The industry will see pricing pressure beginning next year as contracts heavy on coding and phone support come up for renewal, multiple analysts and industry executives said. The first to take the hit will be the businesses of making and maintaining software apps, and providing customer support.
The two businesses – applications development and management (ADM) and business process outsourcing (BPO) fetch an estimated 40% of the industry’s revenue.
“We think the IT services industry is experiencing pricing pressure in many lines of business, consistent with the past few quarters. For CY25, we think BPO and application development and maintenance will continue to experience pricing pressure as well as incremental deflationary forces driven by generative AI,” Keith Bachman, an analyst with BMO Capital Markets, wrote in a note dated 5 December. “In particular, we believe that renewals will be challenging since customers will seek, and likely get, lower renewal prices than historical norms as the power and capabilities of generative AI increase,” said Bachman.
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The analysis, the first to signal GenAI’s impact on pricing, could serve as an alarm bell for investors in large IT firms such as Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd and Tech Mahindra Ltd, which are estimated to get a significant chunk of business from the two businesses. Queries emailed to TCS, Infosys, HCL, Wipro and Tech Mahindra remained unanswered.
“In the medium/long-term, smarter AI solutions will replace humans. Given IT services companies largely employ headcount-driven business models, they will likely struggle to maintain their value proposition,” Piper Sandler analysts Arvind Ramnani and John Nutt wrote in a note dated 4 December.
Currently, none of the large IT firms disclose business from individual clients’ work, and only share business from industry segments and their largest markets. However, according to four people, including two analysts and executives at TCS and Wipro, ADM and BPO account for 40% of total business. On average, at least 15% of total business is renewed annually for these large companies.
This means for a company like TCS, which clocked $29.1 billion revenue in FY24, about 40%, or $11.6 billion, is vulnerable to the impact of GenAI. At least 15% of this — or $1.75 billion — is expected to be up for renewal for TCS in 2025. If the fears of pricing pressure come true, the contract renewals could happen at lower rates.
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A related fallout could be on hiring. The IT services industry, which employs five million people, hires hundreds of thousands of engineers every year. As technology gradually replaces manual effort, hiring could slow.
“Clients will need fewer employees due to automation, and that means that IT services companies will have to scout for additional work to compensate for less work from the BPO and application maintenance arms,” said Abhishek Kumar, equity research analyst at JM Financial Ltd, a Mumbai-based broker.
At the heart of the fledgling structural change is the growing ability of GenAI tools to perform work traditionally done by armies of engineers deployed by IT firms. GenAI tools have started reducing manual efforts in these areas, from writing codes to testing codes for bugs. All of this implies bad news for IT firms.
While analysts highlight pricing pressure on segments that can be automated, tech leaders are yet to follow.
“Pricing overall has remained stable. While there could be aberrations at an individual customer level or the phase in deals which we are facing, at a portfolio level, there is nothing material to call out,” said Samir Seksaria, chief financial officer of TCS, in a post-earnings interaction with analysts on 11 July.
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His counterpart at Infosys, the second-largest software service provider, voiced a similar opinion.
“The pricing overall, the environment has remained stable,” said Jayesh Sanghrajka, chief financial officer of Infosys, in a post-earnings call with analysts on 17 October.
While bosses at the IT firms have not sounded worried about pricing pressure, at least three senior executives from the industry sounded concerned.
“If you dial a hospital toll-free number, the response will come from an AI tool. Earlier, such a call would take you to the Philippines or elsewhere where a person would talk over the phone and address your query,” a senior TCS executive said on the condition of anonymity. “The healthcare industry is looking to automate processes fully,” added the executive.
TCS discontinued sharing business from service lines in June 2017, followed by Infosys, which stopped in June 2018, and Wipro, in April 2021. Until March 2017, nearly half of TCS’s business was from ADM and BPO, while Infosys and Wipro received 36% and 44%, respectively, at the end of March 2018 and December 2020.
GenAI encompasses a wide range of technologies driving chatbots such as ChatGPT and is capable of creating new forms of content, including text, audio and video.
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“While the “revamped offerings” will incorporate a multitude of services, we believe that IT services companies will need to have a consulting front-end (which Accenture, IBM, Capgemini, Deloitte have at greater scale relative to Infosys, Cognizant, Wipro). Further, IT Services companies that are willing to cannibalise existing revenue streams are poised to emerge as net winners from AI-related work,” said Piper analysts Ramnani and Nutt.
