International Business Machines Corp. is staging a remarkable turnaround as it positions itself for the future, signing up an increasing number of clients for its generative artificial intelligence services tied to its consulting business.
While the Big Blue’s book of business—bookings and actual sales—related to GenAI stood at more than $2 billion as of July, Accenture Plc. last week reported $3 billion in GenAI bookings in 2023-24, according to the companies.
A common trait of both the Arvind Krishna-led IBM and the Dublin-headquartered Accenture, the world’s largest software services company, is the strong growth in their consulting business—a pace India’s software services companies are unable to match yet.
“IBM and Accenture were bringing clients into proof of concepts at the (World Economic Forum) at Davos and as part of the sales process much earlier in the game. Some of it was related to consulting, others was just more investment in marketing dollars and POCs,” said Ray Wang, founder and chief executive of US-based Constellation Research Inc.
“I wouldn’t say all the Indian IT services firms have missed out (on GenAI). (But) I do agree that having strong consulting helps,” he added.
To be sure, India’s biggest information technology services companies Tata Consultancy Services Ltd, Infosys Ltd, and HCL Technologies Ltd do not report revenue from their consulting or AI practices.
These homegrown IT companies have been grappling with lower client spending on IT services over the past few years, while clients globally are spending more on AI-related consulting.
In July, as IBM reported its second-quarter financials, it raised its annual growth forecast for its software business on higher AI-related spending by clients looking to adopt the technology, according to a Reuters report. IBM’s Watsonx platform allows its clients to deploy chatbots or enhance code for AI programs. In January, IBM said it expected its GenAI business to help its revenue grow by 4-6% in 2024.
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IBM launched Watsonx, an AI and data platform for businesses, in July last year.
“Our book of business related to generative AI now stands at greater than $2 billion inception-to-date,” chief financial officer James J. Kavanaugh said during IBM’s post-earnings conference call on 24 July. “The mix is roughly one-quarter software and three-quarters consulting signings.”
On Friday, IBM’s share price reached its highest in the company’s 40 years on the New York Stock Exchange, hitting $224.15 before ending the day at $220.84.
A diversion in discretionary spending
Accenture’s consulting business—largely based on discretionary client spending—returned to growth in June-August after six consecutive quarters of decline, boosting hopes for India’s technology sector.
A highlight of its financial results was the $1 billion in GenAI bookings that the company secured in its fourth quarter. Accenture follows a September-August financial year. Consulting accounted for a little more than half of Accenture’s $64.9 billion revenue in 2023-24.
At least one analyst expects GenAI revenues to begin flowing from consulting before moving to other IT segments.
“Broadly speaking, we think generative AI bookings and revenues will start in strategy and consulting and shift to technology and operations business units over time as companies move more into the scale and execution phase rather than the experimentation phase,” BMO Capital Markets analyst Keith Bachman said in a research note dated 21 March.
On Accenture, Bachman said the company “has a leading position in IT services to help with generative AI strategies given the breadth and scale of its operations and its capacity to invest in people, technology, and M&A”.
Also read | Accenture results spark optimism, but revenue revival remains uncertain
That said, AI and GenAI, still in their infancy, account for only a fraction of IT companies’ revenues. But these future technologies are snatching away what little clients keep aside in terms of discretionary IT spending.
Accenture indicated last week that while demand did not significantly change and clients continued to focus on cutting costs, they were using the savings on transformational projects. The company ended Friday’s trading on NYSE down 1.72% at $349.70 per share.
“The biggest issue is that GenAI simply does not generate the hoped (for) revenue for any firm,” said Peter Bendor Samuel, founder and CEO of research firm Everest Group.
“It is in some respects constricting demand for broader tech services as it is capturing much of the discretionary spend budgets but that revenue is being diverted into the AI vendors not tech services,” Samuel added. “Clearly, a strong consulting practice positions firms well to compete for what revenue is available.”
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