Artificial intelligence promised to disrupt India's IT industry and it is delivering.
Outsourcing giants like Tata Consultancy Services (TCS.NS), Infosys (INFY.NS), Wipro (WIPR.NS), HCLTech (HCLT.NS) and Cognizant (CTSH.O) 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 (.NIFTYIT) has tumbled by a fifth this year, with its 10 constituents losing a combined $73 billion in market value.
CONTRACTS SHIFT TO MEASURABLE OUTCOMES
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 (CTSH.O) struck with Daimler Truck (DTGGe.DE) 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."
Daimler Truck did not respond to a request for comment.
A separate multiyear cloud management deal forged in June 2025 was structured so HCLTech will not be paid by German utility E.ON (EONGn.DE) for the first year, with payments from the second year tied to efficiency gains and specific business outcomes, according to two people familiar with the agreement.
E.ON declined to comment, while HCLTech did not respond to a request for comment.
CLIENTS WANT MORE BANG FOR THEIR BUCK
As AI drives productivity gains, clients have become increasingly vocal about getting more for less.
But on the plus side, AI is helping Persistent win larger deals than it would have previously.
"The demarcation of a scale player only by revenue is not necessarily a big thing today," he said.
IT executives and analysts alike say competition from mid-sized firms has become brutally fierce.
Many customers now want rapid development of pilot programmes and smaller firms are winning mandates by deploying senior leaders quickly and offering flexible pricing, says Phil Fersht, CEO and chief analyst at HFS Research.
"Many Tier 2 firms have been more agile and hungry in this phase," he said.
Both Persistent and Coforge (COFO.NS), another mid-sized IT services provider, have seen revenue in dollar terms grow by double digits for at least eight quarters in a row. In April-June, revenue for Persistent surged 16%, while Coforge's sales jumped by a third.
In contrast, TCS, Infosys, Wipro and HCLTech had subdued growth of 1% to 3%.
IRRATIONAL EXUBERANCE?
As pressure from clients grows, some firms are making rash decisions, says Tech Mahindra (TEML.NS) CEO Mohit Joshi.
Some rivals are factoring in productivity gains of 70% to 80% over five to seven years and guaranteeing prices despite rising chip costs, Joshi told an analysts' call last month, adding that his company had chosen not to take such risks.
"Clearly, there is a ton of competition out there, and our competition at times is doing irrational things," he said.
Infosys last month also told analysts it had walked away from contracts that were no longer economically viable.
TCS's Krithivasan said that so far the company has been able to offset AI-related downward pressure on revenue with new work.
"But how fast and how much more we are able to go ahead of the (revenue) deflation will determine the growth going forward," he added.
It is thus far the only Indian IT services provider to have announced mass layoffs in the AI era, implementing cuts of more than 12,000 last year. But companies have flagged that their traditional role as huge hirers of new recruits may be winding down.
The country's IT giants will no longer need large ranks of entry-level engineers, according to former Infosys CFO V. Balakrishnan.
"The pyramid model is gone. With coding agents, we no longer need basic coding," he said.
