For the top tier of Indian IT, the test is sterner. S&P Global Ratings has issued a warning that if the established names do not stand their ground on recurring business, they will see their revenues erode in the coming three years. Between legacy income being squeezed, a slower pace in closing deals and a different set of talent requirements, both the bottom line and market position are in the balance.
AI-native rivals put Indian IT on the defensive
According to S&P Global Ratings, there is a structural issue at play: upstarts that have had AI in their DNA from the start are making inroads with niche tools. They are poised to ratchet up the competition and make inroads into conventional service lines, unless the incumbents put up a firm front.
The agency views AI as a megatrend with the potential to upend how India-based providers do business. The credit side of things will not be uniform; some will handle the transition with more ease than others.
Scale gives leaders breathing room, not immunity
Tata Consultancy Services, Infosys, HCLTech and Wipro come to this with some built-in benefits. Owing to their size, the range of what they offer and the depth of their client ties, they can be aggressive with pricing and put together bundled options. S&P points out that their healthy cash positions leave them with the means to put money into AI.
But the conditions have been less than ideal. A long stretch of soft demand and the oddness of global politics have made for a tough go. In the last three years these firms have put in under five per cent annual growth, and 2024 could be no different.
S&P is of the opinion that while large providers have the upper hand for now because of the cost and hassle of switching for a customer, it is a conditional one. They have to deliver at a rate that makes sense. If they don’t, they may find it harder to hold on to clients and the profits that come with them.
Deal flow is changing as legacy revenue shrinks
When you factor in the savings from automation, which are given back to the client, you get a squeeze on old-school revenue. It has altered the nature of the deal. You are seeing more of the kind of agreement that puts a premium on cost, but they are not as quick to put in place or to bring to fruition.
The easy ones are hard to come by. There is a dearth of the smaller transactions that used to be the lifeblood of growth. With clients putting their discretionary money where the AI is, rather than on run-of-the-mill products, vendors have to put together a case for why their solution is an efficiency win.
Tight budgets amplify pricing pressure
On the client side, there is little give in the budget, so having the right price is non-negotiable. S&P says if a provider can’t be on the mark with both ability and expense, an AI-native company will be there to take the call. It is a matter of holding onto the key accounts or let the revenue seep off to the specialists.
There is still a good buffer in place for the old guard. Take Infosys, HCLTech or Wipro – roughly 95 per cent of their topline is from accounts that come back year in and year out. That kind of loyalty is what allows for the time to put in some work on the offerings and make AI a part of the managed services mix.
Talent strategy and margins face a reset
Where the impact will be felt most is in the makeup of the workforce. This is not like the move to the Cloud; with AI, there is simply less of a need for the lower-end work of coding and testing. S&P’s view is that as AI gets better, we can expect to see a cooling of hiring and, in some instances, a trim in headcount.
There is a need for firms to put their operating margins on a firmer footing by redistributing the work between AI, subcontractors and the people they have on hand. It means making more of the staff and putting money into upskilling. But there is a cost to it: when you have to close a skills gap with an outside contractor, it puts a dent in short-term profits.
Then there is the matter of how work is delivered. You can make development, testing and operations more efficient with AI, but only if the teams are retrained and the incentives are right for the kind of savings automation brings. How quickly a company can reskill will be what sets the top tier apart from the rest.
A stabiliser in GCC ties
Revenue from a second source is on the up. India is home to over 2,000 global capability centres (GCCs) raking in some $100 billion. S&P points to Infosys, HCLTech and Wipro as the go-to partners for these, using build-operate-transfer to make those ties stronger.
Such work is a buffer against the ebb and flow of projects and opens the door to managed services down the line. It also lets providers get in on the client’s plans early on and put AI to work in a big way.
Still, the standard is being raised. Vendors have to put forward solid AI tooling and results if they want to hold their price and grow within a GCC. The reward is having a say in how an enterprise makes its transformation.
Put simply, S&P’s advice boils down to a few must-dos:
– Make recurring accounts stick with some AI in the mix
– Adjust pricing to reflect what automation and outcomes are worth
– Move away from old-style hiring and retrain in volume
– Let GCCs be the base for future growth
– Keep an eye on utilisation to guard the margin
Three years out
The field will get more crowded with AI-native outfits after niche applications. Those with cash can put it to work, but they have to be able to turn a pilot into a steady, large-scale engagement to make up for any legacy squeeze.
Deals will probably still be of the larger, cost-cutting variety, which take time to come to fruition. With less of a small, quick deal to be had and budgets channeled to AI, showing value in a hurry is the only way to keep growing.
Some workforce changes are inescapable. As automation takes hold, S&P sees a lull in hiring and some let-go in unskilled functions. The key is to find the right balance between training in-house and bringing in help so margins don’t suffer while you build up.
You can count on customer loyalty, but it is a two-way street. Big switching costs and leaner budgets are in your favour, but not if your AI and pricing fall behind. Miss the mark and you risk chipping away at that 95 per cent of revenue that is supposed to be recurring.
In the end, the GCC route may well be where the edge is found. With the size of the market in India, being able to move fast on a build-operate-transfer is what will tell. The likes of Wipro and HCLTech are already doing it to gain some control.
S&P’s read is plain: AI is going to put the pieces of the pie in a new order. For the leading names in India, holding on to share and margin is a matter of investing in AI with conviction, being firm on price and running a workforce built for the automated world.
