Generative AI and the Future of the Service Industry

Update February 2025

Jesse Jeng

Founding & Managing Partner, SCALEHOUSE Capital

Looking back at the theses from August 2024

In August 2024, I published an article titled “Generative AI and the Future of Software Startups: Opportunities and Challenges from a VC Investor’s Perspective.” In it, I argued in particular that generative AI would not lead to a collapse in prices and erosion of margins in the software market, but rather create new growth opportunities.

Back then, I emphasized three points:

1. Cost reduction as a growth engine: If software products can be built and operated more efficiently thanks to AI, companies can offer more competitive pricing and still remain profitable. At the same time, they unlock customer segments that previously couldn’t afford software solutions—creating a market expansion effect.

2. Higher “share of wallet”: Through AI-enabled add-on functionality (e.g., automated services or advisory modules), software providers increase their value per customer. Instead of relying solely on license fees, they can tap into additional budgets that previously went to external service providers or internal departments.

3. Automation of previously labor-intensive services: Areas like legal advisory, copywriting, call center services, and other knowledge-intensive services are ripe for AI-based software solutions. This creates entirely new markets for startups that replace or augment traditional service providers.

Early success stories: Even in 2024, I could point to examples like VoiceLine that illustrated this trend. They use generative AI to simplify documentation and communication processes for field sales—an area that used to require highly manual effort and is now largely automated.

Half a year later, these theses are more relevant than ever. In fact, the pace and breadth of change have been even faster and more comprehensive than I had predicted. Companies across the world—including our portfolio companies—are demonstrating how “Vertical AI Agents” are redefining large parts of the services sector.

The global services economy: size and segments

To understand why Vertical AI Agents are so disruptive, it helps to look at the overall scale of the services economy. According to the WTO, around two-thirds of global GDP comes from services. In other words, out of roughly $100 trillion in world GDP, about $65–70 trillion is generated by the services sector. This broad category includes industries such as finance, insurance, legal, consulting, education, trade, transportation, tourism, and many more.

Not all of these segments can be transformed equally by AI—work that depends heavily on proximity to people, craftsmanship, or caregiving will remain predominantly human. But wherever knowledge-intensive, standardizable processes exist, there are often massive automation opportunities. Let’s look at the key segments:

1. Professional services (legal and accounting): Globally, over $1 trillion for legal services (2024) and around $600B for accounting and bookkeeping (2022). These fields contain many repetitive processes (contract review, file analysis, data entry) that can be automated through AI tools. Already in 2023, acquisitions such as Thomson Reuters’ purchase of CaseText ($650M) or DocuSign’s acquisition of Lexion ($165M) showed that major players are willing to invest heavily in AI solutions to expand their service offerings.

2. Financial and insurance services: Whether banking, insurance, or tax advisory—much of this sector revolves around information processing. The accounting-as-a-service space alone is worth several hundred billion dollars. AI systems for claims intake, policy review, and compliance are already ushering in a new era. The potential is huge: global insurance premiums are around $2.8T (2022), and AI agents can save billions in administrative costs alone.

3. Business Process Outsourcing (BPO) & call centers: This market exceeded $300B in 2024 and is expected to grow beyond $525B by 2030. Every subcategory—customer service, data processing, IT support, HR services—is shaped by repetitive workflows and therefore an ideal candidate for AI disruption. A single AI agent can handle the workload of an entire team and complete it in a fraction of the time.

4. Healthcare (administrative services): While medical care itself requires empathy and human expertise, an estimated $300B per year is spent on administration and billing in the US healthcare market. AI agents can massively reduce workload here (e.g., automated clinical documentation, coding for billing). Globally, this is an $8T market where AI is still at an early stage—clinics and insurers are already piloting comprehensive solutions.

5. Education and consulting: More than $5T is spent globally on education. AI-based learning systems or tutor agents could, over time, take on much of today’s labor-intensive knowledge transfer. Consulting services measured in the trillions (management, IT consulting, etc.) will increasingly outsource automatable reporting and analysis tasks to AI.

Overall, this points to a world in which AI agents can capture hundreds of billions to several trillion dollars of potential market share. The global market for Software-as-a-Service (SaaS) is roughly $550B, while the market for more specialized Vertical SaaS is around $150B. Bessemer Venture Partners estimates that Vertical AI could expand the market by a factor of 10 compared to classic vertical software/SaaS, because AI solutions replace not only software licenses, but entire labor costs. Some experts already speak of a potential “trillion-dollar opportunity,” drawing parallels to the SaaS revolution—just on an even larger scale.

Our portfolio startups: Vertical AI Agents in action

MICE Desk – AI outsourcing for the MICE business

With MICE Desk, SCALEHOUSE Capital supported a startup in 2024 that helps hotels handle event and group inquiries. The technology connects directly to hotel property management systems (PMS) and automates the processing of customer inquiries in the MICE segment (Meetings, Incentives, Conventions, Events). Where teams previously spent days calculating and negotiating offers manually, vertical AI workflows now generate proposals in seconds—and personalize them when needed. The cost per transaction drops; hotels no longer lose inquiries due to lack of capacity in event sales. Quality improves as well, because the AI has full access to price and occupancy history and can optimize offers reliably.

