Five Tactics for Technology Service Providers to Guard Profit Margins Against Generative AI Impact | Blog

Technology service providers are committing to gen AI-related benefits to clients without a clear path to realization, which will negatively impact their deal margins. Uncover five strategies providers can use to optimize the productivity benefits of gen AI without denting profit margins in this blog.

The notion that generative AI (gen AI) can negatively impact technology service providers’ profit margins is counterintuitive. Service providers have assumed leveraging gen AI would improve margins by amplifying productivity and efficiency. Unfortunately, this has not been the case.

Most technology service providers commit to delivering gen AI-driven productive gains to clients. However, they will struggle to achieve these benefits in the short term due to the highly contextual and probabilistic nature of gen AI tools and their niche impact on specific tasks. This is hard to guarantee in solutioning.

Consequently, service providers must adopt other methods to realize these productivity benefits. This often involves a combination of people and intellectual property (IP) assets that cannot be charged to clients, hurting near to mid-term profitability.

Let’s look at the following five options that CEOs and CFOs of technology service providers have to address this issue:

  1. Monetize generative AI assets: Service providers have struggled to monetize their IP and assets because they are mostly used as service enablers and differentiators. Clients do not perceive additional value and are not incentivized to pay for these assets. However, gen AI assets could change this trend. Investing in gen AI assets can significantly vary from weeks to months of effort. Monetizing these assets should go beyond implementation and support fees and focus on IP value. If service providers can demonstrate genuine value, clients will be willing to pay the cost through better service pricing, an innovation fund, or direct monetization
  2. Educate sales teams and clients about the realistic impact of generative AI: Sales teams often fear their competitors are moving faster than them. In this rush, they commit gen AI benefits to clients without involving the practice, solution, or delivery teams. Leaders should coach the sales team and engage with strategic clients to have realistic gen AI discussions. Providers should create gen AI literacy services that peel away the hype of eye-catching Big Tech productivity announcements about gen AI offerings. Educational initiatives can help moderate client expectations and limit margin erosion
  3. Transform deal-related enabling functions: Generative AI has significant potential for summarizing and querying knowledge repositories. Service providers already use it to enhance the sales function through requests for proposal (RFP) bots, translating documents, and understanding service level agreement (SLA) requirements and the nuances of client needs. Accelerating such initiatives across sales, pre-sales, delivery management, deal finance, and business reviews can lower deal-related costs and alleviate margin pressure from productivity commitments
  4. Identify the right clients: Service providers need to identify the right set of clients for committing and delivering gen AI productivity benefits. This crucial aspect of the puzzle is frequently overlooked. The selection process should be driven by data, the client’s AI maturity, and the nature of the relationship and services used. Choosing the right clients can increase providers’ margins in their gen AI service delivery adoption journey. These clients will be more supportive of letting specific units experiment with gen AI productivity benefits, provide realistic feedback, and set internal expectations
  5. Transform effort and pricing models: Service providers are struggling to transform their effort and pricing model in the wake of gen AI committed benefits. Providers continue to rely on traditional approaches mainly because they are uncertain about linking gen AI committed client benefits to effort and pricing to manage deal margins. However, this problem must be solved to prevent it from significantly denting profitability. Apparent solutions, such as delinking price from effort, value-based pricing, and outcome-based commercials, have not worked. Since clients are more accommodating to collaborate with providers in this journey, providers should reignite these conversations, educate procurement and vendor management offices, and refresh their solutioning playbooks

While account and delivery leaders are held financially accountable for managing margins, linking this specifically to gen AI-related commitments can backfire. Instead, the focus should be shifted upstream during deal bids, solutioning, and client engagement.

To share your experience and discuss the impact of generative AI on profit margins for technology service providers, contact [email protected] and [email protected].

Watch this webinar, The Generative AI Odyssey: A Year in Review and What’s Ahead in 2024, to hear our analysts discuss the hype vs. reality of generative AI, production-level use cases, and the future of this transformative technology.

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