Generative AI- Boon or Bane for Indian IT Companies?

1

A lot is being discussed these days on the impact, of Generative AI (Gen-AI), on Indian IT Industry and I see an increasingly gradual formation of consensus view that it’s going to disrupt IT industry (some even saying using the word “extinct”).

A typical argument is, with Gen-AI, the end customers of Indian IT companies will be able to gain significant productivity and cost savings, by driving more automation and reducing the need for IT outsourcing. The other argument, also quite common, is that end customers will be able to in-source a lot of IT work and relegate it to Gen-AI to do it for them, thus reducing the need for IT companies.

I have been associated with the IT industry for last 20 years and although today I don’t work for an Indian IT company I still do a lot of work in Digital space especially around Cloud, AI/ML and automation. And from what I see on the ground, I am not convinced by the doomsday scenario being painted for Indian IT industry.

Below is my take on why Gen-AI is actually going to generate more work for Indian IT companies and be margin accretive than what the consensus view offers.

Let’s understand how the implementation of Gen-AI in businesses will play out and how it will generate demand for more services work than destroy it.

1- To start with, businesses don’t simply spend money on technology just because of hype or its usefulness in public domain (think of Gen-AI writing a poetry/essay). Once businesses decide to spend time and money on Gen-AI, they won’t simply download a software from public domain or assign a bunch of developers to build a software and start using it. From my experience, any truly transformative technology like Gen-AI requires a significant time and cost commitment for organizations to implement, scale, mature and adopt to harness its full potential. The bigger the organization, the more time and cost involved.

2- There are several studies that point out large number of failures of multi-year transformation programs built around new promising technologies. CIOs/CTOs are all too aware of this, many of them having their own share of disappointments with new technologies in the past. So they will be wary of risks. While some of them will wait out the hype cycle of Gen-AI, early adopters will have to work through several aspects such as following but not limited to:

a. Are there any high impact use cases that will generate step change improvement in efficiencies, cost savings or market shares?
b. What will be investment required (think of the costs related to hardware, software, migration, integration, training, support etc) to realize those use cases?
c. Can technology scale up to address complex and evolving organization and operations?
d. What are changes required (think of processes, data governance, IT architecture, skills etc) to sustain the adoption?
e. Are there any potential regulatory, societal, ethical risks from adopting Gen-AI?

3- The bigger the organization and the scale of operations, the more time CIOs/CTOs will spend on analyzing these aspects before pulling trigger on Gen-AI. Most will not have skillset or enough resources to do this in house and they will engage a Consulting partner to help them navigate through complexity and define the right strategy- this will create demand for consulting work.

4- Once strategy is defined, implementing that will require a technology partner for several work-streams associated with Gen-AI adoption such as:

a. Data layer, curation, modeling, enriching etc. Companies can’t simply just use data available in public domain as they will need Gen-AI to work with their own data sets and again from my experience majority of the organizations tend to be quite deficient with their data management.- This alone is expected to generate significant demand for IT services in terms of data work.

b. AI modeling- Again one can’t simply use Gen-AI algorithms available on public domain. They need to work within the context of use case, data and processes of a business- This will create considerable demand for data sciences work to build/tailor the AI algorithms.

c. Hosting- Gen-AI by definition is a highly compute-intensive technology. The typical software that writes essay or poetry is running on massive computers somewhere in Cloud. Many businesses are running on legacy on-prem infrastructure that are not suited to demand of computing resources required to run Gen-AI solutions. They will have no choice but to move to Cloud- This will further accelerate Cloud transition, already underway and is a big part of IT companies’ revenue streams.

d. System integration- Any Gen-AI solution will have to be consumed through some kind of software depending on the use case type and user profiles. Also AI- solution will consume data from businesses’ legacy data systems as well as from public sources- This will bring a lot of work for application development and data integration.

e. Supporting the model- Any kind of AI model (including Gen-AI) will require constant changes as businesses evolve- This will require services for support and maintenance of models and applications.

Depending on the nature and complexity of use cases and legacy systems as well as decisions made for Cloud transition, the skills and efforts required to deliver all this work will vary considerably. Today when businesses are trying to become lean, efficient and focused on their core value propositions, they are not going to start hiring hundreds of developers, architects and data scientists to implement Gen-AI. That’s the reason they have been outsourcing in the first place.

