Generative AI disruption in services industries
Ways to scale and increase margins as the TAM widens out
Generative AI disruption in services industries
Ways to scale and increase margins as the TAM widens out
Generative AI disruption of traditional services industries could provide big opportunities for software companies to grow at scale over the coming years.
of market capital in smaller services companies
For bigger, more established enterprises, this will require CEOs to be willing to push the risk envelope and commit the capital needed for R&D teams to innovate at speed. Such is the pace of change, those with a first mover advantage could reap the benefits.
The difference to the previous decade, however, is that while software innovation – led by cloud computing – helped unlock value in data, generative AI will enable companies to unlock value in knowledge. The explosion of cloud computing led to the replacement of a lot of pre-internet companies who were too slow to adapt. A whole new cohort of billion-dollar companies emerged because they had the infrastructure in place to leverage Big Data and overcome many of the pre-existing problems.
Today, we are at a similar fork in the road. Generative AI technologists are already starting to disrupt service-focused industries, fixing problems that are set to open up a far greater total addressable market. How big could that be?
A quick look back at history reveals that strategy consulting, for example, has benefited tremendously from technology innovation over the last 30 years. This is now a $40 to $50 billion revenue global industry. But it is not because there is significantly greater client demand; it is thanks to the proliferation of data management, visualisation and collaboration tools that combine to generate the high value IP that companies are willing to pay for.
Just as technology launched strategy consulting into a higher orbit, generative AI is set to widen the TAM in other industries over the coming decades. In the US specifically, there is an estimated $4.5 trillion of market capital in smaller services companies. Leading tech entrepreneurs like Joe Lonsdale, Managing Partner at 8VC, hold the view that more than one third of these could see their margins double or even triple over the next five years as a result of innovation and displacement.
“This is the most interesting thing going on in the tech world right now, it’s these AI services areas. In America writ large, there's probably about $4.5 trillion dollars of market cap of smaller services companies. And our best guess is more than a third of those can have their margins doubled, if not more than doubled; in a couple of cases we're seeing them tripled. This will be a major wealth creation event in the next five to six years.”
One of the service-led industries where agentic architectures are helping to further push the innovation wave and widen the TAM is auto dealerships.
The customer experience of trying to buy a car is poor because so many dealerships still use old legacy systems. Automation of this space is now underway, as disruptors look to build on Tesla’s success. Rather than be limited to customer support, this is opening up a TAM of approximately 65 million employees in the front office as the call agent model becomes automated.
A second example is the advertising industry, where the TAM in static ads alone is significant. AI services companies that are able to test, experiment and build different cohorts of static advertising will reduce the reliance (and cost) on traditional advertising agencies. This is before even factoring in the market opportunities that will emerge as generative AI is used to generate video-based, multi-media campaigns.
“Historically, it's been very siloed. You had one team that would go after one channel for Google, another channel for Instagram, one for Facebook. And now using not even GenAI but just using predictive, discriminative AI they've built models where you can do cross-channel optimization. And what are they taking away from? They're not taking away from software. They've been taking away business from agencies.”
One other services-led industry where re-architecting the tech stack is difficult is wealth and asset management.
Value creation in this space is already being accelerated by major disruptors like Addepar. By training LLMs on their extensive proprietary data lake, the company is able to deliver portfolio-wide insights across traditional and alternative asset classes, and augment the investor experience. It is not unreasonable to suggest that AI services companies could triple their margins in this space as their influence grows.
But here’s the rub. In order to tap in to this disruption, it will require SaaS software leaders to move quickly. Rather than look to maximise cash flows over the next few years, some of that capital might best be used to acquire one or two AI services companies. And bring accretive value to their platforms.
Not that this should exclude SaaS enterprises from casting a critical eye on how generative AI solutions could impact their own businesses. Roughly 15% of enterprise spend is on technology, the other 80% goes on human capital.
Most of the time, people are struggling with tasks that AI would help them become far more proficient at. Software can solve a tremendous amount of that 80% spend.
If CEOs start to challenge their teams to look to address the human element, this too could lead to a massive expansion in TAM and help them to unlock scale as the “techtonic plates” shift in response to AI.
