What are investors looking for now in digital consultancies?
The growing demand for technology in all sectors and end markets is undeniable. Whether it is artificial intelligence, automation of operations, extracting maximum commercial value from data, or optimising the use of the cloud, there has been no shortage of new technologies emerging over the last decade and this trend is only accelerating.
But with the demand for the technology itself on the rise, it is easy to forget that its effective development and implementation is not simply a given. Businesses must have a lasting and deep-rooted adoption of technologies to ensure maximum and long-term impact.
Indeed, with new technology often moving at a faster rate than corporates can adopt it, an agile approach to facilitate continuous evolution is critical to fully leverage what is available and retain a competitive advantage.
Technology is only part of the equation
Effective outcomes from technology transformation require the whole business to buy into the transformation journey. The operating model design, processes and cultural considerations are fundamental in delivering impactful change, therefore there is increasing value in a strategic consultancy-led approach to digital transformation initiatives.
The recognition of these firms’ ability to make digital transformation ‘stick’ for clients is now a critical factor in evaluating the client proposition of digital transformation firms.
In 2022, we saw unprecedented demand for technology and data-related services, and the core challenge to scaling was finding the right talent to meet this demand. This is nowchanging, and macro events have contributed to a softening (or delays) in demand for major transformation programmes, whilst large swathes of tech lay-off across the sector have contributed to a looser talent market.
What are investors looking for now?
It is therefore now more challenging to identity who will win in a more competitive market, and investors should be prioritising their focus on slightly different areas compared to 12 months ago:
Talent for talent’s sake is less valuable
Skills shortages are still very prevalent across the technology services market, but this is less acute than 12 months ago. At its peak, there was considerable value in scaled digitaltransformation platforms with multiple hundreds of technical heads, even if profit was lacking. As larger players find it easier to tap into the talent market, there is less value inthese organisations, unless they can display a compelling client proposition and a robust, sustainable financial profile.
Client impact is key
It is very difficult to differentiate small to mid-size digital transformation consultancies with similar talent bases and often similar propositions on paper. Clients are increasingly demanding that they can demonstrate tangible impact from transformation programmes. This is where a holistic approach to technology transformation can be valuable.
As a simple example, a new technology platform requires (i) a strategic and commercial lens to ensure it addresses a business problem, (ii) the technical architecture and build, and (iii) robust adoption by people across the organisation. Many technology consultancies focus on (ii) and neglect the other two factors.
From an investor perspective, a valuable and differentiated proposition needs to consider all three to demonstrate maximum client impact.
Further reading: Digital gap between small and large consultancies grows.
2023 will be an important year
The most effective way to evidence a compelling and relevant client proposition is to deliver strong growth in 2023, where much of the market is softening. Pipeline progression is equally important as many firms will see run off in 2023 of longer-term programmes, and the ability to convert new work or win new client logos in 2023 will be an important benchmark.
It is not surprising that we are seeing technology consultancies increasingly looking for front end strategic or business consultancy capabilities. The main factor driving this trend is the complexity of the technology landscape and corporates not knowing where to start when it comes to adopting the right technology solutions.
AI is a case in point – the market is so nascent and fast-moving, but no business can ignore its impact. A highly commercial understanding of the AI landscape and how it can best be leveraged to drive commercial outcomes (with a genuinely platform agnostic mindset) is critical, and that is where a consultancy comes into its own.
In a fast moving and ever-changing market, it will be interesting to see how digital transformation consultancies evolve their propositions to stay relevant and differentiated, and investors are likely to be thinking carefully about which players have a sustainable advantage in a more crowded market.
About the author: Will Evans is a Director at Arrowpoint Advisory, where he focuses on the Business Services sector and leads the Consultancy and Professional Services business line.
