Bengaluru: At a time when India’s $300-billion information technology (IT) services industry grapples with slowing growth, it is discovering that the biggest immediate impact of artificial intelligence (AI) is not necessarily higher revenues and improved productivity, but lower prices.
“The slowdown in the market and the revenue compression are creating intense competitive pressure, which is driving prices down and putting pressure on margins,” said Peter Bendor-Samuel, founder of Dallas-based IT advisory firm Everest Group. “This trend looks like it will continue for several years.”
Clients’ demand for AI-driven productivity gains has triggered an intense price war as technology companies of all sizes slash prices to win deals from clients that often choose vendors based on the lowest bid they receive for projects.
The pricing pressure is most acute in coding, application development and maintenance, where AI is automating a growing share of repetitive work. As a result, vendors are increasingly accepting lower billing rates per employee—the industry’s traditional pricing metric.
Industry insiders said pricing in application maintenance renewals, for instance, has fallen 4-5% over the past year as clients insist AI-driven productivity gains be reflected in contract values.
During an interview with Mint in April, HCLTech’s chief executive C. Vijayakumar said the IT industry was facing AI revenue deflation of up to 5% annually, implying that productivity gains reduce the amount clients are willing to pay for the same work.
Rather than hiring aggressively, companies are cushioning the impact of the pricing war by deploying more employees already on the bench, which is helping offset lower billing rates, according to Namratha Dharshan, chief business leader at Connecticut-based IT research and advisory firm ISG.
“AI is definitely increasing pricing pressure between IT services companies because internally, companies are restructuring and macro pressures are forcing companies to keep costs low,” Dharshan said, adding that Tata Consultancy Services's (TCS) layoffs last year were conducted to do away with talent that could not be reskilled and upskilled.
Srini Pallia, CEO of Wipro, said pricing is also being impacted by how clients want to implement AI—over a shorter period of time or spread out over the tenure of a deal.
“When you deploy AI quickly, the token costs also increase for our client. So, they are looking at the total cost of ownership. And that is something that we’ve been carefully working on,” Pallia said during the company’s post-earnings analyst call on 16 July.
The type of projects being offered is also impacting margins and competition, Pallia said: “If it is a new, reimagine-AI kind of project and program, the margins are much better. But if it’s a traditional work where you have to bring in the productivity (benefits) through AI and at the same time help the clients to shift the budgets, there are competitive pressures.”
Tech Mahindra chief executive Mohit Joshi acknowledged growing pressure to promise aggressive AI-driven productivity gains in order to win long-term contracts, but said his company is refraining from engaging in major price cuts.
Committing to productivity improvements of 70-80% in five- to seven-year deals would mean “getting into productivity benefits that are not visible today without very significant process or system changes by the client, so that is where we would hold back”, Joshi said during the company’s post-earnings analyst call on 16 July.
The impact on profitability, however, has been uneven across companies. Wipro’s margins fell 130 basis points sequentially to 16%, which was the steepest fall among the top five with TCS. On the other hand, Tech Mahindra’s operating margins jumped 60 basis points to 14.4%, which was the biggest jump among the big five in the April-June quarter.
Infosys chief financial officer Jayesh Sanghrajka said demands for higher productivity and aggressive pricing had weighed on the company’s outlook, prompting it to trim its revenue guidance at the upper end.
The ask of productivity from clients and increased competitiveness— competition in pricing that reflected in a lower-than-expected pricing this quarter—will have an effect on the rest of the year,” Sanghrajka said during the company’s post-earnings analyst call on 23 July.
Infosys cut the upper end of its guidance from the preceding quarter and now expects to end the full year with 1.5-3% growth in constant currency terms.
AI is also lowering barriers for mid-sized IT companies to compete for large contracts, intensifying pricing pressure on bigger rivals.
“The large caps will have pressure from the smaller peers because a mid-sized IT firm is also competing aggressively be it pricing or offering—to bag large deals—whereas sometimes a larger company may not be able to due to higher cost pressures and lesser agile teams,” said Dharshan, adding that the focus on mid-market companies is shifting this dynamic.
Still, some tech services firms are focusing on not ceding profitability as the new technology rewrites how they engage with clients.
“I feel that we continue to remain disciplined in terms of our pricing, and so that gives us the optionality in the future about how much we want to focus on expanding margins and how much we want to focus on further deepening capabilities,” said Joshi.
Despite the pressure on traditional work, companies say AI is opening new revenue streams that could eventually offset the pricing squeeze.
TCS reported annualized AI revenue of $2.6 billion last quarter, up from $2.3 billion in the previous quarter, while HCLTech's advanced AI revenue rose 10.6% sequentially to $171 million. Most other IT services companies do not disclose AI revenue.