Services initiatives create a $4.6 trillion opportunity.
As AI becomes more prevalent, the transition to service-as-software will impact roles in many industries. … [+]
Automation in the past few decades has been all about efficiency. Machines have helped humans speed up various tasks. In his current decade, AI has dramatically increased efficiency and made things exponentially more complex. Where once software simply digitized and augmented human work and services, in Automation 2.0, bots are the brains.
AI companies are leading the transition from Software-as-a-Service to Service-as-Software, upending the very nature of SaaS. In a software business, a company may sell access to its platform or tools, but the customer is still responsible for using that tool to achieve desired results. In a service business, the responsibility for achieving the desired results lies with the company selling the service. We provide tax services as an alternative to QuickBooks. In this case, an AI accountant is in charge. Because the global services market is small compared to the software market, the upside of this change is significant, representing a $4.6 trillion opportunity.
Foundation Capital has been investing in the intelligent automation space for more than a decade (backing classic successful startups such as cloud management platform CliQr and document manager SpringCM). Our confidence in startups like Eightfold, Tonkean, Turing, and Ikigai comes from years of studying the evolution of these ventures. We have already traced the history of intelligent process automation, focusing on his three specific waves of innovation. Here, we explore the implications of the paradigm shift to Service-as-Software (or more appropriately, Software-as-Autonomous-Service) and detail the scale of the opportunity for AI-focused founders.
AI eats up software, now it will eat up salaries and services
Corporate leaders have spent decades using software to drive corporate growth. And software is the backbone of the modern technological economy. Ten years ago, there were only 15 SaaS or software unicorns. Currently, that number is 416 companies. The public market capitalization of enterprise software companies exceeds $1 trillion. Recent growth has been fueled by moving on-premises software to the cloud and the fact that software has used up the hardware portion of his IT spending.
Over the next decade, we believe software will continue to not only improve productivity, but also make inroads into the services market.
How does it work? Let's take the sales department as an example.
The fundamental value of software like Salesforce is that human salespeople enter data and Salesforce helps create and organize workflows. Voila! Productivity has improved.
The introduction of AI, especially agent AI, will dramatically increase productivity. LLM-powered AI agents read and interpret structured and unstructured content, generate output, set priorities, and direct tasks just as skilled humans perform services. can. Agents have complex decision-making and autonomy, so software does more than orchestrate workflows. This fundamentally changes the way jobs are executed.
Automating work is not a new trend. But the scale changes as AI can perform tasks that were previously performed by entire categories of highly skilled workers. Think of it this way. Salesforce is one of the most successful software companies in history, but it only has $35 billion in annual revenue and will continue to grow over time. Global companies spend $1.1 trillion on sales and marketing salaries each year. The scale of the opportunity for AI disruption is many times greater than what Salesforce has been able to achieve to date.
The $4.6 trillion problem
So how much work will AI + automation and service-as-software models save? We believe this is a $4.6 trillion problem. Just look at some numbers in the Market Overview to see what's at stake over the next five years. He considers areas to automate in two buckets.
- Job salaries around the world ($2.3 trillion in sales and marketing, software engineering, security, and human resources; see chart above)
- $2.3 trillion spent on outsourced services and payroll for both IT and business process services, according to Gartner
The breakdown of approximately $4.6 trillion is as follows:
A to Z of business services
In enterprise companies, services are divided into IT services and business process services. (The history of these markets is an interesting globalization story. American companies learned long ago that they could get significant cost savings by outsourcing their IT services teams to India. Gartner estimates that current global spending is: IT services are expected to reach $1.5 trillion in 2024 and $2.3 trillion in 2028. They predict that the size of the business process services market will reach $303 billion by 2027.
The takeaway here is that as more companies deploy AI customer service agents, AI troubleshooters, and AI assistants of all kinds, there is tremendous potential for AI to automate both full-time positions and services. It means that it will become.
In DevOps circles, companies have long wanted to unify logging, incident management, and infrastructure management. In the service-as-software world, the focus has shifted from selling tools for infrastructure management and monitoring to management and monitoring itself. DevOps Company X sells on-call AI agents built to resolve software incidents autonomously. Reduces MTTR, or time to repair. The company also sells his AI technical support engineers, who reduce unnecessary ticket escalations through troubleshooting and intelligent triage of difficult technical issues.
