Regtech and the rise of the machines in a divided market

By Fiona Czerniawska.

Regular readers of our blog will know that we’ve talked a lot about the way in which the consulting market is bifurcating. A simple statement by clients—“we use consultants in two different ways”—is stretching the consulting business model between two markets: low-cost, industrialised work in areas with which clients are very familiar; and high-value work where innovation and sheer intellectual horsepower are critical to success.

Talking to many consulting firms during a visit to New York recently I was struck how this reshaping of the consulting industry overlaps with another hot topic: Robotics.

Now, I should say up-front that I’ve always been hugely cynical about the extent to which consulting work can be done by computers, and history is littered with failed attempts to do so. But in a divided market, where low-cost and high-value consulting are increasingly distinct, it’s much clearer where computers will have a role. For all the evolution in technology and the development of sophisticated algorithms, we’re still a long way from replacing high-value consultants with technology. Too much of the work done in this space depends on the interaction of people, changing behaviours through influence, having the leadership skills to drive through transformation, being able to think outside the (computer) box, and so on. But the low-cost consulting market is ripe for mechanisation: the work done here covers familiar ground; there’s abundant and well-documented experience to draw on, a set of rules in effect that could be converted into code; and the pressure on fee rates means that everyone is looking for low-cost alternatives.

One of the best examples of this at present is regtech, the point at which fintech innovation (so 2014, darling) meets regulation and consulting, and the latest buzzword to appear in our new report on consulting in the financial services sector. As Deloitte points out in Is Regtech the new Fintech? the idea of using technology to address regulatory change and compliance isn’t new, but “increasing levels of regulation and a greater focus on data and reporting has however brought the regtech offering into greater focus thereby creating more value for the firms that invest in these solutions.” Regtech is, in fact, useful in several ways. It holds out the promise, for businesses that are regulated, of being able to manage future regulatory change in much the same way that we now manage technology upgrades. Once the initial investment has been made by suppliers, the cost of delivery will be cheaper. It will also generate annuity income streams for consulting firms used to living hand-to-mouth.

What it won’t do (can’t do, as things stand at the moment), is replace the high-value part of the regulatory consulting market. And this is where our bifurcating model helps: Regtech isn’t the solution for everything, but as clients increasingly divide the consulting market in two, they’re helping to carve out a clear space where it can play a defining role.