services markets are dominated by a small, clearly identifiable group at the top and large numbers of lower-tier firms operating in their shadow. Consulting’s giants include McKinsey, Boston Consulting Group, and Bain; technology-based firms Accenture and Capgemini; and the Big Four accounting firms Ernst & Young, Deloitte, KPMG, and PwC. In law, the top tier includes the five London-based firms informally known as the Magic Circle — Linklaters, Clifford Chance, Freshfields, Allen & Overy, and Slaughter and May — along with Kirkland & Ellis, Latham & Watkins, and DLA Piper.

How have these firms been so resilient? Our research, which included interviews with 25 executives and a review of case studies on a dozen would-be disrupters, revealed many factors at work. The one that distinguishes the most effective firms is their capacity to diagnose potential causes of disruption and respond accordingly.

We define industry disruption as an upending of the established order, with incumbents losing out to new competitors. As Joshua Gans has argued, disruption can occur when incumbent firms have blind spots about what customers want (a demand-side effect) or when a new technology makes the incumbents’ existing capabilities obsolete (a supply-side effect) — or a combination of the two.4 (See “Four Types of Potential Threat in Consulting and Law.”)

Because each scenario requires its own response, understanding the dynamics of supply- and demand-side effects can enable executives in any sector to more readily identify potential disrupters and keep them at bay.5

Demand- and Supply-Side Threats

Based on our research, we identified artificial intelligence technology as the biggest supply-side risk, threatening to take over work that professionals have traditionally seen as their own. On the demand side, the threat comes from clients seeking greater control over how they buy and use professional services. Still other would-be disrupters challenge incumbents from both the supply and demand sides at the same time. Meanwhile, new boutique and specialist firms have cropped up to serve particular client needs in lucrative business segments, though they have rarely been truly disruptive. Below, we look at each potential threat in detail.

AI undermines the business model. The launch of generative AI in November 2022 has accelerated the ongoing transformation of many aspects of professional services work, enabling greater accuracy and significant cost savings.

At law firms, AI tools scan legal documents and review contracts. AI-based services companies such as Kira Systems, Clio, Reveal-Brainspace, iManage, and Thomson Reuters provide assistance in discovery, due diligence, and contract management and review. Thomson Reuters’s services are used by 97% of the largest law firms.

These companies don’t position themselves as competitors to law firms, but as they scale and the technology gains capabilities, they can begin to undermine those firms’ business models. Clio’s legal software, for example, can conduct e-discovery for a claim and even engage in litigation analysis by scanning precedent-setting cases, potentially reducing the number of billable hours that a firm can charge to clients.

In consulting, AI can help professional services firms provide additional value by uncovering new relationships, identifying patterns of customer behavior, and highlighting cost-saving opportunities. “It’s no longer good enough to show up with a team that knows more about this industry than anybody else,” one Big Four consulting partner said. “You also need a data set or an algorithm that provides additional sources of value.”

But AI can also be a powerful disrupter. Palantir Technologies started out using AI to detect fraud and has since expanded to applying state-of-the-art machine learning to solve problems for a variety of government and private clients. Its work in support of government surveillance has drawn controversy, but its predictive analytics helped a large automotive supplier make large efficiency gains in its engineering and manufacturing functions. Such results represent a significant advance in the rigor and quality of insights consulting firms can offer.

Established firms have taken on the threat by building up their own AI capabilities through acquisitions and in-house development. McKinsey has acquired 12 mostly small AI firms since 2013, including U.K.-based QuantumBlack, which uses advanced data analytics to improve organizational performance.6 In law, San Francisco-based DLA Piper has developed Aiscension, an AI product that monitors compliance risks. The insurance law firm Kennedys created its Kennedys IQ spinoff, which uses AI to assess medical evidence and recommend amounts for damages.

These acquisitions and partnerships deliver more than new capabilities; they can expand the range of issues their firms can handle for clients.

Incumbents are also enhancing their role as high-touch trusted advisers, which AI cannot replicate. Several large consulting firms have increased their range of offerings by investing in experience centers — physical and virtual environments where clients and consultants use design thinking and other creative techniques to envision possible futures. Over the past five years, IBM, Deloitte, Accenture, and other firms have bought more than 200 creative agencies to help develop these centers.

Clients take control: unbundling the service. The most profound demand-side threat is unbundling, as increasingly savvy clients look for ways to cut costs and exert greater influence over their relationships with services firms. This can mean reclaiming activities previously handled by outside firms or turning to specialists instead of the broad offering of a large professional firm. Both options can help clients build up their internal capabilities and gain greater accountability for business outcomes. But unbundling threatens the incumbent firms’ leverage model by taking away work that would typically be assigned to a lot of their junior — and lower-paid — generalists.

In law, the emergence of alternative legal service providers (ALSPs) is a testament to this demand-side threat. ALSPs aren’t law firms as such, but they provide a vast array of legal services, such as document review or contract management, at a lower cost. In 2017, DXC Technology, a Virginia-based IT services firm, outsourced almost its entire legal function to UnitedLex, an ALSP based in Overland Park, Kansas. DXC transferred 150 in-house lawyers to UnitedLex, retaining only a small number of senior professionals. While outsourcing in-house legal departments is not uncommon, law firms saw this as a huge threat because it was the biggest transaction of its kind at the time and because it involved an ALSP, which can offer a much lower cost structure.

