Artificial intelligence is no longer something businesses are planning for "one day".
It is here, it is advancing at a rapid pace, and whether businesses like it or not, it is already changing the way many industries operate.
Much of the discussion around AI has focused on the opportunities it creates. Increased productivity, reduced costs, better customer experiences and faster decision-making are all compelling reasons for businesses to embrace the technology.
However, there is another side to that conversation.
Every significant technological shift creates winners and losers. Businesses that adapt early often thrive. Those that delay, ignore the change, or underestimate its impact can find themselves under increasing financial pressure. As insolvency practitioners, we have seen this story play out before. Disruption from online retailing, digital media and e-commerce created a new paradigm for business owners, and those who failed to, or were unable to adapt quickly enough, suffered quite severe financial consequences and many failed.
Now AI has the potential to accelerate that disruption at a pace we have not seen before.
The question is not whether AI will contribute to future insolvencies, the more important question is which industries are most vulnerable to its impact.
We've seen this before
While AI feels like a once-in-a-generation technological shift, the reality is that business disruption is nothing new.
The business landscape is full of companies that were leaders in their industry but failed to evolve as technology changed around them.
Kodak famously invented one of the first digital cameras in 1975. Despite recognising where technology was heading, it remained heavily invested in its highly profitable film business. As consumers rapidly embraced digital photography, Kodak was slow to adapt its business model. The result was a steady decline that ultimately saw the company file for bankruptcy in 2012.
Blockbuster followed a similar path. At its peak, it operated more than 9,000 stores worldwide and dominated the home entertainment market. Yet it failed to respond quickly enough to changing consumer behaviour and the emergence of online streaming. While competitors embraced digital technology and subscription models, Blockbuster remained committed to physical stores and late fees. Within a decade, the business had largely disappeared.
Neither company failed because technology existed; they failed because they failed to evolve.
That is perhaps the biggest lesson AI offers businesses today. The technology itself is not the threat; the real danger lies in assuming that yesterday's business model will remain profitable tomorrow.
While AI has the potential to influence almost every business, the impact is unlikely to be evenly distributed.
Businesses that rely heavily on repetitive, process-driven or information-based tasks are likely to experience the greatest disruption. In many cases, AI is not replacing the service itself; rather, it is dramatically reducing the time, cost, and resources required to deliver it.
That creates a new competitive environment where businesses can deliver the same or, in some cases, a better outcome using fewer people and at a lower cost. For organisations that fail to adapt, the result may be increasing pressure on margins, declining profitability and ultimately, financial distress.
Conversely, businesses that rely on highly personalised advice, complex decision making, relationship management or physical service delivery are likely to remain more resilient, although even these industries will need to consider how AI can improve efficiency and enhance client outcome.
While no one can predict exactly how the next five years will unfold, there are several sectors that appear particularly exposed.
Professional services
Professional services have traditionally relied on highly skilled people selling their time and expertise.
Accountants, lawyers, consultants, engineers, architects and financial advisors have all benefited from business models built around hourly rates, specialist knowledge and labour-intensive processes.
AI challenges many of those assumptions.
Tasks that once required several hours of professional time can increasingly be completed in minutes. Drafting correspondence, analysing financial information, reviewing contracts, preparing reports, conducting legal research and summarising complex information are all becoming significantly faster.
Importantly, AI is not replacing professionals altogether; rather, it is reducing the amount of human time required to produce the same output.
For firms that charge based on time, this creates an interesting commercial dilemma. Clients are unlikely to continue paying yesterday's rates for work that technology can now produce much faster. At the same time, firms that fail to embrace AI may struggle to compete against those that can deliver work more efficiently.
This is likely to place downward pressure on margins across many professional service firms.
Smaller practices, in particular, may find themselves caught between rising labour costs and increasing client expectations around efficiency and pricing.
Marketing and creative agencies
Marketing agencies have already begun experiencing significant disruption.
Content creation, graphic design, advertising copy, video production, social media campaigns and search engine optimisation can now all be partially automated using AI-powered tools.
While creativity, strategy and client relationships remain incredibly valuable, the volume of work capable of being completed by smaller teams has increased dramatically.
Businesses that previously required teams of designers, copywriters and marketing coordinators may now achieve similar outcomes with significantly fewer people supported by AI.
For agencies competing primarily on production rather than strategic advice, this presents a genuine commercial risk.
As barriers to entry reduce and productivity increases, pricing pressure is likely to intensify.
Administrative and business support services
Few industries are as exposed as businesses providing administrative support.
Virtual assistants, transcription services, document preparation businesses, data processing providers and customer administration functions are all increasingly capable of being automated.
Many of these businesses compete on efficiency rather than specialised expertise.
Unfortunately, efficiency is precisely where AI excels.
Unless these businesses evolve into higher-value advisory or relationship-driven services, maintaining profitability may become increasingly difficult.
Recruitment and information-based intermediaries
Historically, many businesses have generated revenue simply by connecting buyers and sellers of information.
