This report does not constitute a rating action.
Artificial intelligence (AI) has rapidly gained attention as a potentially powerful tool to turbocharge operating efficiency in delivering customer service. Companies have started to implement the technology in hopes of cutting costs, handling larger volumes per agent, providing faster response times, replacing agents with Gen AI-powered bots, and enhancing customer satisfaction. In contrast, the pace of adoption of these solutions also faces barriers such as the high cost of the technology, client concerns about data privacy and security, and global regulatory risks. Some early adopters have learned that the technology can hallucinate and provide inaccurate information to customers, raising liability concerns. For example, Air Canada was held liable by a Canadian Tribunal earlier this year for inaccurate information that its chatbot provided to a customer. Meanwhile, customer experience outsourcers stress the importance of human interaction in more complex customer engagements and tout their use of AI to provide competitive services.
In this article, we refer to the CX industry as the collection of providers of customer engagement services. Though these services have traditionally been composed primarily of call centers and text-based customer support services, some providers in this space have increasingly expanded their scope to include adjacent services including customer journey mapping, website and application design, customer data analytics, and more. Sometimes these services are offered through partnerships with outside technology providers.
This year, investors have expressed deep concerns about the prospects of the customer experience outsourcing industry by pulling out of their investments. The share price of Teleperformance and Concentrix, the two largest players in this space, is down about 15% and 27%, respectively, this year. Furthermore, Foundever, the privately held, third-largest player, has seen its debt trade at a steep discount in recent months.
In this report, we address frequently asked questions from investors related to the risks that AI poses to customer experience outsourcers.
Frequently Asked Questions
How is AI threatening the outsourced customer experience (CX) industry?
A perceived threat to the CX industry is that large language models could potentially replace human representatives in most interactions without compromising service quality. This would eliminate the need for contact center outsourcing services because companies could engage directly with providers of AI and CX technology platforms to solve their customer interaction needs at a fraction of the cost of traditional CX services. While we are constantly evaluating this risk amid rapidly evolving technology, we anticipate there will be limits to AI capabilities and potential regulatory hurdles that will prevent a full replacement of traditional contact center work; however, we do expect AI will decrease human-based interaction volumes and lead to greater efficiency over time.
Over the longer term, larger players in the CX space who are now investing heavily in AI-related capabilities could revolutionize their businesses, offering highly competitive traditional contact-center services as a smaller proportion of their businesses, with greater emphasis on higher value services. This could include AI readiness services, technology consulting, data analytics, and customer journey mapping. These services are offered today at a smaller scale, with providers more focused on infusing AI into their contact center services to extract efficiencies by improving the training process, assisting agents during customer interactions, and performing quality reviews. We think this could lead to improved pricing for clients as competition heats up and the industry is further consolidated. Meanwhile, this could enable a shift toward outcome-based pricing from primarily volume-based pricing today, especially for larger players with broader service offerings, potentially expanding profit margins for stronger providers.
What is our view on the credit impact to customer experience outsourcers?
We see limited credit impact to these issuers in the shorter term, with longer-term market contraction risks at least partially offset by potential opportunities to expand the scope of service offerings and productivity gains. It is unclear to what extent the development and implementation of AI-powered solutions will require our rated issuers to increase costs and capital expenditure (capex) because the amounts invested so far have been relatively limited and total capex has been stable as a percentage of revenues.
We expect the deployment of Gen AI to be gradual as clients across several sectors (such as health care and banking) remain cautious, and acknowledge the requirements for large amounts of reliable, well-organized data and governance frameworks for scalable Gen AI solutions. This presents a barrier that will likely delay broad adoption of AI for all customer relationship management services. A measured pace of adoption will be helpful for ongoing assessment of hallucination-related liability risks for AI platforms, CX providers, and their clients, as this technology matures. Our view on the pace of Gen AI adoption could evolve rapidly as we monitor developments of the risks, threats, and opportunities.
Meanwhile, we think an asymmetric impact to the industry is likely, as larger players who are investing heavily in advancing their capabilities are more likely to come out on top as the industry continues to consolidate, while smaller players are more likely to face a challenging path forward. The evolution of AI may prove to be a credit positive for CX platforms that can develop a meaningful competitive advantage through proprietary technology and effective partnerships. In our view, traditional contact center work will likely evolve and could contract over time but is unlikely to be replaced entirely by AI.
As such, we do not foresee near-term rating impact on our rated issuers related to the generative AI disruption threat, but we will continue to closely monitor these developments and assess their credit materiality. Although rating headroom has reduced for some of our issuers (notably ones of medium size with a more regional footprint), this is because of the macroeconomic slowdown observed since 2022, rather than recent AI developments. The slowdown negatively impacted demand and significantly reduced and delayed numerous clients’ projects, which ultimately led to lower revenue growth for customer relationship management (CRM) companies.
What will determine the winners and losers in the industry?
We believe scale is paramount in the CX industry. Larger players can invest heavily to rapidly improve their offerings and compete on price. Investments that improve efficiency without compromising quality will be rewarded with market share gains, while those who are unable to sufficiently invest in technology to keep up with the evolving industry landscape could lose market share. We think this theme, along with mergers and acquisitions (M&A) will lead to further consolidation in the CX industry over time, with a few large players remaining.