What businesses will do is find the companies who can do it all for them at much lower cost and faster. And to me Indian IT companies will be their perfect choice as the they have already started ramping up their capability and scale to deliver Gen-AI solutions.

People, who doubt if Indian IT companies can move fast on Gen-AI, need to simply look at their past track record with similar highly hailed technologies such as Cloud, Blockchain, IOT, mobility etc. Take Cloud for example: in just a few years, many large Indian IT players (e.g. TCS, Infy) have evolved their capabilities to see regular mention among leaders in research papers published by Gartners’ of the world. I don’t see any reason why they can’t repeat the same success with Gen-AI, thus positioning themselves to win big chunk of work that will come from the adoption of Gen-AI (if and whenever that happens).

Last, I see Indian IT companies have also started to use Gen-AI to transform their internal operations and I believe they will be able to improve their own productivity and margin structure over time with the use of technology.

So, overall I feel rather excited, than unnerved, by prospects of Gen-AI becoming the next big technology wave. Our IT industry has got everything (quality of management, skills, capitals, scale and relationships) to be able to ride this wave than get swept away.

Disclaimer- I have significant holding in IT stocks in my portfolio and can be biased in my views. Pls don’t take it as a recommendation for buy/sell. And as always I welcome different opinions to broaden my perspective.

19 Likes
2

Most large companies, not just IT, are AI running pilots. The results are promising. Many companies are estimating that in the next two or three years they will have to move fully into cloud and be ready to implement the new tech. Indian companies will gain more business. It will hopefully start with the rate cuts. Invested in IT.

2 Likes
3

Very well reasoned summary, Hemant. Really appreciate the details involved. In most forums, I keep getting the same question from the audience and I have found this write-up (fireside chat) in the TCS Annual Report 2023 very useful. This was written by Mr Anantha Krishnan, CTO TCS and an Industry Veteran and it gives a detailed insight into why GenAI can be value accretive to the IT Industry. He also brings in the economics of why this phenomenon cannot be compared with farm mechanization, which led to effort deflation. I hope you find this useful too.

What is the evidence for this thesis (IT Industry wont become redundant with the advent of GenAI)?

KAK’s response - The evidence is empirical. Every new generation of technology has led to reduction in programming effort per function point. But while that has steadily fallen, aggregate spending on IT services has only risen year after year, over decades. Take for example, the switch from assembly language to C. Its compilers came with large, extensible libraries of reusable pre-defined procedures. A developer could invoke a procedure with one line of code in C and embed its entire logic in the codebase, without actually coding all of it from scratch. Three lines of C accomplished what took 30 lines in assembly language. The 10x effort deflation didn’t result in mass layoffs of programmers. Instead, there was an explosion in software development because the same IT team could now build ten times as many function points.

Similarly, enterprises adopted offshore outsourcing, it led to a big cost deflation, but nobody’s IT budgets deflated. Instead, those savings went into building new systems and volumes rose to fill budgets and spending on IT services has only expanded. Likewise with low-code, no-code platforms.

**Why is that so? Farm mechanization caused effort deflation and rendered the agricultural workforce
redundant in the West. **

KAK: With most goods and services, when the price falls, any increase in volume is limited by how much of that good or service the market can consume in a defined period. When farm mechanization reduced the cost of tilling, the increased demand for men in tractors was not large enough to compensate for the effort deflation because there was only so much land available
to till.

Demand for IT services behaves differently. In every enterprise, there is significant unmet demand. Every CIO has limited capacity for new system development, resulting in a requirement
backlog that never gets fulfilled. Technologies like generative AI or low code-no code can help a CIO expand capacity and accomplish much more with the same budget. But even then,
the backlog never goes away because there is no limit on business users’ ingenuity or competitive drive. Demand just rises to fill the incremental capacity created by new technologies. The emergence of new technologies triggers more ideas, experimentation and more demand for our services. To that
extent, business application of generative AI, along with other technologies, will itself drive the incremental demand that fills up the capacity it frees up through higher productivity."

11 Likes
5

I think GenAI is set to reshape the IT industry in ways we’ve never seen before. For smaller IT companies, it’s a game-changer. With automation taking over repetitive tasks, these firms can operate more efficiently, offer highly customized solutions, and compete with the big players without needing massive manpower or budgets. It levels the playing field, giving them a real shot at capturing market share and carving out niches where agility and innovation matter most.

