Investors are increasingly betting on the idea that generative AI can transform low-margin service businesses, like BPOs, into high-margin software companies. The strategy involves acquiring traditional BPOs at low valuations and using AI to automate workflows, reduce headcounts, and boost margins. However, this approach faces significant challenges, as evidenced by the valuations of “AI-transformed” BPO firms compared to genuine software companies. Historical attempts to convert BPOs revealed that their inefficiencies are often structural and not only operational, making true transformation unlikely. BPOs remain tied to traditional, billable-hour models that conflict with automation’s goals. Investor enthusiasm overlooks these realities, leading to an overestimation of what AI can achieve in this context. While AI can improve processes, it doesn’t inherently alter business models, making the assumption that service firms can seamlessly be turned into scalable software companies misguided. Ultimately, the distinction between services and software lies deeper than mere automation.
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