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

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These days, pricing for contracts is more likely to be dictated by performance outcomes [File] | Photo Credit: REUTERS

Artificial ​intelligence promised to disrupt India’s IT industry and it is delivering.

Outsourcing giants like Tata Consultancy Services, Infosys, Wipro, HCLTech and Cognizant are rejigging business models, increasingly tying fees to performance outcomes ‌instead of hours worked , as clients demand steep price cuts and more productivity.

Industry executives also say they are losing some work entirely ​as customers use AI to shift tasks in-house, while all the uncertainty that the new technology has brought is resulting in shorter ⁠contracts.

And where once the big IT companies won contracts because they could point to their huge employee base, that has become less and less of an advantage as AI automates more and more tasks — levelling the playing field for smaller rivals which have jumped at opportunities to snatch business.

“It’s a desperate market for the service providers. The odds are very ‌much in favour of clients,” said Jimit Arora, CEO of research and advisory firm Everest Group.

Software companies globally have been battered by worries that AI will render key parts of their business obsolete, but India’s IT industry — worth $315 billion in annual revenue — is the most obvious victim ‌with its traditional reliance on billable hours.

The Nifty IT index has tumbled by a fifth this year, with its 10 constituents losing a combined $73 ‌billion ⁠in market value.

These days, pricing for contracts is more likely to be dictated by performance outcomes.

TCS Chief Executive K ⁠Krithivasan told Reuters that about 80% of the company’s contracts within its finance, human resources and other business services segment are now based on outcome performance measures.

That number represents a doubling since AI went mainstream in late 2023, said a person with knowledge of the matter, who was not authorised to speak to media and declined to be identified. TCS did not respond to a request ​for comment.

Other examples in the industry include an AI and ‌automation deal Cognizant struck with Daimler Truck in February. It stipulated AI-related cost savings would be split between the vendor and the client, according to people familiar with the terms.

“With AI, the fundamentals are shifting,” Cognizant said in a statement to Reuters, though it declined to comment on specific contracts. “Clients now expect more value and measurable outcomes, and we are re-forging our model for that reality.”