There’s a BIG opportunity for AI-native companies to improve on labor-intensive traditional professional services. We’ve already made quite a few investments, and are excited to find more. 

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Professional services provide specialized, knowledge-based work, historically requiring people with specific expertise, skills or context to deliver the work. Examples include services like outsourced IT, security and customer support, legacy software maintenance, physical security, staffing, legal, accounting, tax, advertising, and business process outsourcing.

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AI presents an opportunity to offer solutions that deliver better outcomes, faster, more scalably, and at lower cost. Rather than pricing by staffing requirements or hours (which can decrease incentive to do things faster or with fewer people), AI services are likely better aligned with customer value and outcomes, too.

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Professional Services is a HUGE TAM

Professional services in the US drive an estimated $3.2T in annual revenue and employ about 14% of the working population. Big segments:

• IT Services & Consulting (~$500-600B in est. annual revenues) includes services like systems integration, cloud migration, custom software development, infra management and business process outsourcing (BPO).  Companies like Accenture, Deloitte, Tata, Cognizant, IBM and NTT Data have built giant, extremely labor intensive organizations in this category. We see tons of opportunity for AI solutions focused on subsegments of this huge category. 

• Management & Strategy Consulting (~$300-350B). Firms like McKinsey, Bain and BCG do this work, as well as the companies mentioned above. Work can include strategy, business and culture transformation, operational improvement, change management and competitive intelligence. Strategy consulting can be very discussion and relationship driven, so may be slower to be replaced with AI; but it’s a category ripe for AI tools to supplant much of the research, reading and analysis.

• Legal Services (~$350-400B) this includes corporate M&A, contract review, litigation, regulatory compliance, IP and patents. Lawyers at firms like Kirkland & Ellis (~$9B in annual revenue) or Latham & Watkins ($7B), Wachtell and Quinn Emanuel can bill at up to $2,600 per hour. Given the vast amount of reading, research and writing involved in legal work, many VC-backed startups are going after horizontal and vertical legal AI solutions. But, it’s early days in adoption and product innovation. Historically, many of the first movers in a platform shift help break ground and teach customers about the new tech’s capability - then are leapfrogged by later entrants. There’s still lots of opportunity. Ripe areas include solutions focused on M&A, personal injury, litigation, intellectual property, labor law and legal compliance, to name a few.

• Accounting & Tax (~$150-200B) includes tax prep and planning, financial audits, bookkeeping, forensic accounting. The “Big 4” accounting firms Deloitte, PWC, EY and KPMG generate over $80B in revenue - indicating there’s opportunity for AI to do much of the reconciliation, communication, synthesis, reporting and compliance in this category.

• Security Consulting & Services (~$125-150B) split between cybersecurity assessments, penetration testing, compliance work, plus outsourced SOC operations, incident response, and threat monitoring.  Given the expense, scarcity and overwhelming workloads for security talent in today’s dynamic and increasingly insecure world, this is a category ripe for AI. Solutions will scalably scan and investigate security flags, identify patterns in massive amounts of data, read and suggest security and compliance improvements to code and agents, pentest and fuzz systems, personalize employee security training, and address much more. 

• HR Consulting (~$40-50B) includes recruiting, comp benchmarking, org development, benefits administration. We’re already seeing AI recruiting tools of all kinds to identify, evaluate, schedule, and interview talent - and again, it’s early days. Compensation benchmarking, employment contract and comp negotiation, and adjustable benefits are just some additional areas for AI innovation.

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Why now? AI’s capabilities, plus incumbent cultures & business models 

Professional services firms have historically sold specific expertise, and scaled by adding more experts, sellers and doers. Customers have been billed by the staffing requirements and/or the hour, with minimal technology leverage.

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But if you look under the hood of many professional engagements, many of the billable hours are for the human tasks required to get to the point of judgment. Reading documents, tracking down, pulling, entering and classifying information, answering questions, drafting outputs. So many manual hours in information gathering, organizing, synthesizing, and communicating.

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For example - Accenture is a giant in professional services, employing 733,000 to generate ~$70B in revenue, or $215k per employee. Similarly, consulting/BPO firm Cognizant relies on 336k people to generate about $21B, or $161k/employee. Both companies trade at ~2x revenue.

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Accounting firms like Deloitte ($70B revenue, 457,000 employees), PwC ($57B), EY ($53B), and KPMG ($40B) are even more people-intensive, with lower gross and operating margins, and less revenue/employee.

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With so much existing revenue at risk, it will be hard for incumbents to change their longstanding cultures and disrupt their people-powered business models.

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In contrast, LLMs and AI agents change what’s possible. AI can read unstructured documents and extract what matters, track down and synthesize information, reason through multi-step workflows, handle ambiguity and escalate edge cases. AI native companies will figure out and execute many of the ‘jobs to be done’, 24/7, in a more scalable, lower cost way.

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Examples of AI-native solutions in professional services

We see 2 approaches to AI services:

1. Selling software to services incumbents (Harvey and Ironclad sell AI powered software to law firms, for example)
2. Competing with human-powered incumbents (e.g. Sierra and Decagon in customer support) 

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Some examples of Cowboy backed companies solving customer problems with cutting-edge AI, plus domain expertise:

• Accounting: Vic.ai uses AI to understand and process accounts payable invoices, matching with purchase orders, identifying discrepancies and insights, and handling approvals and payments, with high accuracy - providing high invoice volume businesses with incredible speed, scalability and cost savings

• Healthcare admin: Basata.ai provides a HIPAA compliant platform to automate administrative workflows like reading and acting on faxes and emails making and taking calls, authorizing actions and scheduling appointments for specialty healthcare providers - enabling patients to be seen more quickly and enabling providers with 24/7, high accuracy, faster, lower cost service.

• Legal contract management: Ironclad offers AI-powered software for legal teams to create, read, redline, negotiate, analyze, execute and record contracts - enabling legal teams to get business done faster with greater consistency and compliance.

• Home services: an unannounced portfolio co supports the “built world” like HVAC, plumbing, electrical, roofing, remodeling and pest control companies with a suite of AI tools to manage revenue and customer interaction - from tailored outbound marketing to appointment scheduling to recurring business, providing built world operators with 24/7 customer care, marketing and scalability.

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We’re just at the beginning of an AI re-imagination of professional services. If you’re building in this area, come get feedback at Cowboy’s Office Hours on February 26.

We’ll be holding in-person office hours in Palo Alto with some great VC and operator friends, to give feedback to teams building AI-native products addressing professional services of all kinds.  

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If you haven’t yet raised seed and want to meet with a curated group of friendly investors to get feedback on your product, plan, or fundraising story, please apply HERE.

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And if you can’t make it to our office hours but are working on a startup in AI-powered professional services, we’d love to hear from you - get in touch with us at aileen@cowboy.vc or hello@cowboy.vc