The problem with "selling the work"
Many startups these days are founded on the premise that, to use Sarah Tavel’s phrasing, they can “sell the work,” rather than software. (See the recent splashy fundraise announcement from 11x.ai as the latest example.)
And, indeed, selling the work has some critical advantages over selling software.
It opens up new vertical opportunities. Despite software eating the world since 2011, there are still countless niches that software has yet to touch. By selling the work, rather than the software, companies are able to wedge into verticals that previously were challenging, or simply unprofitable, to penetrate
It aligns incentives. The shift from seat-based pricing to usage-based pricing has unlocked growth for many software categories because usage-based pricing aligns incentives between the company and the customer. “Selling the work” achieves that same alignment across a whole new set of software categories.
It’s easier for customers to buy. Turns out that it’s easier to sell a piece of completed work (whose price and value can be compared to the cost of the human that is currently completing that task), than a “productivity improvement” (which is just about the best pitch you can usually make with most seat-based SaaS).
But I think the business model might have a fatal flaw.
I was chatting with the founders of an AI-powered company targeting the legal sector last week, and they shared an interesting insight from their time in Big Law. Turns out that pretty much every big customer was showing up to their renewal conversations saying basically the same thing: “I know you’re using AI to automate your work. So I’ll need a 30% discount.”
As you might imagine, the law firm caved. As is true for many service providers, any pricing power they have is based on their brand alone, and that isn’t enough to protect them from the deflationary impact of AI. Most of the benefits their customers imagined they were getting from AI (whether real or not!) got transferred right to their customers.
So what happens next? Is this the new equilibrium in the legal industry? Or is this just a transient dynamic on the way to something radically different?
My bet is on the latter.
The continued competitiveness of open source models suggests to me that most of “the work” itself will eventually become a near-commodity. If that’s the case, then the clearing price for that work will continue to fall. In that world, only business models that don’t rely on making money by selling that work will succeed.
Law firms, themselves, will have to evolve or die. The biggest firms with the best brands will call in consultants to build their own internal tools to automate a lot of this work. Others, realizing they need to change their cost structure entirely, will re-launch as vertically integrated “AI-enabled” law firms that give away the commodity work at cost (essentially zero) as a loss leader for winning the more profitable business that still requires a human touch. And some enterprising founders will realize they can disintermediate the service provider entirely, “sell the work” at cost as a way to win business, and monetize in other ways.
Regardless, it’s hard to see how a startup that is simply “selling the work” within legal will survive. And because most service providers do not have pricing power, I imagine we’ll see this exact scenario play out in pretty much every other service sector that’s being impacted by AI as well.
My point is not to celebrate the (hypothetical) flaw of a popular, new business model. But more to highlight just how disruptive - and deflationary - AI actually is. What seems disruptive now may easily be disrupted soon. What looks like a new equilibrium may simply be a momentary pause as business models evolve. The only thing that’s clear is that it’s nearly impossible to see more than a few steps ahead. It’s a good reminder that this era will reward the founders who are nimble enough to stay upright as the ground continues to shift below their feet.