The AI Services Split: From Digital to Phygital

**Karen Stokes Lockhart** (0:02)
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Welcome to Gartner ThinkCast, I'm Karen Stokes Lockhart. Today, we're covering how AI goes beyond just changing technology. It's changing how tech services get delivered in the real world. From customer experiences to business operations, we're seeing a shift from simple app-based interactions to something much bigger. AI that can act, decide, and even operate in physical environments.
That shift is creating a new kind of race in the AI services market. On one side, companies are scaling fast using AI platforms and automation. On the other, traditional approaches like relying on large teams and digital-only services are starting to fall behind. To help break it all down, you'll hear from Gartner experts Craig Lowery and Scott Frederick, as they cover what this transformation means, who's winning, and how organizations can adapt. Now, here's Craig and Scott.

**Craig Lowery** (1:35)
Hello and welcome to Gartner ThinkCast. I'm VP Analyst and Chief of Tech Services Research, Craig Lowery. I'm joined today by Scott Frederick, also a Gartner VP Analyst and Research Manager.
Welcome to the program, Scott. Good to have you here.

**Scott Frederick** (1:48)
Great to be here, Craig. Thanks for having me.

**Craig Lowery** (1:51)
Today, we're diving into a big change in AI services. It's an unusual instance of market bifurcation. We see that frequently where it splits. But seeing it split into winners and losers, not quite as easily as we're seeing this one. And what's happening here is that providers that are sticking to just these digital or app-based services are feeling squeezed by the big tech providers like the hyperscalers. So it's getting tougher to stand out if all you offer as a tech service provider is something along the line of an online experience or an app.
But providers that are expanding into new targets in the physical domains, which you often hear referred to as phygetal, they're seeing upsides in opportunities, often more than they can even get to, assuming they've got the capabilities to go to market and serve those opportunities. So AI is moving out from behind screens and apps. We're seeing it in the real world, emphasize on managing real world experiences, interacting with that physical domain, which means AI isn't just something you use on your phone anymore. It's becoming part of everyday life. It's even showing up in places like stores, offices and homes. What do you think about that position there, Scott?

**Scott Frederick** (2:59)
I 100% agree, Craig. And to your point, it's moving into complex decision making as well in places like healthcare, banking, government. At this point, it's not just an IT discussion anymore. It's reshaping how we learn and work and live as well.

**Craig Lowery** (3:13)
Exactly. I mean, it's profound. And with AI becoming so pervasive to Scott, the competition in AI services continues to get ramped up. So now we're seeing expansion in assets like specialized delivery platforms that help services go to market faster, deliver more efficiently than we've ever seen before. And it's almost like these companies can now grow and do more without needing to hire more people.
Sometimes hear that called growth without growth because they're scaling up their impact without actually getting bigger in the traditional sense. So let's talk a little bit about how these providers are pulling this off. It sounds like a feat to me. It sounds like a little bit unbelievable too. I mean, how are they finding new ways to boost their revenue without just adding more staff? I know AI is part of it, but what role exactly does AI play, say, in that service delivery platform to make all that possible?

**Scott Frederick** (4:06)
Well, Craig, the days of driving revenue by simply adding headcount are fading fast. And now the AI agent is really the asset that's doing an awful lot of heavy lifting. To your point, we're beginning to see some non-linear scaling in terms of labor and revenue where providers are using autonomous AI and other technologies to scale operations and capture more revenue with fewer resources. And that's really where AI service delivery platforms are coming in. They're not just performing coding exercises anymore, they're providing agent orchestration, governance capabilities, marketplaces, and skilled providers are using the telemetry they provide to link the work directly to business outcomes, thereby putting them in position to monetize both the platform and potentially the outcome.