Hi Thomas, and welcome aboard!
Great to have an investor from Siili here in the discussion; Siili is a fantastic company—I’ve followed it for many years.
You asked,
“Are you afraid of overcapacity in the IT consulting industry due to the implementation of AI for software development?”
This is a great question! Those of us who grew up in the Knight Rider era have been waiting for KITT to wake up. Rarely have I been as excited about new technology as I am now Still, I’m cautious not to contribute to the hype surrounding it, as is often the tendency in our industry.
I believe IT consulting will indeed undergo a significant transformation over the next ten years, largely driven by advancements in tools and AI technology. Developers will become more efficient, achieving much more in less time, as you mentioned. At present, we are still in the early stages of this development, and new technologies seem to be increasing demand for IT services rather than decreasing it.
In this transformation, what I find exceptional is how it levels the playing field for all IT companies. All knowledge and tools are almost freely available to everyone. Some companies believe they can build a competitive advantage by being the fastest or by focusing on AI technology, but in reality, all companies implement the same systems, and skills develop at the same pace. I don’t believe these generative AI technologies will create a massive competitive advantage for individual companies unless they’re actually developing those tools. But it’s precisely this easy accessibility of technology that makes it so significant.
IT companies are typically the first to implement new tools, and people turn to them when expert knowledge is needed. Will demand decrease as technology progresses? It’s hard for me to see that happening—in fact, I believe every company will become an IT company to some extent. Roles will certainly evolve, and some tasks may be needed less, but at the same time, new roles will emerge.
Humans have a unique ability to create things we can only imagine. The technical complexity of building things may gradually decrease, but imagination remains the limit. As a sci-fi enthusiast, I dream of smarter systems like the Babel Fish in The Hitchhiker’s Guide to the Galaxy. This is now closer than ever, and I’m writing this with AirPods on. I don’t think it’ll be long before these same headphones simultaneously translate all languages on the fly, making trips to the airport much more interesting. And what about cars? I’ve already paid for self-driving functionality, but I think it’s pretty underwhelming. Refrigerators? My fridge isn’t any smarter than it was 30 years ago—maybe it keeps food fresher; I’m not sure. Washing machines? No real changes in decades that make the device smarter or reduce the work I have to do. I still have to figure out each time what clothes can go together and which need separate washing. There are countless examples like this, and some companies will eventually bring the intelligence we’re looking for to these products.
In my view, there are still too few IT professionals, despite what it may feel like in a recession. The IT field, as we know it, is very young. It has grown tremendously over the last 10–20 years, and I don’t see a future on the horizon where the need for expertise radically decreases or disappears. IT service companies benefit both from technological advancement and from a shift in work culture—one where people seek meaningful work through purpose-driven missions. We no longer want to commit to a single employer and a specific role for our entire careers; rather, meaning comes from different projects we take on. I’ve also wanted to be: a professional skier, a fighter pilot, a lumberjack, an entrepreneur… and an IT professional. Meanwhile, my mother worked 40 years in the same job at a regional hospital—she enjoyed it, but that was never my goal. IT service companies are appealing workplaces for people like me who want to take on multiple different roles and tasks. There are a lot of us today.
Our industry has already had a clear overcapacity situation for some time, evidenced by a drop in job openings and several change negotiations that companies in the field have had to hold. Competition for new projects is fierce. I don’t particularly fear this situation, nor do I believe many others do—companies have long adapted to the current operating environment. At Witted, this has meant f.e. investing in building an highly efficient commercial organization. The market is what it is—the same for everyone.
You also asked:
“And how come there isn’t more consolidation in the Finnish consulting industry, when share prices are historically low and intrinsic value (as Warren Buffett calls it) is a lot higher than today’s levels?”
I’ve wondered about this myself, both as an observer and from the perspective of a consolidator. It’s no secret that Witted wants to grow both organically and inorganically. This has meant that a significant portion of my time has gone into trying to find suitable investment opportunities. It hasn’t been easy.
In my view, consolidation has become bottled up. In “normal times,” this would be the stage where consolidation would be heating up. Some clients have begun concentrating purchases with fewer partners in the past 12 months, and procurement organizations have gained more power. As the number of contract partners decreases, there’s a strong interest among suppliers to merge. Since clients don’t want to lose their best experts, they also benefit from consolidation.
So why isn’t this happening?
To me, supply and demand aren’t matching up in the usual way. The valuation levels of public companies have factually (as Inderes puts it) dropped to historically low levels, but companies’ perceptions of their own valuations haven’t followed this trend. Private companies, meanwhile, don’t anchor their valuations to public companies but to history and what someone has previously paid—ultimately creating a bottleneck. IT companies’ valuations have been positive for over ten years, so it’s tough to lower asking prices. This is human nature; we act similarly when it comes to our homes. I wouldn’t sell my home at a significant loss unless I had no other choice. I’d rather wait for the market to recover. Whether this is smart will only become clear in hindsight for each company. Meanwhile, M&A activity in the Nordics has shown signs of recovery, and it seems that many P/Es are now actively on the move. I could imagine this activity intensifying if interest rates fall.
But this is just my own reflection on these themes. Your perspective could be just as good, or even better :-). What are your thoughts on these topics? Or do other readers have any good additions to share?
Best Regards,
Harri Sieppi
Sedimented Organisational Fat