Will Vertical Play by Tech Giants Disrupt the IT Services Business Model?

• Artificial Intelligence

Microsoft recently unveiled Dragon Copilot, the first AI assistant for clinical workflow that brings together the trusted natural language voice dictation capabilities of DMO with the ambient listening capabilities of DAX. Being part of Microsoft Cloud for Healthcare, Dragon Copilot is built on a secure modern architecture that enables organizations to deliver enhanced experiences and outcomes across care settings for providers and patients alike. On similar lines, the Microsoft Advertising Accelerate event showcased copilot-powered products such as Microsoft Advertising Showroom ads and Dynamic filters for dynamic ad generation. With the emergence of Generative AI, we continue to witness tech giants like Microsoft entering the vertical solution space that is typically serviced by product companies or IT service providers.

What has led to the arrival of this new set of competitors?

A tightly coupled ecosystem is built by the tech giants where data aggregation from multiple systems of records is orchestrated through the creation of sales cloud, marketing cloud, services cloud, healthcare cloud, retail cloud, financial services cloud, and many more. These data foundations would enable them to build multiple vertical-focused solutions targeting specific personas with the help of AI. Dragon Copilot from Microsoft for healthcare professionals is one such example. This is an emerging trend and is creating a new segment of competitors for product companies and IT service providers. These tech giants with vast resources, proprietary data, and deep AI expertise have the advantage of controlling the underlying platform. They can seamlessly integrate their vertical solutions and create a powerful ecosystem lock-in.

Earlier, creating vertical solutions on horizontal tech platforms was effort intensive as it required bringing in client context, data from diverse sources, and persona-specific nuances.  Since it was heavy on customizations, the revenue from such projects was linear to the effort invested. Tech giants stayed away from this as it was not a high profit business as the revenue productivity per employee was low. This was a sweet spot for IT service providers. With the advent of GenAI and the capability to generate, test, deploy code, create documentation, and autonomously manage applications, it opened the doors for bringing in non-linearity into the vertically focused solution space – revenue is no longer directly proportional to the effort invested! Doubling the revenue at half the workforce could be the new normal! This new trend is driving tech giants to explore and offer vertical-focused solutions.

What are the implications of this new segment of competitors?

Erosion of Traditional Value Proposition

IT service providers have historically thrived on building and customizing horizontal platforms for industry-specific needs. Now, tech giants are directly addressing those needs with pre-built, AI-powered vertical solutions. This directly challenges the “customization” and “integration” services that were core revenue streams.

Shift in Client Expectations

Clients are increasingly demanding ready-to-use, outcome-driven solutions, rather than just raw technology. They want solutions that solve specific business problems, not just generic platforms that require extensive customization.

Shift in pricing construct

With the arrival of platform-based solutions, usage-based or outcome-based pricing will be preferred over Time & Materials (T&M) or Fixed Price contracts.

How can IT service providers manage this market reality?

Deepen Domain Specialization

• Focus on becoming experts in specific industries (e.g., healthcare, finance, manufacturing).
• Invest in building domain-specific knowledge, certifications, and partnerships.

Provide Access to Proprietary Data

• Identify and stich partnerships with proprietary first-party and third-party data providers. Those who have access to data have the advantage to create differentiation and moat!

Embrace AI and Automation

• Leverage AI to enhance existing services and develop innovative solutions.
• Reimagine current software development process where human and AI agents collaborate and deliver outcomes.
• Automate repetitive tasks to improve efficiency and reduce costs.

Focus on Integration and Customization of Vertical Solutions

• Become experts in implementing and customizing the AI solutions that are being offered by the large tech companies.
• Continue to improve on managed services offering.

Develop Proprietary IP and Accelerators

• Indian IT services companies typically spend around 0.5% of their revenue on R&D, whereas tech giants on an average spend 10%-15% of their revenue on R&D. IT services companies need an overhaul of their R&D/ IP strategy and that warrants a multifold increase in investments from current levels.
• Focus on developing intellectual property that addresses specific industry challenges. Create proprietary tools, frameworks, and accelerators that enhance the value.

Build Strong Partnerships with Platform Providers

• Forge strategic partnerships with platform vendors and other technology providers.
• Collaborate on joint solutions and go-to-market strategies.

Double down on Consulting and Advisory Services

• Shift from being primarily a technology implementer to a trusted advisor.
• Develop effective AI adoption strategies and help clients navigate the complex landscape of vertical solutions.

Focus on Building Data Foundations

• Help clients become data-ready for AI.
• Become experts in data management and governance.

Focus on User Experience

• Design intuitive, business process-specific applications that resonate with users and drive adoption. Solutions should reduce friction and integrate seamlessly into existing processes.

The AI technology landscape is rapidly evolving and will continue to create ripples in the market. New segments of competitors will continue to emerge. Your current hyperscaler or cloud data platform partner could soon be your competitor! Though the market is large enough for everyone to have their pie, the need of the hour for service providers is to be prepared, protect their turf, and avoid the “Who moved my cheese?” moment, or in the words of Marshall Goldsmith, remember: “What got you here won’t get you there.” By embracing the change, adapting to market realities, being agile, forging partnerships, having a culture of continuous learning, and focusing on innovation and creation of IP-led solutions, IT service providers can tide over the current volatility and threats. It will enable creation of the next-generation AI-powered IT services organization with an enduring business model.

Share