AI reshapes India's IT services sector contracts as clients demand more for less

Artificial intelligence is transforming India's IT services sector as clients demand higher value for less. Major players like Tata Consultancy Services, Infosys, Wipro, HCLTech and Cognizant are adjusting their business models, tying fees to performance outcomes rather than billable hours. This shift comes as clients seek cost reductions and increased productivity, often using AI to perform tasks in-house.

The uncertainty brought by AI has led to shorter contracts and, historically, larger IT companies have found their employee base less of an advantage as automation levels the playing field. Everest Group CEO Jimit Arora noted the market is "desperate" for service providers. The Nifty IT index has fallen by a fifth this year, with a combined loss of $73 billion in market value for its constituents.

TCS CEO K Krithivasan revealed that around 80% of the company's contracts now involve outcome-based performance measures, a doubling from late 2023. Cognizant recently signed an AI and automation deal with Daimler Truck, where AI-related cost savings are split between the vendor and client. HCLTech recently agreed to a multiyear cloud management contract with E.ON, with payments tied to efficiency gains and outcomes in the second year.

To stay competitive, smaller IT firms are gaining ground by rapidly developing pilot programs and offering flexible pricing, driving revenue growth for companies like Persistent and Coforge. However, some firms are making hasty decisions due to client pressure, while TCS is investing in AI adoption and considering acquisitions. The traditional model of large IT service providers hiring vast numbers of entry-level engineers may soon be obsolete, according to former Infosys CFO V. Balakrishnan.