India’s largest IT services company is passing on automation savings to clients in a phased manner to preserve its margins, as it seeks to change the way it engages with customers amid an AI onslaught that has investors writing off the $300 billion sector
Tata Consultancy Services Ltd (TCS) is billing clients based on outcomes rather than hours for AI-led engagements, before transitioning them to fixed-price contracts, its management said during a post-earnings conference call on Thursday.
“We are seeing, I would say, output commitment-based models, outcome-based models where we are committing through the AI program to deliver a business outcome in a fixed duration,” said Aarthi Subramanian, its chief operating officer.
“And second one, I would say, is definitely fixed price, fixed capacity, where you start with a program, then once the customer sees value, then we actually set up multiple pods as I spoke earlier. We call it our AI lab offering, which is part of the build-and-scale. So you build once, then create capacity in a fixed price model," he added.
The management said the company is transferring AI-led productivity benefits to clients in phases, disclosing for the first time that it is generating up to 15% cost savings through the advanced technology.
“By and large, as I said, it's a rule of thumb saying that we can expect a 10% to 15% productivity savings because of AI. But we are seeing that we are able to offer a front-loaded commitment to our customers so that we are able to smooth it out over the term of the project,” said its chief executive, K. Krithivasan.
Investor concerns
But investors worry that as AI automates coding, software development, data analysis and cybersecurity tasks, clients will need fewer billable hours, putting pressure on the revenue growth and profitability of IT services companies.
The company's shares have fallen 35% since the start of 2026, underperforming its peers and hitting a six-year low in June.
However, on Friday, the stock opened 4% higher, compared with the Sensex's 1.5% gain, suggesting that investors took kindly to its first-quarter performance.
The Mumbai-based company ended the June quarter with a revenue of $7.62 billion, flat sequentially but ahead of analysts' expectations. A Bloomberg poll of 34 analysts had estimated a revenue of $7.53 billion.
For now, TCS is using AI tools to disburse IT work at a faster pace as part of its large deals.
Staying relevant
IT services firms are now bringing the AI component much earlier into deals as clients demand productivity benefits upfront.
“Whether it's in ops (operations) or transformation, AI is part of the day-one proposition and execution,” Subramanian said. The approach allows TCS to pass on productivity gains gradually, rather than taking a sharp hit to revenue upfront.
As AI dominated the discussion, analysts asked TCS management about the cost of using AI models such as OpenAI's ChatGPT and Anthropic's Claude. These large language models (LLMs) charge businesses based on the amount of data they process, measured in units called “tokens”, making them a key expense for companies deploying AI at scale.
TCS expects to play a bigger role in informing clients on tentative token spending. Krithivasan said clients are likely to use older models for certain queries and newer models for certain workloads, creating opportunities for tech services firms.
The management added that it would have a bird’s-eye view of the required technology work due to its deep understanding of the client's IT landscape.
“Being in the client environment for decades, for years, knowing the context and then making investment in these partnerships to know these products and technologies, the role we play is taking the product capability and creating enterprise value out of it,” Krithivasan added.
The company reported annualized AI revenue of $2.6 billion, up from $2.3 billion in the previous quarter, even as it outlined an uncertain roadmap due to geopolitical tensions in West Asia.
“We initially said things were improving, but then around March, we started seeing geopolitical uncertainties increase. That sentiment continued throughout the quarter. And I don’t think I know when this will change,” Krithivasan said.
Commentary was better than expected, said Motilal Oswal Financial Services analysts Abhishek Pathak and Keval Bhagat in a 10 July note.
“While we also expect 2Q to be better, we believe evidence around demand improvement is scant. The pent-up demand narrative has been around for some time, while geopolitics, tariff uncertainty and cautious discretionary spending continue to weigh on decision-making. We continue to expect FY27 demand to remain muted," the note said.
HCL Technologies Ltd, Wipro Ltd, and Tech Mahindra Ltd will announce their earnings next week.