For giants like TCS and Infosys, though, I see a storm brewing. These companies have relied heavily on legacy services and workforce-intensive projects for decades, but GenAI is disrupting that model. Automation will shrink the demand for traditional outsourcing, and clients may start keeping tasks in-house with the help of AI tools. Plus, with smaller players able to deliver competitive services at lower costs, the pricing power of these giants will inevitably take a hit.

In my view, the big IT firms need to act fast. They’ll have to re-skill their massive workforces to align with this AI-driven world, develop proprietary GenAI solutions to differentiate themselves, and pivot toward consulting and strategy roles where human expertise still has an edge. The future of IT is no longer just about scale—it’s about adaptability and innovation. Those who embrace this shift will thrive, and those who don’t could find themselves left behind.

Wrote my detailed thoughts here:

3 Likes
6

Having been in this industry for 20+ years and still being in touch with senior leaders of many Indian IT companies and also research analysts from leading brokerages, I respectfully disagree with several points you have raised so let me address them one by one:

1- Gen-AI will have similar impact on all the Indian IT services industry regardless of their size. Smaller IT companies are more in commoditized business (with exception of engineering service providers) and are far less differentiated than big IT companies. You read their presentation, go to their offices, talk to their managers, and they all do the same thing. The advantage that large IT companies have is scale and factory model for workforce skilling/reskilling which allows them to execute variety of large outsourcing projects at a lower cost . I fail to see how a Persistent Systems, Zensar, Birlasoft or Sonata will unlock value in Gen-AI in a way that big IT companies can’t.

2- I fail to see what possible scenarios could play out from wider adoption of Gen-AI which will reduce need for outsourcing. Can a manufacturing company order Gen-AI to move all their workload to Cloud? (I have been closely associated with Cloud and know how much efforts it’s to do that.). The answer is No. Can an oil and gas company simply ask Gen-AI to write an application that does say production analytics? The answer is no. Or can a banking company simply use Gen-AI to support all their infrastructure on its own? Answer again is no.

3- All Indian IT services companies operate in B2B space where their customers have to think about scale and value for any new technology deployments before they invest money. They don’t buy toys. Gen-AI can write poetry, create a piece of code, make a beautiful portrait and that’s all exciting for technophiles.

But companies tasked to make money for their shareholders use technology to reduce the cost, reinvent their business model or gain market share. Simply bringing a bunch of developers armed with Gen-AI will not cut it. All of this requires technology partners who understand their business, can advise CxOs teams, help them out with infrastructure and application modernization, solve their data management challenges and take complete ownership of managing their IT systems.

These large companies want to become lean and last thing their CEOs want to do is hire an army of developers to write software codes for them using Gen-AI. B2B space is very different from B2C space. In fact in my industry, I have seen many big companies shedding their in-house IT team because they are under pressure from their shareholders to cut costs.

Where Gen-AI is going to be value accretive for Indian IT services company is reducing their cost base. So a lot of backend software development tasks can be automated which will add to the margins.

The good thing with Indian IT companies (especially the large ones) that they are run by very talented and smart people who know how to make money from a certain technology trends. And they have done it very successfully in the past. Look no further than the Cloud. When the latter started making waves a decade ago, lots of people started predicting demise of Indian IT companies saying it will disrupt their on-prem infra outsourcing model. Guess what, Cloud related services today are one of the biggest contributors to Indian IT companies’ revenue streams.

So the process of skilling workforce has already started. I have seen Indian IT companies setting up their own centers of excellence for Gen-AI. From my interaction with senior management of these companies, they are also coming up with Gen-AI enabled solutions for their clients. So wheels are in motion.

Since article quotes a small company Saksoft to back up its point if you talk to the management of any other IT company (large or small) and they will tell you pretty much the same thing in terms of what they are doing with Gen-AI. In Indian IT services industry things get democratized very fast. So if one company is doing something with a technology, you can take it for granted that others are doing the same.

7 Likes
7

Hi @Hemant_Kumar2,

Thank you for your detailed counter arguments to the points made earlier. While I do agree with you that the larger IT companies will find a way out, but I am finding it difficult to see how GenAI will not cannibalize their existing revenues.