Consulting faces a similar challenge from the rise of consulting networks, such as London-based Eden McCallum, and from online platforms, such as New York-based Gerson Lehrman Group. These companies match clients with consultants on a project-by-project basis, bypassing the large firms. London-based Kubrick Group contracts with companies to provide teams of data scientists and technologists, who can later be hired by the client.

Such arrangements put the onus on the client to define its problems and integrate work teams — something traditionally handled by a large consulting firm. But they eliminate the need to hire a large firm except on the biggest and most complex projects. And without the incumbents’ higher overhead, fees are much lower.

Clients are also changing commercial arrangements, increasingly demanding outcome-based deals that require consultants to demonstrate that they were directly responsible for the desired results, such as a 5% reduction in costs. Because this can be harder to do with projects that involve factors outside the consultants’ influence, like growing revenue, most firms agree to outcome-based deals only when they can be confident of contributing to the desired result.

Incumbent firms are responding to these demand-side challenges in a couple of ways. Law firms have formed their own ALSPs; London-based Allen & Overy created Peerpoint in 2013, a separate operation with 350 largely freelance lawyers and 53 million pounds ($64 million) in revenue. In consulting, Deloitte created a unit called Pixel that breaks down client problems into their constituent parts and then uses a crowdsourcing platform to find the right experts to work on each part.

The large firms are also doubling down on their traditional strengths: tackling clients’ biggest and most challenging problems. Their value comes from their ability to provide advice and compliance in high-impact, large-scale, high-risk situations, and they can charge a premium for the service. “We do open heart surgery rather than provide [general practitioner] services,” said one senior lawyer.

Boutiques and specialists find strength in market focus. New competitors emerge all the time in professional services, as former top partners set up their own boutiques or venture firms back new startups. The successful ones take market share in specific niches but rarely cause much concern to top-tier firms. They cause limited disruption on either the demand or supply side, and they simply reflect the heterogeneity and complexity of the market.

In consulting, London-based Baringa has grown quickly by focusing on the energy industry, identifying such hot topics as renewable energy and hiring specialists who use scenario modeling to project future energy prices. New York-based AlixPartners focuses on turnarounds, litigation support, and transformation. Both firms have more than 1,000 employees. The legal industry has seen the rapid growth of specialists such as Caldwell Intellectual Property Law in the U.S. and Mishcon de Reya, a specialist in disputes, in the U.K. and Singapore. The success of such firms shows how deep expertise can create a defensible niche against broad-based competitors.

Large firms don’t view these smaller businesses as a direct threat and often ignore them altogether. “They’re not on our radar for the work we do with the C-suite,” said a partner in a large London law firm. Still, they can help incumbents stay vigilant.

For one, they provide a window on a changing marketplace, often prodding established firms to move into business areas they might have otherwise neglected. Deloitte, for example, launched its digital business in response to the emergence of specialized boutique firms. Bain created and spun off The Bridgespan Group in order to focus on nonprofits.

The specialty firms can also expose weaknesses in top-tier firms’ ways of working that need attention. For example, Altman Solon, the largest global strategy consulting firm specializing in telecommunications, media, and technology, commands C-suite attention in large part because the entire firm comprises specialists with deep expertise in those sectors, unlike many large firms that fill junior ranks with a lot of smart generalists. As a result, it is already up to speed with the industries in which it operates and thus is better able to develop client-specific strategies quickly.

Would-be disrupters that pose supply- and demand-side risk. The nightmare scenario for incumbents is disruption that affects the supply and demand sides at the same time. This is ultimately what killed Kodak and Polaroid: Digital technology changed how images were created and how they were consumed, leaving the incumbents nothing valuable to fall back on. The survivors from the photography industry, such as Fuji and Canon, did so by moving into adjacent markets, not by staying and fighting.

Such challengers have appeared in professional services, but so far they have fallen short as disrupters. For example, HourlyNerd, founded in 2013, had big ambitions to become a marketplace for connecting technology clients with freelance consultants, giving the client a wider choice of consultants at a faster rate than the typical procurement process. “We like to think of ourselves as a replacement to potentially hiring a consulting firm,” one of the cofounders said.7

Axiom Law, founded in 2000, sought to provide on-demand legal talent using a network of employees and associates to provide legal services more efficiently. “Axiom has an opportunity to disrupt an industry that hasn’t materially changed in a century,” one investor said.8

Both firms have done moderately well. HourlyNerd, which rebranded as Catalant in 2016, shifted to a software-as-a-service model and today has several hundred employees. Axiom is a midsize law firm with about 1,600 employees, $842.5 million in revenue, and a more flexible business model than most of its competitors.9 But neither has achieved the disruptive effects it aspired to.

