Artificial intelligence (AI) is reshaping the commercial model behind India’s $315 billion IT services industry, accelerating a move away from traditional outcome-based contracts focused on employee numbers and hours worked.
Major IT services companies including Tata Consultancy Services (TCS), Infosys, Wipro, HCLTech and Cognizant are increasingly exploring agreements tied to measurable business-related outcomes, according to Reuters.
AI and automation are helping providers to complete tasks such as coding, testing and application maintenance with fewer employees. This is challenging the traditional industry model that used to rely heavily on large workforces and billable hours.
AI Is Changing How Services Are Priced
For decades, India's outsourcing industry has benefited from providing large teams of relatively low-cost technology workers to global businesses. AI is beginning to disrupt that relationship.
Some enterprise customers are now demanding contracts based on real results delivered, rather than paying providers based on the number of people assigned to a project, or the time it takes to get it done.
For example, TCS, an Indian multinational technology company, is increasingly exploring outcome-based pricing. This model ties compensation directly to measures such as cost savings, productivity improvements or other agreed-upon business results.
The company has already been applying this model to enterprise projects. In one AI-driven agreement with a North American energy company, TCS reported its approach had helped reduce the total cost of ownership across critical operations by around 50%.
However, outcome-based pricing also transfers some of the risk from the customer to the IT provider. If the expected efficiencies or results aren’t achieved, providers may not receive the same returns they would under more traditional contracts.
Smaller IT Firms Gain Ground
The changing market is also creating opportunities for smaller Indian technology companies. Mid-sized providers such as Persistent Systems and Coforge have been able to become more competitive in a large market by offering rapid AI pilots and more flexible commercial arrangements.
Their recent growth has outpaced some of India's largest IT companies. Persistent Systems reported revenue growth of around 16% in the second quarter, while Coforge grew by approximately 33%. Larger providers also recorded growth of between 1% and 3%.
This creates another challenge for established IT services companies, which must adapt their commercial models while protecting profit margins.
Some providers are already prepared to walk away from deals where the economics no longer work. Tech Mahindra and Infosys have both opted out of contracts considered financially unsustainable, Reuters reported.
AI Puts Pressure on India's IT Workforce Model
The shift towards AI is also affecting the workforce model that helped turn India into one of the world's largest technology outsourcing hubs.
Automation can reduce the amount of human labour needed for routine tasks, including entry-level coding and testing. That could potentially weaken the relationship between workforce size and revenue, something that was once one of the big characteristics of the sector.
TCS has already begun restructuring its workforce while simultaneously increasing its focus on AI adoption and acquisitions. Reuters reported that it is the only major Indian IT services provider to have initiated mass layoffs as part of the current transition with more likely to follow.
The wider industry is simultaneously searching for new ways to demonstrate value. Some providers are developing reusable AI platforms and services that can generate revenue without requiring a corresponding increase in headcount.
The changes suggest that the impact of AI on IT services is moving beyond individual productivity gains and beginning to affect how technology work itself is bought, delivered and priced.
What Does This Mean for Enterprises?
For enterprise customers, AI could change what constitutes value in an IT services contract. Instead of paying primarily for the people and time required to complete technology projects, organisations may increasingly negotiate agreements around measurable outcomes. This can include reduced operating costs, faster processes or improved productivity.
However, for IT services providers that creates pressure to prove that AI delivers those results while absorbing the financial risk if it doesn’t pan out.
The transformation of India's IT services sector therefore offers an early indication of a much broader change in enterprise technology procurement. As AI makes some technology work faster and cheaper to operate, businesses are increasingly questioning whether they should continue paying for effort made or rather start paying for results.
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