This results-oriented approach not only aligns software unit costs with associated business value (by removing opacity that makes it difficult to attribute results), but also unlocks more scalable business models. Vendors no longer have a financial incentive to restrict product usage and can grow in tandem with their customers. AI companies typically more Because the more products you use, the better data you can collect.
A results-oriented approach aligns the cost of a software unit with the associated business value (by removing opacity that prevents easy attribution of results).
Business process services (such as data entry and audio transcription) have long been ripe for transformation because they involve many repetitive, rules-based tasks. Again, what makes AI so powerful here is its ability to understand context, interpret user intent, apply inference, and adapt to new tasks. In the autonomous software-as-a-service space, jobs include making recruiting calls (ConverzAI), answering frequently asked questions from potential buyers (Docket), and entering data and reading faxes (Tennr). is completely handled by AI. According to Gartner, AI and generative AI-enabled technologies are expected to inject $28 billion into the business process services market over the next four years.
In the market map below, we've outlined what the Service-as-Software shift looks like in several in-house and outsourced functions, along with the roles that will be automated and the key companies leading this wave.
Here's what a transition to Service-as-Software looks like for some in-house and outsourced functions. … [+]
Sales & Marketing
In this sales example, seasoned salespeople are accustomed to writing outbound emails, scheduling demos, following up, and meeting customers for dinner. AI can now do everything except eat dinner.
Salespeople are used to writing outbound emails, scheduling demos, following up, and meeting customers for dinner. AI can now do everything except eat dinner.
Our portfolio company, Wizia, has built an “AI SDR” that takes over the entire outbound email workflow, including sourcing contacts, validating information, researching target accounts, and creating highly personalized sequences. We predicted this change.
Changes in sales companies' business models include: Rather than charging customers per seat based on the number of Sales Development Representatives (SDRs) and Account Executives (AEs) on the platform, software vendors instead charge customers based on the number of customers. will be charged. Eligible Opportunities or Contracted Customers Offered by the Software.
software engineering
There are more than 30 million software engineers and data scientists worldwide, with salaries worth nearly $1 trillion. AI is transforming the way developers build and maintain software and data systems.
It starts with people's workflows, like orchestrating code reviews with AI, automating front-end design, and fully authoring documents. For example, consider a cursor. It essentially has a coding autocomplete feature that allows programmers to digest third-party code libraries and automatically debug their own code libraries.
cyber security
In cybersecurity, AI can perform tasks that are too complex and time-consuming for human analysts in an industry that is chronically understaffed. Security analysts are often drowning in alerts, increasing the risk of a major breach. AI allows businesses to use automation to more efficiently detect and respond to attacks. You can also check for and mitigate vulnerabilities when creating new systems. Our portfolio company AirMDR, founded by the founders of Sumo Logic, does just that. Build a virtual analyst to provide security to small and medium-sized businesses at a fraction of the cost.
SaaS is evolving, not disappearing
The emergence of AI-powered solutions and their expansion into services does not necessarily mean the end of the SaaS model. Many markets exhibit dynamics where multiple business models coexist and thrive.
The emergence of AI-powered solutions and their expansion into services does not necessarily mean the end of the SaaS model.
Some customer segments may choose to outsource functions, while other customer segments may keep those functions in-house. In many companies, there is a debate over whether or not humans should be involved in each task or part of the business. Humans still design workflows. Perform spot checks and investigate problem cases, even in the most mechanical tasks such as invoice processing. Ultimately, AI-powered companies could challenge or replace his SaaS incumbents in any industry. Or they may offer a complementary business that works alongside SaaS.
One thing is for sure: Service-as-Software represents a once-in-a-lifetime change where AI is at the cutting edge. This development points to a future where services are not just delivered as software, but are constantly learning and evolving with us. Foundation Capital supports entrepreneurs from the early stages. If you're working on the convergence of automation, services, and AI, we'd love to hear from you.