Disruptive Threats on the Horizon

So, what looming disruptions keep the executives running consulting and law firms awake at night?

One factor the senior professionals we interviewed pointed to is a dramatic acceleration in AI and analytics capabilities. In law, codification — the process of capturing the legal reasoning of an experienced partner and turning that into an algorithm that can then be applied to future cases — threatens to eliminate much of the cognitive work now done by professionals. “That would be disruptive,” said a partner in a large London firm.

Several others indicated that the biggest threat in the near future will most likely come from the giant technology companies: Google, Amazon, Microsoft, and Salesforce, in particular. Each has built client-facing capabilities, some from the large consulting firms, to enhance their strength in selling solutions to clients’ technology challenges.

With their AI capabilities and global reach, they could affect both the supply and demand sides of professional firms’ businesses. For example, using the vast amount of data at its disposal, Amazon Web Services could exploit its unique insights into customer behavior to provide retail clients with forecasts of online shopping trends.

“The greatest impact of Amazon Web Services won’t lie in its position as a supplier of cloud services, but in the extraordinary scale and depth of its information on consumer buying behavior, which no conventional consulting firm could begin to compete with,” said a partner in a large consulting firm.

Others downplayed the threat. “The likes of Google are not actually that good at client service,” one interviewee said. While it is possible that a tech company could buy a large consulting firm, that would represent a significant strategic pivot from the typical approach of developing partnerships with consulting firms and would reduce the number of firms it could partner with in the future.

Staying Nimble

The big professional services firms haven’t avoided disruption simply because of the actions they’ve taken. More important is their vigilance and responsiveness to changes in their business environment. While consulting and law firm executives often disparage their seemingly old-fashioned ways of working, their professional partnership models have proved to be remarkably resilient.

From our interviews, we identified three elements of success that are worth highlighting as potentially applicable to other sectors as well.

Innovation efforts are devoted to solving client problems. This contrasts with many other businesses, where innovation activities are pursued separately from the customer-facing parts of the organization. The best professional services firms pursue product and service innovations based on common limitations, frictions, and opportunities they’ve identified in their clients’ businesses. They then develop, test, and refine those innovations with selected clients and partner organizations — such as technology providers — before launching them across their client portfolios.

Partners and their juniors work closely together with clients. The firms’ apprenticeship model means that the sense-response gap — the difference between sensing client needs and then taking appropriate action to address them — is narrower than in firms where the leaders are a long way removed from those doing the work.

Firms take a cautious approach to investing in new activities. While this might seem to be a weakness in a fast-changing world, the truth is that most emerging technologies take a long time to realize their potential, and plenty of firms have failed by moving too quickly. Because of the project-based nature of their work, professional firms are able to test new technologies, see what works, and then move forward based on project success and client demand.

Staying Ahead of Disruption

The experience of professional services firms in holding off potential disruption suggests four actions that firms in other sectors can take to prepare for and respond to change.

Diagnose the threat. While every new competitor or technology can be seen as a potential threat, it’s necessary to assess the magnitude of the risk and the part of the business that it might affect. The consulting and law firms we studied were mostly very thoughtful about separating out the demand- and supply-side effects. (See “Diagnosing the Nature of the Disruptive Threat” for how to apply this logic.)

Match the response to the challenge. Once the supply and demand effects have been mapped, it’s possible to target the appropriate response. Demand-side challenges require experimentation in how clients’ needs can be anticipated, understood, met, and adjusted to. Professional services firms are inherently good at this. Project teams are empowered to come up with creative solutions and to experiment with alternative models for forming partnerships and delivering services. This should serve as a cautionary note to firms that have become too “corporate,” with decisions flowing from the top down to partners and teams.

Supply-side changes, in contrast, require investment in new capabilities and an openness to restructuring and even outsourcing internal activities. This often requires a higher level of centralization, frequently with a dedicated team that hires from the outside or makes small acquisitions. The challenge is to integrate them with client project teams so they are deployed in the market.

Stay focused on the organization’s true mission. While there are plenty of genuine threats out there, there’s also a lot of noise. Paying too much attention to all of the changes swirling around can cause leaders to lose sight of the bigger picture. For professional services firms, the client relationship transcends all else, and the appropriate response to both demand- and supply-driven threats is to double down on that relationship. “We want to retain the overall relationship, focusing on the areas of premium work,” the partner in a large London law firm said. “The debate is how much we leave … to other law firms and how much we retain and do via third parties or alternative delivery models.”

Balance pragmatism with a healthy paranoia. The law and consulting partners we spoke with in our interviews were genuinely torn. On the one hand, they saw little or no evidence that their strong positions were under threat, and they agreed that the dire predictions of disruption from a decade ago had been unfounded. On the other hand, they did not want to appear complacent, and they certainly didn’t want to send a message to their junior colleagues that there were no future risks of disruption. Executives must learn to live with a dual mindset: a pragmatic acknowledgment that the fundamentals are sound, coupled with a paranoid suspicion of emerging technologies or new competitors. After all, it was those incumbents that might be caught by surprise that Christensen and his colleagues considered most at risk of disruption.