For most of the last two decades, enterprise software budgets moved in one direction. Digital transformation was a board-level mandate, cloud migrations had to happen, and the systems integrator who could field the largest team won the work. Scope expanded, headcount expanded, and services firms were rewarded for being able to ramp quickly. Bigger was the proxy for capable.
That posture has changed. Enterprise buyers are still asking for transformation, for new features, and for a modernization roadmap to keep moving. They are simply asking for all of it on a smaller budget, with a smaller delivery team, and on a tighter timeline. The phrase that shows up repeatedly in procurement conversations and earnings calls alike is "do more with less." It is not a temporary cost-cutting cycle. It is the new operating assumption for how enterprise technology gets bought.
Several forces are pushing in the same direction. Enterprise IT budgets have come under sustained pressure since the 2023 rate cycle, and CFOs who learned to scrutinize software spend during that period have not loosened up. Generative AI has simultaneously rewritten what buyers believe is possible. Every executive has personally seen a working prototype built in a weekend by someone who is not a developer, and that experience has reset their intuition about what a feature should cost and how long it should take. The benchmark for "reasonable effort" has shifted, even though the underlying production engineering has not become meaningfully easier.
The result is a structural compression of services economics. The same scope of work that supported a thirty-person team two years ago is now expected to be delivered by a team of twelve, in two-thirds of the time, and at a price point that assumes both. Buyers do not particularly care how that math works. They care that someone is willing to sign up for it.
For services firms, this creates a sorting function. Firms that respond by simply shrinking teams and hoping to absorb the margin hit will erode. The work still has to get done, and a smaller team executing the old workflow at the old velocity simply misses deadlines. The firms that will compound over this period are those that treat "do more with less" as a delivery-model problem rather than a staffing problem. That means redesigning how work moves through the firm so that the unit of production decouples, at least partially, from the unit of human labor.
This is where the AI-assisted development stack matters, and where we have previously written about the shift from time to outcomes (https://alten.capital/blog/from-time-to-outcomes) and the explosion of demand for custom software it unlocks (https://alten.capital/blog/the-coming-explosion-of-custom-software). The firms that are quietly winning right now are the ones using AI coding tools, agentic workflows, and reusable internal IP to deliver scopes that would previously have required two or three times the headcount. They are not advertising it loudly to clients, because clients do not want to hear about the tooling. They want to hear that the project will land on time at the agreed price. The tooling is how the firm makes the economics work behind the scenes.
The interesting consequence is that gross margin in services is starting to bifurcate. Firms that have rebuilt their delivery model around AI-augmented teams are reporting margin expansion even as effective rates compress, because the cost of producing each unit of output has fallen faster than the price. Firms that have not done that work are absorbing the price compression directly and watching utilization and margins move the wrong way at once. The same revenue line can hide very different underlying businesses.
There is also a demand-side effect that is easy to miss. When buyers believe a feature should cost less and ship faster, they ask for more features. The total volume of work expanding across the enterprise is larger than it was three years ago because the perceived unit cost of software has dropped. A services firm that has solved the delivery economics is therefore not fighting over a shrinking pie. It is positioned for a larger pie that is being served in smaller slices, which is a meaningfully different business.
The firms that will look like clear winners three years from now are the ones treating this period as a forcing function to rebuild how they deliver, rather than a headwind to wait out. The buyers are not going back. The budgets are not returning to their previous levels. The expectation that a smaller, AI-leveraged team can deliver what used to require a larger one is now embedded in how enterprises plan. The services businesses that internalize that and rebuild their delivery model accordingly will be the ones that compound through it.
Alten Capital invests in technology services businesses. Reach out to explore potential partnerships.