India’s IT sector faces new pressure as AI cuts costs

Artificial intelligence is reshaping India’s IT services industry, forcing major outsourcing companies to change how they price and structure contracts as clients demand lower costs, faster delivery and higher productivity.

Tata Consultancy Services (TCS), Infosys, Wipro, HCLTech and Cognizant are increasingly linking fees to performance outcomes rather than hours worked. Clients are also pushing for steep price cuts and greater productivity.

Industry executives say some work is being lost altogether as customers use AI to move tasks in-house. The uncertainty created by the technology is also leading to shorter contracts.

The traditional advantage of large IT companies — their huge employee bases — is becoming less important as AI automates more tasks. That is giving smaller rivals more opportunities to compete for 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, to Reuters.

Software companies globally have been hit by concerns that AI could make parts of their businesses obsolete. India’s IT industry, which is worth $315 billion in annual revenue, is particularly exposed because of its traditional reliance on billable hours.

The Nifty IT index has fallen by a fifth this year, while its 10 constituents have lost a combined $73 billion in market value.

Contracts shift to measurable outcomes

Pricing for IT contracts is increasingly being determined 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 figure represents a doubling since AI went mainstream in late 2023, according to a person with knowledge of the matter who was not authorised to speak to the media and declined to be identified. TCS did not respond to a request for comment.

Cognizant struck an AI and automation deal with Daimler Truck in February under which 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.”

A separate multiyear cloud management deal agreed in June 2025 was structured so HCLTech will not be paid by German utility E.ON for the first year. Payments from the second year will be 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 demand more for less

As AI drives productivity gains, clients are increasingly demanding more work for lower costs.

Persistent Systems CEO Sandeep Kalra told Reuters that clients were demanding the same work for 25% to 30% less while expecting faster delivery and higher productivity.

AI is also 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 say competition from mid-sized firms has become increasingly fierce.

Many customers now want rapid development of pilot programmes, while smaller companies are winning mandates by deploying senior leaders quickly and offering flexible pricing, said Phil Fersht, CEO and chief analyst at HFS Research.

“Many Tier 2 firms have been more agile and hungry in this phase,” he said.

Persistent and Coforge, another mid-sized IT services provider, have both recorded double-digit dollar revenue growth for at least eight consecutive quarters.

Between April and June, Persistent’s revenue surged 16%, while Coforge’s sales jumped by a third.

By comparison, TCS, Infosys, Wipro and HCLTech recorded subdued growth of 1% to 3%.

## Firms face pressure on pricing

As pressure from clients increases, some companies are taking greater risks, according to Tech Mahindra 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. He said Tech Mahindra 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 the company had so far 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.

TCS is also increasing the number of engineers who embed with clients to accelerate AI adoption and is looking for AI acquisitions.

It is so 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.

However, companies have warned that their traditional role as major recruiters of new employees may be coming to an end.

India’s IT giants will no longer need large numbers 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.

(With inputs from Reuters)