IT firms pass on AI-led gains as clients seek cost savings

While a rapidly evolving tariff war has put on hold an expected recovery in India’s $280 billion information technology industry, artificial intelligence (AI) is bringing fundamental shifts to the IT services delivery model. Customers are demanding productivity gains and cost savings derived through AI to be passed on to them, especially in an uncertain business environment where saving the last dollar is a top priority.

Over the last two weeks, the chief executives of three of India’s top four IT companies confirmed that they were passing on productivity gains to clients. In some cases, cost savings may be eating up their revenue and shortening project timelines. Meanwhile, IT services vendors are changing their pricing models, from the traditional TNM (time and material) to more outcome-based, as AI upends the traditional model based on FTE (full-time equivalent, or the total hours worked by their employees on a contract).

India’s largest IT firm, TCS, is taking the cost savings from “AI for IT” projects to fund new “AI for business” programmes to gain market share. According to the company, AI for IT refers to mostly software engineering projects, while AI for business involves larger AI-driven business transformation projects.


“...what we did with $100, if we are able to do with $95 or $90, and if I’m going to realise a benefit, we will share the same with the customer,” TCS chief executive K Krithivasan said during a post-earnings conference call earlier this month. “It saves something that can go towards funding a new AI for business programmes.”

TCS indicated one project with an up to 50% reduction in manual effort in optimising software development life cycles. Infosys is anticipating a productivity benefit of 20-40% by applying GenAI in some large customer service programmes and 20-25% using tools built on public models. “Those discussions are very much at the forefront of clients’ minds,” Infosys CEO & MD Salil Parekh said. “Sometimes the client view may be larger than what we are seeing in realisation, and so we have a choice to make there.”

AI is a component of automation and lean offerings, which along with cost-takeout opportunities are key in the current environment, he said, adding that AI is also leading to some new opportunities. Wipro CEO Srinivas Pallia said the company is leveraging GenAI to open up new revenue streams.“Some of the times, the customers’ budgets are getting freed up, so we are actually using GenAI and also getting some incremental work done for the same customer and that could also offset some of the revenue drops,” Pallia said.

Protecting revenue

At least three industry experts indicated that IT companies may be seeing 10-20% revenue cannibalisation from passing on the benefits of AI-led productivity improvement, depending on the type and size of the deals.

“While this could have a 3-5% deflationary impact on revenue growth over the next several quarters, leaders can offset this by upselling work at accounts where they have delivered AI-led value, as well as through offensive plays that enable them to capture wallet share from competitors,” said Nitin Bhatt, technology sector leader at EY India. IT companies are seeking to add to business to offset the possible impact from AI adoption cannibalising revenue and create a win-win situation. “Leveraging AI, we are willing to cannibalise. Sometimes willingness to cannibalise is a strength,” Krithivasan said in a recent interview.

Pricing structures

Data from HFS Research show that 72% of the Forbes Global 2000 enterprises intend to renegotiate their IT services contracts this year, and six out of ten are looking to embed AI into their relationships. Customers are preferring flexible pricing structures, such as outcome-based pricing, pay-as-you-go contracts, usage-based billing, or subscription models that adjust with AI adoption, as well as enhanced service level agreement as they seek AI-powered efficiency gains to translate into cost savings, experts said.

“Services firms have no choice but to leverage GenAI and agentic tools to keep margins at the same level and pass these on to their clients. In short, they are having to deliver more service volume without increasing headcount, which is forcing them to train their talent and develop more innovative partnerships with their clients,” said HFS Research chief analyst Phil Fersht. This could lead to some erosion of margins in the medium and longer term as competition intensified for agentic “services-as-software” solutions, Fersht said.

“Many enterprises are now actively looking to renegotiate their contracts with IT services companies to capitalise on the declining costs of AI,” said Achint Arora, partner, Everest Group. Customers are asking for additional AI features for the same budget, performance and return on investment guarantees, and claw-back mechanisms in case of failure. While the falling costs of AI models may benefit IT firms, enterprises increasingly demanding price reductions or additional value will keep the margins in check, Arora said.