Service providers and software firms on a collision course—a test of an age-old friendship

Software vendors and service providers have traversed separate orbits in the enterprise universe since the 1950s. However, this is taking a dramatic twist as advances in AI technology are forcing them to cannibalize each other’s revenues.

Until this year, their relationship has been largely symbiotic, with clear and complementary roles defined in an enterprise ecosystem. But, the jump-start to ‘Services-As-Software’, as coined by HFS in September 2024, is set to put this partnership dynamic to the test. 

Questions around a potential ‘orbital’ intersection first made the rounds during the meteoric rise of hyperscalers, leading to an existential question—will AWS, Azure, and GCP gobble the services business? However, the playing field never really got disrupted as the hyperscaler charge was built around enabling the enterprise ‘digital foundation’ layer, at the expense of hardware/ infrastructure vendors.

In short, cloud was all about replacing dated on-premise technology with modern, scalable web technology, while Services-as-Software is centered on mimicking and replacing human activities with software bots, or agents.

The software-service blur has finally triggered a genuine orbital intersection

This time, it feels different because we are seeing a genuine blurring of the lines between human effort and technology delivery to achieve business outcomes. We recently declared the beginning of the Services-as-Software era, which will be characterized by an increasing collapse of tech-services boundaries. What sets this disruption cycle apart is that the tech-service confluence is all-pervasive, manifesting at the heart of and influencing all facets of enterprise business operations—read full-stack disruption.

Software vendors and service providers are looking to seize this inflection point to redefine their positioning and sphere of influence among enterprises. Traditionally, software vendors have dominated the strategic sale of outcomes, while service providers have sold the tactical roll-out of the software to reach these outcomes. The big challenge is for the software firms to focus more on the tactical ‘how to’ and the services firms to be more relevant with the ‘why.’ This is an unprecedented time in technology history where outcomes, dreams, and tactical delivery are becoming one, and we don’t yet know who the clear winner will be.

The evolved playing field will see these two supply segments increasingly vie for similar enterprise operations scope/budgets, treading into each other’s toes (see Exhibit 1). While this may not be a fight to the death, the tech vendor-service provider ‘alliance’ equation is being upgraded to a ‘frenemy’ paradigm.

Exhibit 1: The service provider-software firm orbital intersection

Source: HFS Research, 2025

Tech vendors are relishing the sweet taste of the services pie

The shift to the new S-curve of value creation led by AI-driven tech arbitrage is flipping the historical labor-first services model on its head. This shift provides a great entry point for tech vendors to infiltrate and influence the lucrative enterprise services spend by disrupting the very role of services teams.

We have already commented on how tech vendors such as SAP, Salesforce, ServiceNow, Workday, Microsoft, IBM, Palantir, and Snowflake are making moves in this direction by:

• Introducing AI-infused tools and agents to eliminate manual tasks and constant human intervention significantly
• Evolving SaaS offerings into multi-functional platforms to enhance enterprise-wide operations visibility and straight-through processing
• Pre-packaging expertise and automated intelligence into solutions to replace traditional technology consulting requirements

The actual pivot, however, won’t be as straightforward for the tech vendors. These vendors must possess deep industry, process transformation, and customization know-how to transform the enterprise’s operational backbone. Tech and AI expertise must be strongly complemented with capabilities to design the reimagined operating model, ascertain human+agent ecosystem economics, and drive significant organizational change management. Relying on service provider partners for this expertise—whose very business gets cannibalized in such a model—will be tricky, at the least.

Recently, companies such as Microsoft and ServiceNow have interestingly, and a bit unexpectedly, reported a decline in their consulting/support services revenues. It will be interesting to observe how technology vendors approach scaling their independent professional services arms.

Non-linear revenue growth—the only path forward for service providers

The glory days of strong IT outsourcing growth are behind us thanks to the exhaustion of labor arbitrage and increased enterprise propensity to build internal capabilities. Building a sustainable business model that disentangles top-line growth from headcount—backed by a robust platform and product play—will determine new winners and losers in the ensuing service provider wallet share battle (see Exhibit 2).

Exhibit 2: The case for non-linear revenue growth for service providers

Source: Company results

Over the years, providers such as Infosys (EdgeVerve), Cognizant (TriZetto), Accenture (SyOps), TCS (Bancs), and HCL (DryIce) have showcased a strategic intent to pursue this path. In the future, we expect service providers across the board to make proactive bets to build a strong platform and product portfolio.

For example, prevailing geo-political risks impacting US-based tech vendors provide a unique opportunity for non-US headquartered service providers to turbocharge their journey by positioning ‘alternative’ custom-built products.

Broader success in the products and platforms space will be determined by the service provider’s ability to:

• Play fast: Swiftly seize the right opportunities to position co-development/ joint innovation within transformation programs.
• Play right: Proactively identify white spaces to attack (linked to inherent strengths across verticals and functions).
• Play bold: Rewire internal DNA and invest to win—bold vision with short-term margin sacrifice, cross-functional and cross-disciplinary talent, agile solutions and creative pricing models, robust stakeholder engagement, strong incentivization of pre-sales/sales/delivery teams.
• Play hard: Develop a strong narrative around domain know-how, speed to value (e.g., MVPs), transparent outcomes, product roadmaps, interoperability, support ecosystem, and choice/ flexibility with customization as a key USP.
• Play smart: Carefully balance agnosticism with your own product and platform aspirations—diplomatically manage friction points with vendor partners and maintain objectivity when chosen as independent tech consulting partners.

Overall, this is great news for enterprises

As enterprises navigate the digital dichotomy and drive self-funded transformation, this evolving supply ecosystem offers greater flexibility, choice, and bargaining power. Enterprises will need to factor in the following aspects into sourcing programs:

• Determine the right operating model for their specific business needs (foundational step), then overlay the right products and platforms.
• Adapt supplier evaluation frameworks for the new sourcing dynamic, where choices for a specific solution include tech vendors and service providers.
• Stay open to experimentation—avoid straight-jacketing supplier categories and shooting down innovative ideas without meaningful trial.
• Leverage the bargaining position to get the best of worlds—depth and breadth of functionalities, solution flexibility, minimal lock-in, operational resilience, and maximized value on investment.

The Bottom Line: S-a-S is the start of a new world order.

Tech vendors and service providers will continue to be in bed with each other, but blurring boundaries will test their relationships. Only the brave and diplomatic will win. Let the coopetition begin!