Recruitment agencies identify suitable candidates, mortgage brokers compare lending products, travel agents research destinations, etc.
Many of these businesses provide considerable value beyond simply locating information. However, AI is rapidly reducing the time required to search, compare and analyse vast amounts of data.
Businesses whose value proposition is based primarily on information gathering rather than judgement, experience or trusted relationships may find themselves under increasing competitive pressure. The businesses most likely to succeed will be those that demonstrate expertise rather than simply access to information.
Customer service and contact centres
AI-powered chatbots and virtual assistants continue to improve at remarkable speed. Many routine customer enquiries can now be resolved without human involvement.
Businesses operating labour-intensive customer service centres may therefore experience declining demand as organisations increasingly adopt AI-driven support platforms.
While complex customer interactions will continue to require people, the volume of routine enquiries requiring human intervention is likely to continue falling.
It is not just about replacing jobs
The conversation around AI often centres on job losses. From an insolvency perspective, the more significant issue may be margin compression.
If every business within an industry has access to similar AI technology, the competitive advantage quickly disappears; instead, AI simply becomes the new minimum standard.
Businesses will still need to compete on service, quality, and relationships. The difference is that clients will increasingly expect lower prices because providers can complete work more efficiently. That creates enormous pressure for businesses that have not fundamentally reviewed their pricing models, operating structures and workforce requirements.
Many businesses may continue generating strong revenue while quietly experiencing declining profitability and deteriorating cash flow. That is often where financial distress begins.
AI may also change business valuations
One consequence of AI that receives far less attention is its potential impact on business value.
Many businesses, particularly professional service firms, derive much of their value from future maintainable earnings. If AI places sustained downward pressure on fees, reduces billable hours or compresses profit margins, those future earnings may decline. That has implications well beyond annual profitability.
Lower earnings can reduce business valuations, making succession planning, equity sales and refinancing more challenging.
Buyers are also likely to begin asking different questions. Rather than focusing solely on historical financial performance, they will increasingly want to understand how well a business has integrated AI into its operations, whether its systems remain competitive and whether its earnings are sustainable in an increasingly automated environment.
Businesses that embrace AI and reposition themselves towards higher value advisory services are likely to protect enterprise value far better than those relying on repetitive, labour intensive work.
The danger for SMEs
Large organisations generally have greater financial capacity to invest in new technology, redesign business processes and retrain staff. Small and medium-sized businesses often do not.
Many SMEs are already operating on relatively thin margins while dealing with rising wages, increased compliance costs, higher interest rates and ongoing economic uncertainty. Introducing AI-driven pricing pressure into that environment may prove difficult for some businesses to absorb.
The greatest risk is not necessarily that AI replaces their workforce; it is that competitors become significantly more efficient while they continue operating under business models that are becoming increasingly outdated.
History tells us that businesses rarely fail because of a single event; more often, insolvency is the result of multiple pressures occurring simultaneously. AI may simply become another pressure point that accelerates an already difficult situation.
AI, you and your clients, and how could advisors can play a part?
It’s often said that business owners are lonely in that they often don’t have a senior management team to assist with strategy, planning and other noncompliance matters.
Professional advisors in the legal, tax and accounting areas should consider stepping in and working with their client directors in facilitating discussion around AI. Such a discussion could centre around such issues as:
Could the competitors deliver the same service faster or at a lower cost by using AI?
Which parts of the business genuinely create value for clients, and which are simply administrative processes?
If the business revenue reduced by 20%, would its current cost structure remain sustainable?
Is the business investing in technology quickly enough?
Does its pricing model still reflect the value it provides?
If this business was starting up today, would it be built the same way?
Directors who regularly challenge their own business model are far more likely to identify emerging issues before they become financial distress. The professional advisor should not underestimate its role in this process.
Waiting until profitability has materially declined often leaves significantly fewer restructuring options available.
Final thoughts
Artificial intelligence will not be the cause of every insolvency over the next decade.
Poor management, inadequate capital, rising costs and economic conditions will continue to drive financial distress. However, AI has the potential to become a significant accelerant.
Businesses already operating on thin margins, relying heavily on repetitive labour or competing primarily on price may find themselves under increasing pressure as competitors become faster, leaner and more efficient.
Kodak and Blockbuster remind us that business failure is rarely caused by the arrival of new technology. More often, it is caused by an inability or unwillingness to evolve alongside it.
For directors, the message is simple: don't wait until declining profitability forces difficult decisions. Continually assess how AI could impact your industry, your pricing model and your competitive advantage. Businesses that embrace technology, invest in their people and focus on higher value services are likely to remain resilient. Those that fail to adapt may discover that by the time financial distress becomes apparent, many of the available restructuring options have already disappeared.
As insolvency practitioners, we often say that the earlier advice is sought, the greater the number of options available. In the age of artificial intelligence, that advice has never been more relevant.
Contact a Worrells Principal.