However, the level of investing needed to remain competitive is uncertain since technology costs decline over time and the right partnerships with AI technology providers could enable smaller players to compete effectively with limited upfront cash costs. Furthermore, a market for more traditional contact center solutions could bifurcate the industry and allow smaller providers to thrive by serving smaller clients, while the top CX providers focus on AI-enabled automated solutions tailored to their large enterprise clients.
What do we think will happen to contact center volumes if CX companies adopt AI tools to replace customer service agents?
Some companies have noted significant productivity gains by adopting generative AI tools that they claim can replace the work traditionally done by customer service agents. However, automating low-complexity customer interactions has been a theme in the CX industry, long before the advent of generative AI. We believe automating this work is part of the natural progression of the industry and leads to more complex interactions over time. For instance, Concentrix believes that lower complexity interactions comprise a small and shrinking proportion of its revenue (7% as of the second quarter of fiscal 2024), which is where we expect the most disruption. We expect these companies will use Gen AI-powered technology to decrease staffing without any material impact to revenues and margins, mostly because their clients may pay them to implement and maintain the technology.
While overall human-based engagement volumes may decline, we anticipate that an increase in complex interactions will have a positive impact on price and profit margins. We also think embracing this technology is important for the industry to provide a compelling value proposition to potential clients as the industry evolves far beyond traditional contact center solutions. We believe the customer experience market remains largely untapped and increasing rates of outsourcing will likely help mitigate much of the volumes lost to automation.
Will small and mid-sized businesses (SMBs) be able to buy off-the-shelf software to address their customer service needs?
We think there are major hurdles to deploying generative AI products for the customer service functions of SMBs. For AI to effectively provide customer service functions, it first needs to learn company policies using existing documentation. SMBs are less likely to have robust documentation to feed an AI platform and enable this learning. Access to vast amounts of data from prior interactions, company policy documents, employee handbooks, and other internal sources could enable AI platforms to engage successfully with clients in a manner that is consistent with expected level of service. Without robust data to enable learning, customer service functions performed by generative AI tools would likely be very limited or flawed. This leads us to believe that smaller companies, especially those who do not maintain stringent data collection and cleansing practices, are less likely to successfully use AI to replace even lower complexity traditional customer service functions. Still, we think AI products and services could be used to augment customer interactions, enabling efficiency gains.
What is the risk that AI platform providers take CX providers’ share by engaging with companies directly?
AI platform providers are in the early stages of identifying optimal strategies to monetize their technology, and they may find direct sales for CX purposes to be suboptimal. Partnering with outsourcers who already have client connections and customer engagement expertise could prove advantageous for these providers. Still, we think of this as a longer-term threat that is especially relevant among CX clients and potential clients seeking to outsource and automate high volume, low complexity functions.
Providers who exclusively offer human-based contact center solutions are most exposed. Meanwhile, we observe that larger players in the CX space today are broadening the scope of their services, which we think will provide some protection against this risk and perhaps allow those companies to capitalize on new opportunities. In the shorter term, investments to use AI to aid agents through training, guide them through customer interactions, and provide quality assessments will provide more immediate returns on investment, enabling pricing competition that could make it challenging for AI platforms to compete.
The largest customer experience providers are increasingly focused on offering more wholistic services that consider every aspect of a customer’s engagement with a brand through services that include consulting, data analytics, digital engineering, and more. These providers can utilize their expertise to improve customer engagement tailored to the needs of each client. With the right offering, we think larger CX players are well positioned to maintain a healthy share of the market, even against large technology platforms. Our view on this will evolve partly depending on the success of several ongoing proof of concepts with their clients aimed at the use of Gen AI-powered technology to improve customer experience, through a more data-based personalized interaction with the end customers.
How could evolving regulations impact AI adoption in the CX space?
Adoption of generative AI is in the very early stages and the regulatory landscape will likely take some time to establish, though some jurisdictions have started to enact legislation to regulate the use of AI. For example, the European Union formally adopted the EU AI Act in May 2024, which aims to impose rules on AI systems based on their perceived risk level and to introduce transparency requirements for AI-generated content. We anticipate similar AI related legislation to be introduced in other jurisdictions over time.
Meanwhile, copyright infringement cases against AI platforms allege that these tools are trained with improper use of copyrighted material or that they reproduce copyrighted material and threaten to upend the budding AI industry. We think these regulatory and copyright risks are a threat to early adoption of AI technology, likely hindering adoption in the shorter term. Depending on regulatory outcomes, infusing generative AI into customer experience functions could be limited, and transparency requirements may cause companies to tread slowly and carefully to avoid alienating their customer base.
Related Research
- AI Will Gradually Reshape U.S. Tech Companies' Credit Quality, April 8, 2024
- Your Three Minutes In AI: The EU AI Act Could Become A Global Benchmark, March 15, 2024
- Artificial Intelligence: What Are The Key Credit Risks And Opportunities Of AI?, Dec. 4, 2023
- Gen AI Is Writing A New Credit Story For Tech Giants, Nov. 13, 2023
| Primary Contacts: | Pasha Azadmard, CFA, New York 212-438-1641; pasha.azadmard@spglobal.com |
| Nishit K Madlani, New York 1-212-438-4070; nishit.madlani@spglobal.com | |
| Pranav Khattar, CFA, Boston 1-416-507-2549; Pranav.Khattar@spglobal.com | |
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