VoiceLine – An AI operating system for field sales

Back in August 2024, I also reported on VoiceLine, which we financed at SCALEHOUSE. VoiceLine built an AI assistant for sales organizations that minimizes documentation overhead in the field. Every conversation note and every customer visit is captured by AI and automatically archived in CRM systems. Field reps save hours each day that they previously spent writing reports and emails.

Since I mentioned it in 2024, VoiceLine has developed rapidly: the startup now reports double-digit monthly growth rates and is integrating additional AI features that provide sales teams with concrete next-best-action recommendations. This turns what started as a “call recording tool” into an end-to-end sales operating system—a textbook example of Vertical AI transforming a time-consuming service (sales documentation) into scalable software.

Locaboo – From municipal resources to automated administrative work

Locaboo started as a cloud platform to make municipal resources (sports halls, community centers, etc.) bookable online. But the real breakthrough is now emerging: Locaboo aims to use generative AI to automate the entire back-office administrative workflow. Thanks to a large existing customer base (several hundred municipalities), Locaboo can roll out its Vertical AI Agents in the public-sector context quickly.

They are already negotiating with large municipalities and plan to price AI-enabled services in relation to the labor cost of an average administrative employee. This highlights the enormous cost-reduction potential enabled by AI and reinforces my thesis that cities and municipalities are highly motivated to solve personnel bottlenecks with software. Here we see Locaboo targeting labor costs directly—not just software budgets—which points to a much larger market than before.

Current views from leading US VCs

In the meantime, leading US venture investors such as a16z, Sequoia, and Khosla Ventures have also become increasingly optimistic about Vertical AI:

Andreessen Horowitz (a16z)

In September and December 2024, a16z published several analyses describing the concept of a “third wave” of Vertical SaaS: AI-powered software that doesn’t just manage data, but actually replaces human labor. They cite examples of AI solutions for call centers, insurance, and accounting that can increase revenue per customer by 10×, because they digitize far more steps of the workflow.

Sequoia Capital

As early as late 2023, Sequoia began investing heavily in AI startups. By October 2024 at the latest, they emphasized in a blog post how quickly truly agentic AI applications are taking hold—beyond simple chatbots—and are automating complex workflows. Again, the focus is on “Vertical AI Agents” that embed domain-specific knowledge into software.

Khosla Ventures

In November 2024, Vinod Khosla said in a VC roundtable that he sees Vertical AI as an opportunity that could be 10× larger than classic SaaS. The reason: instead of selling “software to software budgets,” AI startups tap directly into labor cost budgets. That aligns exactly with what we’ve seen at Locaboo or MICE Desk—solutions priced not like traditional software, but relative to saved labor costs.

Conclusion: the services industry in 2025—at the start of a new era

From my perspective, the core thesis of the original article has become even stronger: generative AI is not causing a collapse of software margins or market saturation. Instead, it is unlocking new customer segments, new revenue sources, and entirely new markets for software startups. Especially in services, we can see formerly manual and often monotonous service processes being transformed step by step into Vertical AI Agents. This not only improves efficiency, but also expands the total market for digital solutions.

• Cost savings: Customers (hotels, municipalities, enterprises, etc.) are happy to pay AI providers because expensive labor costs or agency fees disappear. It’s a win-win: lower costs for customers and higher margins for software providers.

• Scalability: AI agents scale extremely well. Once the domain expertise is trained, thousands of customers across regions can be served without hiring linearly more people. This opens up a new order of magnitude in growth potential for software startups.

• New application fields: Whether in legal, accounting, insurance, BPO/call centers, or healthcare—wherever knowledge can be digitized, the automation potential is enormous. An estimated $65–70T in global value creation comes from services, and several trillion of that will likely be penetrated by AI solutions over time.

• Portfolio examples: MICE Desk, VoiceLine, and Locaboo show how specific slices of industries (MICE, field sales, municipal administration) can be “softwarized” in a targeted way. Locaboo in particular is developing pricing tied directly to saved labor costs. This illustrates how Vertical AI business models evolve: they don’t just access software budgets—they capture labor and outsourcing spend.

Overall, I strongly believe we are only at the beginning of this transformation. In the coming years, Vertical AI Agents will take hold in more and more segments—accelerated by regulatory adjustments, large-enterprise adoption, and rising labor costs. For startups, this is a unique opportunity to establish leadership niche by niche and become the unchallenged category leader. For us as VC investors, this is one of the most exciting developments of the last decade.

The future of the services industry is digital, AI-driven, and vertically specialized. Those who jump on this wave early can make a decisive contribution to a more efficient, connected, and future-ready services economy.