As AI lowers software creation costs, the high-margin "product" business is splitting. Companies will either be low-cost providers or offer customized solutions via forward-deployed engineers. This "professional services" model, once a red flag for VCs, is now a viable, high-value strategy.

The rise of Forward Deployed Engineers (FDEs) at OpenAI and Google isn't just about a new job title. It's a strategic Trojan horse to bypass traditional consulting firms and directly capture the massive services revenue associated with AI implementation, shifting from software sales to outcome-based pricing.

Pure software-as-a-service (SaaS) companies are vulnerable to being replaced by foundational AI models that can replicate their functionality. A Sequoia partner suggests the defensible model is to become a services company that uses technology as a layer, focusing on implementation, strategy, and human expertise.

Just as YouTube lowered media distribution costs, AI is lowering software development costs. This could shift the SaaS market away from large, one-size-fits-all platforms toward a model where small, elite teams deliver highly customized software solutions directly to enterprise clients.

Enterprises struggle to get value from AI due to a lack of iterative, data-science expertise. The winning model for AI companies isn't just selling APIs, but embedding "forward deployment" teams of engineers and scientists to co-create solutions, closing the gap between prototype and production value.

As large AI models absorb functions of traditional SaaS products, investors and entrepreneurs are shifting focus back to tech-enabled services. Integrating AI deeply into physical services and workflows is now seen as creating more defensible, lasting value than pure software, reversing a years-long trend.

The idea that AI will kill SaaS is flawed. Instead, SaaS is evolving to integrate "agentic" capabilities. This creates a hybrid model where humans and AI agents collaborate within optimized workflows, delivering more value than either could alone. This fusion expands the market rather than destroying it.

SaaS companies are being disrupted not by better tools, but by AI that delivers the outcomes customers want. The winning strategy is to shift from selling software licenses to selling a guaranteed result, becoming an 'AI-native services business.' This changes the business model from high-margin software to a hybrid with lower but still scalable margins.

Leading AI labs are launching massive consulting ventures because they realize selling powerful models isn't enough. Enterprise adoption requires deep, hands-on organizational transformation, a 'last mile' problem that technology alone can't solve, forcing a shift into services.