Surviving GenAI: Indian IT recodes its future as a decades-old model crumbles

Homegrown IT services companies such as Infosys Ltd and Tata Consultancy Services Ltd typically bill clients based in part on the number of people deployed on a project. But GenAI has made it possible for IT projects to be handled by fewer people, forcing companies to turn to a value-based pricing strategy that’s pegged to outcomes rather than the costs deployed in reaching the outcomes.

While Infosys and HCL Technologies Ltd are developing small language models for their clients, TCS, India’s largest IT service provider, merged its cloud and AI businesses to start a business unit called Ai.Cloud in May last year.

Small language models require less memory and compute power than large language models that power popular GenAI platforms such as ChatGPT. Cloud businesses offer remote software development and maintenance support.

US financial services firm Piper Sandler said in a recent report that legacy IT companies focussed on headcount for revenue may struggle to cope with GenAI.

“Companies that may struggle in an evolving landscape include those that are oriented on a headcount-driven model. We believe that legacy IT service providers that lack a focus on investment towards new technologies are at risk,” Piper Sandler analysts Arvind Ramnani, John Nutt, and Caden Dahl said in a note dated 23 March.

“In our view, AI winners will be the companies that are focused on engineering and digital transformation (e.g., Accenture, Globant, EPAM within our coverage). These companies are benefiting from Al-driven initiatives and leveraging Al to offer more value to clients,” the analysts added.

Ireland-headquartered Accenture Plc. has been able to outpace India’s top IT services companies in securing large contracts in part because of its early adoption of GenAI solutions, Mint reported. Accenture has so far secured GenAI orders worth $5.6 billion, more than the $4.3 billion revenue that LTIMindtree Ltd, India’s sixth-largest software services company, earned in 2023-24.

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An expensive transitioning

As Indian IT services companies struggle through a prolonged spending slowdown by clients in crucial markets such as the US, HCLTech’s chief executive underscored why the sector needs to change its business model.

“I think a large part of the industry is really driven by a very input-based model. It’s either time and material or it’s always a number of people delivering certain outcomes. But I think we need to dramatically change from input ways to more output and outcome-based,” HCLTech’s CEO C. Vijayakumar said during industry body Nasscom’s flagship event in Mumbai last month. “A lot of services that we deliver, operational services, from people-based needs to become platform-based.”

Value-based business, which involves a pricing strategy focused on outcomes rather than the costs deployed, is already reaping dividends for Infosys, India’s second-largest IT services company, Keith Bachman, an analyst with BMO Capital Advisors, wrote in a note dated 16 January.

He was referring to Infosys’ Project Maximus programme, which is designed to boost the company’s operating margin by reducing costs and implementing GenAI to improve efficiency.

“(Infosys’) management called out that the price realization of moving to value-based selling as a part of Project Maximus has increased by 3.6% in the first three quarters of the year, which has provided a 30 bps YTD (basis points, year-to-date) tailwind to operating margin,” Bachman wrote.

“We find this encouraging even while admitting that we believe that a transition to value-based selling can be lumpy in the near- to medium-term. If the transition is successful, we think this could help offset potential longer-term headwinds from AI efficiency in cost to serve,” he added.

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With GenAI models capable of generating content such as text, images, videos and even software code, companies are increasingly looking for workers with Al and low-code/no-code skills, say analysts.

“Indian IT Services companies (Cognizant, Infosys, TCS, Wipro, etc.) that are highly reliant on high volume/low cost talent will likely have to transition to more expensive and higher skilled talent,” the Piper Sandler analysts said in their note.

India’s five largest IT outsourcers—TCS, Infosys, HCLTech, Wipro, and Tech Mahindra Ltd—collectively employed more than 1.5 million people as of December. But given the sectoral headwinds, their combined revenue in 2023-24 dropped to $71.8 billion from $76.3 billion in the year before. They did not disclose revenue from GenAI.

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