Organizations that have placed early bets on the potential of AI could find their expectations unmet, according to Gartner, one of the leading research and advisory firms. Despite the novelty and excitement surrounding GenAI, many organizations are still grappling with how to effectively leverage its potential.
Organizations are looking to deploy GenAI to transform their businesses and create new business opportunities. However, companies are struggling to justify their GenAI investments in terms of productivity enhancements.
The Gartner report predicts that at least 30% of GenAI projects currently in testing will be abandoned after proof of concept by the end of 2025. The research company highlights escalating costs, poor data quality, unclear business value, and inadequate risk controls are the most common causes for failed GenAI projects.
According to the Gartner report, the typical costs of GenAI investments can range from $5 million to $20 million, including upfront and recurring costs. While GenAI initiatives that involve deploying AI coding assistants or personalized sales content are less costly, other projects that involve building custom models from scratch can be expensive. Gartner estimates upfront costs for a custom-built LLM to have an initial cost of $8 million to $20 million, with $11,000 to $21,000 in recurring costs per user per year.
When it comes to GenAI initiatives, the costs can be unpredictable as no one size fits all. The costs are based on several factors including the specific use cases and the deployment approach. Pursuing widespread AI integration or focusing on productivity gains involves varying costs, risks, and strategic impacts.
Gartner’s research highlights that regardless of the ambition or scope of the AI initiative, GenAI tends to demand a higher tolerance for financial investments and typically does not deliver a quick ROI. Business leaders who prefer more immediate returns are more likely to be disappointed by the slower ROI of GenAI.
“After last year’s hype, executives are impatient to see returns on GenAI investments, yet organizations are struggling to prove and realize value. As the scope of initiatives widen, the financial burden of developing and deploying GenAI models is increasingly felt,” said Rita Sallam, Distinguished VP Analyst at Gartner, at the Gartner Data & Analytics Summit in Sydney this week.
Even though returns from GenAI investments can be slow, the Gartner report reveals that there is a lot to be gained. The early adopters of GenAI have reported a range of business improvements, including a 15.8% revenue increase, 15.2% cost savings, and 22.6% productivity improvement on average. These findings are based on a recent survey of over 800 business executives conducted by Gartner.
“This data serves as a valuable reference point for assessing the business value derived from GenAI business model innovation,” said Sallam. “But it’s important to acknowledge the challenges in estimating that value, as benefits are very company, use case, role, and workforce specific. Often, the impact may not be immediately evident and may materialize over time. However, this delay doesn’t diminish the potential benefits.”
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Gartner recommends that when adopting GenAI, organizations should analyze business value and the total cost of GenAI business model innovation to gather a better understanding of GenAI’s impact on broader AI adoption. Additionally, they should prioritize initiatives that promise the highest value for their business requirements.
Scaling GenAI innovation becomes easier when business outcomes meet or exceed expectations. However, if results fall short, companies should explore alternative innovation opportunities to optimize resource allocation.
Gartner’s 30% failure prediction for GenAI initiatives serves as both a warning and an opportunity. It underscores the need to refine GenAI strategies and improve overall effectiveness in advancing AI innovation.
The concerns highlighted by Gartner’s report were echoed by a recent Goldman Sachs report, which questioned how long it would take for GenAI investments to deliver the expected returns. Some experts interviewed by the company shared that for GenAI to deliver on its promise it will have to solve complex problems – something it is currently not doing.
Other experts quoted by Goldman Sachs were more optimistic. They believe that while it may take some time, GenAI will deliver value. In addition, they expect GenAI investments to become less expensive over time, improving its return on investment. According to these experts, several technological breakthroughs, such as the iPhone and Uber, initially faced resistance but eventually achieved significant success. GenAI could follow a similar trajectory.
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