AI vs. McKinsey: Will AI Replace Consulting?
The Transformative Potential of AI in Professional Services
Navin Chaddha, managing director of Mayfield, a Silicon Valley venture firm with a 55-year history, anticipates a significant impact of artificial intelligence on industries heavily reliant on human labor, such as consulting, legal services, and accounting. The experienced investor, known for successful investments in companies like Lyft, Poshmark, and HashiCorp, recently shared his insights at TechCrunch’s StrictlyVC event in Menlo Park. He believes that “AI teammates” have the potential to deliver software-like profit margins within these traditionally labor-intensive sectors.
Reimagining Industries with AI
Chaddha explained that Mayfield’s longevity – over half a century in business – provides a unique perspective, having observed numerous technological shifts, from mainframes to mobile computing and now, AI. He drew parallels to previous eras, like the rise of e-business in the late 1990s and the trend of outsourcing to emerging markets like India and China.
He stated that AI represents a 100x force, designed to collaborate with humans and enhance their capabilities. This collaboration will fundamentally reshape how businesses operate.
The Two-Pronged Growth Strategy
The implementation of AI will likely follow two primary paths: organic growth and inorganic growth. Repetitive tasks will increasingly be automated by AI systems, streamlining processes and reducing reliance on manual effort.
A Concrete Example: Salesforce Implementation
Consider the implementation of a complex system like Salesforce. Traditionally, a human client manager would oversee the process. With AI, this task can be approached differently. AI can handle the bulk of the implementation, with human oversight reserved for areas requiring nuanced judgment.
This shift allows for a pay-per-use model, where customers only incur costs when utilizing the AI-powered services.
Targeting Neglected Markets
Chaddha emphasized the importance of targeting underserved markets rather than directly competing with industry giants like Accenture, Infosys, or TCS. There are approximately 30 million small businesses in the U.S. and 100 million globally that lack access to affordable professional expertise.
AI can provide these businesses with essential services – receptionists, schedulers, website builders – delivered as a software service, with pricing based on specific outcomes rather than hourly rates or monthly retainers.
Outcome-Based Pricing and Margin Potential
This transition to outcome-based pricing, similar to cloud billing or electricity consumption, unlocks significant margin potential. With AI handling up to 80% of the work, gross margins could reach 80% to 90%. Even factoring in human involvement, blended margins of 60% to 70% and net income of 20% to 30% are achievable. This contrasts with many tech companies that rely heavily on venture capital and public market funding.
Gruve: A Case Study in AI-Powered Consulting
Mayfield recently invested in Gruve, an AI-powered tech consulting startup. Founded by experienced entrepreneurs with a track record of building successful services companies, Gruve acquired a security consulting firm and leveraged AI to accelerate growth.
Within six months, Gruve increased revenue from $5 million to $15 million, achieving an 80% gross margin through an outcome-based pricing model. Customers pay only if a security breach occurs, a significant departure from traditional monthly fees.
The Innovator’s Dilemma and Established Firms
Chaddha believes that established firms like McKinsey face the “innovator’s dilemma.” They may be hesitant to adopt new business models, such as monthly subscriptions, that disrupt their existing revenue streams. He advises startups to focus on serving the neglected masses, identifying unique go-to-market strategies that larger firms cannot easily replicate.
However, he acknowledges that these smaller companies will eventually compete with the industry giants, forcing the larger firms to adapt or risk becoming obsolete.
AI Teammates vs. AI Tools
Mayfield has dedicated $100 million to investments in “AI teammates.” Chaddha distinguishes between AI tools and AI teammates, defining an AI teammate as a digital companion that collaborates with humans to achieve shared goals and improve outcomes. This could manifest as an “HR teammate” or a “sales engineering teammate,” designed to augment human capabilities rather than replace them.
Addressing Job Displacement Concerns
Chaddha recognizes the potential for job displacement but remains optimistic. He believes that humans will adapt and reinvent themselves, leveraging AI to expand markets and increase revenue. He cited examples like the introduction of Microsoft Word and Excel, which initially raised concerns about job losses but ultimately led to new opportunities.
He envisions AI filling gaps in markets where human labor is unavailable, particularly in emerging economies.
The Current Investment Landscape
Chaddha acknowledged the current unpredictable investment climate, noting that traditional valuation metrics may no longer apply. He pointed to the recent acquisition of a young Israeli company by Wix as an example, questioning whether the $80 million price tag for a company with $2.4 million in annual recurring revenue was justified.
The Art of Investing in AI
Successful investing in the AI market requires experience, discipline, and a clear vision. Chaddha emphasized the importance of avoiding “FOMO” (fear of missing out) and maintaining a long-term perspective. He stressed that venture capital is about transforming small investments into larger returns, not simply collecting prestigious portfolio companies.
He concluded by warning that while significant wealth will be created during this cycle, a large percentage of investors are likely to lose money due to a lack of understanding and experience.
