Indian IT firms’ resilience on test as AI wave sweeps world
The Indian IT services industry is right now fighting a battle across two fronts. While the US administration has imposed tariffs on its trading partners, the global economy is going through a phase of uncertainty. This is happening at a time when artificial intelligence (AI) is bringing in sweeping changes in the technology world. While the Trump tariff related uncertainty is a passing phase for the Indian IT industry, AI is ushering in many fundamental changes in the industry. Firstly, AI and generative AI are automating many repetitive tasks.
This is making many entry level jobs redundant. With the advent of Agentic AI tools, companies are now able to manage a process end to end without human intervention. These two developments are leading to job losses in the technology industry. Since last year, global technology firms have laid off thousands of workers as they leverage AI to manage tasks. It was likewise with some Indian IT firms like TCS, which have also decided to reduce their headcount due to fundamental mismatch in skillsets in the current AI era. Secondly, as AI makes rapid inroads, IT services companies are facing a deeper shift in their business model.
It should be noted that Indian IT services firms draw more than half of their revenue from T&M (time and material) model. It means that they charge the client as per the utilisation of human resources deployed in the project. Usually, billing happens per hour rate. This T&M model is now shifting to an outcome-based model. It means the client pays as a certain outcome is achieved in a project.
AI is accelerating the shift of T&M model to outcome-based model. While such a shift is giving an opportunity for getting higher margin from outcome-based projects, it is in many cases leading to margin erosion. That is the reason behind the tepid improvement of Indian firms in their operating margins in recent quarters. Additionally, AI in certain cases is cannibalising their revenue. Ongoing projects are witnessing productivity improvement on the back of AI tools, which is leading to lesser billing in some cases.
So, the Indian IT services industry is facing its most formidable challenge in the last three decades through an AI-induced shift. It doesn’t mean that IT services companies are losing the current battle. It is far from the truth.
Most Indian IT firms are aggressively shifting their business strategy to be at the top of the new game. An overwhelming number of employees are getting reskilled in relative domains of AI. On the capability front, the Indian firms are acquiring companies with interesting AI platforms and solutions. That apart, many of them are now building AI-powered platforms to compete with the global AI firms. Moreover, Indian firms are making many organisational changes to ride the AI wave. Many have announced separate AI units with domain leaders, leading the show.
Every company trying to minimise disruption coming from the new technology. Indian IT firms had seen many technology waves earlier- from cloud to digital. When many sceptics had written them off; they had proved them wrong. The Indian IT industry has successfully navigated earlier technology wave to emerge strong. In the AI era, the same feat is expected from a $290 billion-strong Indian IT industry, which has not only employed millions in the sector, but also has been a flagbearer for the nation.