Say, there is a large size project like an ERP Implementation along with some customizations that would need some development. Without GenAI, the project let’s say would need a large team of consultants, developers which would be out of reach for smaller IT companies like Saksoft, AllETech, Coforge etc. But with GenAI, if the technology becomes that adept, it certainly becomes within their reach and now they would be able to bid for that project and compete with giants like TCS, Infosys.

Do you see this happening or is your view that this would still not impact the bigger companies? What I think is that for TCS, Infosys to bid for the same project, they will have compete with these smaller players and hence bid down the total cost of the project. With GenAI and using less manpower, the same project can be completed with higher margin, but lower total revenues. This is what I meant by cannibalization of the existing revenues. Would love to hear what you think about it.

1 Like
8

It’s important to take a granular view of competitive landscape of the IT industry.

1- In IT industry scale and brand name are very important. So a large bank looking to outsource their whole infra spend that runs into several hundreds of millions of dollars will never consider smaller IT companies regardless of whatever tools the latter are using because there is a lot of risk. For CIOs these deals can make or break their careers. Why would a CIO take too much risk betting on a smaller player that doesn’t have any experience handling mega projects? So if you were a CIO of a fortune 100 company and you were looking to outsource your company’s 100 million dollar ERP project to a company would you go to Accenture, Deloitte or TCS or entertain Saksoft because the latter’s CEO tells you about their cool new GenAI tool? I remember a guy joking that no CIO ever got fired for hiring an Accenture to implement their ERP project.

Just look around for large outsourcing deals (multi-year, multi-billion) going on in the world and players you will find only big companies (TCS, Infy, HCL, Capgemini, Cognizant) competing there.

Conversely when it comes to small projects smaller players have an edge because those smaller projects are not lucrative for big companies given their high overheads. And smaller players are OK with that because they need just need one-two 20-50 million dollars deal to grow their topline. While for big companies 20-50 million dollars don’t move the needle (not to say they are not important). That’s where a Saksoft will rather compete against a Birlasoft than TCS.

2- There is a lot of due diligence done by a customer before they choose to work with an IT company on a large IT project. You have CIOs, business heads visiting IT companies’ campuses, learning about their capabilities and going into things like cultural fit, long term strategy etc. These decisions are not just made based on if a company has got one tool or the other. Also a company won’t change their supplier unless they are unhappy with them or they see them slipping behind on the innovations which is rarely the case with companies like TCS or Infosys. They are always a step ahead, bringing new ideas to their customers. Large accounts of Indian IT companies have dedicated account managers and consultants whose sole purpose is to grow the wallet share in the account.

3- Finally most of the projects that IT companies do tend to be fixed price. Any cost take out in delivery goes to the operating margin and bottom-line. So Gen-AI will help IT companies reduce their cost of delivery and further improve their competitiveness.

So my take is that Gen-Ai is not going to change competitive landscape of the industry. But it will surely change the industry…for better.

5 Likes
9

The ball game is different with Gen AI can’t compare it with SaaS wave. AI Agents have the potential to be far more disruptive.

Aren’t Indian IT giants already doing that? They outsourced to reduce cost, now AI will further reduce cost likely cannibalizing the already outsourced pie.

10

I gave the example of Cloud to show that it turned out to be a boon for Indian IT company instead of being a destroyer. Not sure if you were following Indian IT industry closely 10 years ago but many experts with hardly any understanding of the industry were giving really very bleak commentary saying that Cloud is going to be the biggest disruptor for IT industry and Indian IT companies were going to lose their businesses to Microsoft, AWS, Google etc. I always question these overly simplistic prognostics of the future.

Second point I don’t understand what you mean. IT giants outsourced? To whom?

Point was that quantum of work for Indian IT companies will not stop as companies shed their overheads to become more agile and they move to Cloud. You can’t have GenAI without moving to Cloud. Today not even 50% workload globally are on Cloud. And moving to cloud is not liking flicking a button. These are multi-year complex engagements. Also every transition to Cloud creates so many different opportunities for outsourching. Gen-AI is only going to accelerate Cloud transition, presenting massive opportunities for Indian IT companies which are already reporting burgeoning orderbook.

4 Likes