Artificial intelligence is delivering on its promise to reshape India’s $315 billion IT services industry, forcing outsourcing giants to abandon the billable-hours business model that built their empires.
Tata Consultancy Services, Infosys, Wipro, HCLTech and Cognizant are rapidly restructuring their contracts around measurable performance outcomes rather than hours worked, as clients demand steep price cuts and proof of AI-driven productivity gains, Reuters reported on August 21.
Outcome-Based Contracts Double at TCS
TCS Chief Executive K. Krithivasan told Reuters that roughly 80% of the company’s contracts in finance, human resources and business services are now tied to outcome performance measures, a figure that has doubled since AI went mainstream in late 2023. The shift marks a fundamental break from the labor-intensive staffing model that made Indian IT companies global powerhouses.
Cognizant struck an AI and automation deal with Daimler Truck in February stipulating that AI-related cost savings would be split between vendor and client. HCLTech structured a multiyear cloud management agreement with German utility E.ON so that it would not be paid in the first year, with payments from year two tied to efficiency gains and specific business outcomes.
Clients Demand 25-30% Price Cuts
Persistent Systems CEO Sandeep Kalra told Reuters that clients are demanding the same work for 25% to 30% less while expecting faster delivery and higher productivity. The Nifty IT index has tumbled by a fifth this year, with its 10 constituents losing a combined $73 billion in market value as investors price in the structural shift.
It is a desperate market for the service providers. The odds are very much in favour of clients, said Jimit Arora, CEO of Everest Group. Industry executives also report losing work entirely as customers use AI to shift tasks in-house, while shorter contracts reflect the uncertainty the technology has introduced.
Mid-Sized Firms Gain Ground
The leveling effect of AI has eroded the competitive advantage of large employee bases. Smaller firms are seizing the opportunity. Persistent and Coforge have each posted double-digit dollar revenue growth for at least eight consecutive quarters, with Persistent surging 16% and Coforge jumping 33% in the April-June period. By contrast, TCS, Infosys, Wipro and HCLTech managed subdued growth of just 1% to 3%.
Many Tier 2 firms have been more agile and hungry in this phase, said Phil Fersht, CEO of HFS Research, noting that mid-sized competitors win mandates by deploying senior leaders quickly and offering flexible pricing.
The pyramid model is gone. With coding agents, we no longer need basic coding.
– V. Balakrishnan, former Infosys CFO
Tech Mahindra CEO Mohit Joshi warned that some rivals are making rash commitments, factoring in productivity gains of 70% to 80% over five to seven years and guaranteeing prices despite rising chip costs. Infosys told analysts last month it had walked away from contracts that were no longer economically viable. TCS remains the only Indian IT services provider to have announced mass layoffs in the AI era, cutting more than 12,000 positions last year.
Sources: Reuters via The Star Malaysia; Everest Group; HFS Research
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