AI Reshapes Contracts in India’s IT Services Business

AI is Changing Contracts in India’s IT Services Business as Customers Want More for Less

AI is Changing Contracts in India

Artificial intelligence is fulfilling its promise to upend India’s IT sector. As clients demand sharp price reductions and increased productivity, outsourcing behemoths like Tata Consultancy Services (TCS.NS), Infosys (INFY.NS), Wipro (WIPR.NS), HCLTech (HCLT.NS), and Cognizant (CTSH.O) are rethinking business models and increasingly tying fees to performance outcomes rather than hours worked.

Executives in the industry also claim that they are losing some jobs completely as clients utilize AI to transfer work in-house, and that the uncertainty brought forth by the new technology is leading to shorter contracts.

Additionally, as AI automates more and more jobs, the larger IT businesses’ ability to win contracts by citing their large workforce has become less and less of an advantage, leveling the playing field for smaller competitors that have seized commercial possibilities.

For the service suppliers, the market is desperate. According to Jimit Arora, CEO of the research and advising firm Everest Group, “the odds are very much in favor of clients.”

The IT sector in India, which generates $315 billion in sales annually, is the most obvious casualty because to its traditional reliance on billable hours. Software companies around the world have been pummeled by concerns that AI could make important aspects of their business obsolete.

The market value of the 10 components of the Nifty IT index (.NIFTYIT) has dropped by a fifth this year, totaling $73 billion.

These days, performance results are more likely to determine contract pricing.

Approximately 80% of the company’s contracts in its finance, human resources, and other business services division are now based on outcome performance indicators, TCS Chief Executive K Krithivasan told Reuters.

According to a person with knowledge of the situation who declined to be named and was not authorized to speak to the media, that figure marks a doubling since AI became popular in late 2023. A request for comment from TCS was not answered.

Additional instances in the sector include an AI and automation agreement between Cognizant (CTSH.O) and Daimler Truck (DTGGe.DE), which opens a new tab in February. According to those familiar with the agreements, it said that the vendor and the client would split any cost savings connected to AI.