Mid-sized IT services companies lead AI charge with new investments

Mid-sized information technology (IT) companies, including LTIMindtree Ltd, Mphasis Ltd, and Persistent Systems Ltd, are investing in new-age technologies such as AI agents in order to make themselves future-ready by building AI capabilities and gaining market share in the new technology.

A divergent approach to AI investments

These investment efforts by mid-cap software companies are in sharp contrast to their larger peers including Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, and Wipro Ltd, which have so far looked at building AI technology in-house, staying away from investments in companies providing AI tools.

“Mid-cap software services companies do not have the training infrastructure that large IT services companies have. The larger IT service providers can build these AI capabilities organically because of their scale and the clients they work with, whereas the mid-sized software service providers may not have such capabilities and hence may have to go inorganic," said Pramod Gubbi, co-founder of Marcellus Investment Managers, a Mumbai-based investment management firm.

Also Read: GenAI may pile pricing pressure on customer support and maintenance work of IT services companies

Last week, LTIMindtree agreed to invest up to $6 million in Voicing.AI, a US-headquartered, eight-months-old company specialising in providing human-like AI voice agents to customers, to help customers use AI tools in their customer engagement processes.

“Our investment with Voicing.AI aims to redefine how businesses interact with their customers through intelligent automation and AI," said Debashis Chatterjee, chief executive officer  and managing director of LTIMindtree, in a press release dated 4 December.

Agentic AI is an advanced version of AI that can solve complex human tasks without much human intervention. The new AI technology does not just reply to prompts but can also make suggestions based on past behaviour. Agentic AI technologies can also execute complete business processes such as plan workflows and give real-time updates.

"Customer engagement processes are critical for clients to not only service their customers for products sold, but also enhance their sales effectiveness. For example, almost $3.7 trillion is potentially lost revenue. LTIMindtree, in partnership with Voicing.AI’s Agentic AI, intends to significantly disrupt this market and provide significant cost savings almost up to 60%," a spokesperson for LTIMindtree said on Wednesday in an emailed response to Mint's queries.

While LTIMindtree, which is India’s sixth-largest software services company, is looking at agentic AI solutions, peer Mphasis made a similar stride to enhance user experience and conversational AI-driven automation.

In October 2023, Mphasis acquired Silverline, a New York-based digital transformation consultancy and Salesforce partner for $132.5 million. Silverline reported a revenue of $75.8 million for the year ended December 2022.

“The acquisition will complement our key strategic initiative of driving the intersection across customer experience (CX) transformation, contact centre modernization and conversational AI-enabled automation, thus enabling tech transformation to meet the evolving and dynamic needs of our clients," said Nitin Rakesh, chief executive of Mphasis, in a press release dated 12 October 2023.

Mphasis has yet to respond to Mint's queries.

Persistent Systems, another mid-sized company, aimed at addressing privacy concerns that AI brings with it.

Persistent acquired Arrka, a Pune-based data privacy consultancy firm, on 30 September for ₹14.4 crore, or $1.7 million, to meet data privacy requirements and address data privacy issues in Persistent’s AI models.

Also Read: Why IT services firms don’t offer full-year guidance but set lofty revenue goals

“Their (Arrka’s) mature frameworks and data privacy management platform provide a scalable foundation to ensure this new capability is platform-driven and embeds governance from the outset, which is now critical for successful AI implementations," said Sandeep Kalra, chief executive of Persistent, in a press release dated 30 September.

Arrka reported ₹2.9 crore, or $0.32 million, in revenue for the year ended March 2024.

An email sent to Persistent Systems went unanswered.

LTIMindtree, Mphasis, and Persistent Systems respectively reported $4.29 billion, $1.61 billion, and $1.19 billion in revenue for the year ended March 2024.

Expert opinions and future outlook

At least two experts were unsure of the immediate impact of these investments to the revenue and profitability of the IT service providers.

“Building newer capabilities through acquisitions enables mid-sized companies to gain credibility and market share quickly. Especially in a high-growth area like AI, it also helps penetrate their must-have prospects who otherwise would have continued with their established larger IT services partners," said Ramkumar Ramamoorthy, partner at Catalincs, a Chennai-based growth advisory firm.

Ramkumar added that revenue and profitability from these investments would follow market share gains from AI.

Mint had reported on 13 August that more than three-fourths of AI applications in the testing stage had failed to move into real-time production because of high deployment costs and error rates.

Marcellus’ Gubbi voiced a similar opinion.

“The world will require more IT services as GenAI becomes more broad-based. Software service integrators might eye AI as a new source of revenue in the long run and are building capability in the technology," said Gubbi.

Generative AI reached company boardroom discussions after the launch of ChatGPT in November 2022. GenAI enables human functions such as content generation in video, audio, and written form just by entering a prompt.

To be sure, none of the Indian IT outsourcers have yet disclosed the business they get from GenAI.

Also Read: SAP confident of new job creation by AI

TCS, India's largest software exporter, started a new business unit in May this year called AI.Cloud, merging its cloud and AI businesses into one entity.

Meanwhile, its peers have come out with AI platforms that can be integrated in client projects.

Infosys, India's second-largest software services company, launched Topaz, its AI offering, in May last year. Topaz comprises AI solutions, services and more than 10 AI platforms that clients can use in their business operations.

TCS and Infosys reported a revenue of $29.1 billion and $18.6 billion, respectively, for the year ended March 2024.