Reboot Mode: How Indian IT firms are adapting to the AI disruption

India’s it sector is facing a defining moment. The sentiment was echoed by Wipro’s CEO & MD Srini Pallia in an analyst call on April 16 after FY25 results. He had been in the top job for a little over a year. There was understandably a lot of attention.

The tone was measured, but his words did not hide worries over tepid growth and margin pressures. His guidance—tracked most closely—talked about the uncertainty and how clients could take a measured approach, especially on transformational projects and discretionary spending. “With this in mind, and based on our current visibility, we are guiding for a sequential growth rate of -3.5% to -1.5% in constant currency terms,” he said.  

Cut to July 17. Little had changed. In a call following the results for the first quarter of FY26, Pallia said returning to profitable growth was a top priority and guided for a sequential growth rate of -1% to 1%.

Wipro isn’t an outlier. The IT sector has been struggling for at least three years. The combined revenue of the big four IT firms grew at an annual rate of 10% over the last decade, from Rs 2.32 lakh crore in FY15 to Rs 6.24 lakh crore in FY25, according to data from ACE Equity. Profits rose 8% a year from Rs 48,449 crore to Rs 1.06 lakh crore. However, revenue growth has slowed to 5% and profit growth to 7% since FY23, according to ACE Equity data. Shares of Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies are down 9-31% over the last one year.

The IT industry, which spearheaded India’s economic boom following the 1991 reforms, is now grappling with challenges such as dependence on a legacy business model and a widespread adoption of artificial intelligence (AI) for complex tasks, and mushrooming of global capability centres (GCCs).

Can it weather the perfect storm?

The IT model in India has undergone significant changes over the years. Jaspreet Bindra, co-founder & CEO of AI&Beyond, highlights a few areas—the end of cost arbitrage, the advent of AI that has replaced the role of entry-level engineers, and geopolitics (including the H-1B visa issue and global companies setting up captives in India)—to demonstrate the extent to which things have changed. “Now, it is time to completely rethink the model. Doubling down on GCCs is critical, and the transition from IT services to an AI-first approach by some companies is encouraging,” he says.

By all accounts, the IT companies must travel some distance. Both Gen AI and Agentic AI (the latter having the ability to solve complex problems) are new and rapidly evolving. Even customers need help to understand the technology, identify use cases, and prepare themselves. “They must adeptly shift focus from cost-efficiency to higher-value and innovation-oriented services. However, Indian IT and BPO firms have yet to differentiate themselves effectively in these areas,” says Peter Schumacher, Founder & CEO, Value Leadership Group, an international management consulting firm. The result is that global customers do not see Indian IT services firms capturing a significant share of these early-stage opportunities.

Siddhartha Tipnis, Partner and Technology Sector Leader, Deloitte India, says the revenue upside from AI will not be immediate but is clearly on the horizon. “Enterprises are already making focused investments in AI services, augmenting existing application landscapes, and launching pilots for more aspirational use cases. A meaningful revenue upside for Indian IT and ITeS firms is expected to materialise in FY26 to FY27, as organisations transition from GenAI experiments to enterprise-scale deployments,” he says.

Indian IT companies will have to take a call on whether they want to make large AI investments. Given the pressure on margins and market valuations, that is anything but easy. In an interaction with BT in August, K. Krithivasan, TCS CEO & MD, said that his company’s financial strength has helped it accelerate capability building in high-growth areas such as AI, cloud, cybersecurity and quantum, while also investing in infrastructure from data centres to AI platforms. “It means we can deliver transformation at scale. For instance, we recently set up an innovation centre in Singapore, expanding our AI research and innovation footprint to 13 hubs globally.”

A big decision, announced at the time of the company’s second quarter results, was a foray into data centres. The plan is to develop an up to one-GW AI facility over the next five-seven years at an investment of $5-7 billion. It will be a co-location model, with TCS providing the passive infrastructure. The opportunity, said the management, comes from an unmet demand—India has around 1.2 GW of installed capacity; demand is expected to rise 10x in the next few years.

This is the time for reinvention. “Arguably, this is the biggest pivot since the offshore wave of the 1990s,” says Pari Natarajan, CEO, Zinnov, a global management and strategy consultancy firm. This is not a small shift by any yardstick. How they sell, says Natarajan, will move from largely time-and-material contracts to outcome-based models. “How they deliver would also change, with a hybrid of people and repeatable software assets, varying by service line. How they hire and train will change as repeatable tasks increasingly get automated by bots and AI agents. Hiring and training will shift towards domain expertise and contextual knowledge rather than pure coding skills.” The reinvention will demand a fundamental reset across commercial models, delivery mechanisms and talent strategies to sustain long-term momentum. Apart from a threat to the traditional IT business model, AI has also led to significant job losses as routine coding and support roles are being replaced by automation.

Crisis comes home

Last year has been forgettable for the global technology industry. In late July, TCS laid off 12,000 employees, 2% of its workforce, sending shockwaves. According to reports, Microsoft has laid off 9,000 employees, while Intel plans to eliminate 25,000 jobs by the end of the year. Around 4,000 people at Salesforce’s customer support division have lost their jobs. Accenture has laid off 11,000 employees over the last three months. Julie Sweet, Accenture’s CEO, says reskilling for AI roles remains the preferred option, and not all employees will make the cut.

The mood at Nasscom’s annual technology and leadership forum said it all. C. Vijayakumar, CEO of HCL Technologies, called the traditional three-decade-old business model of India’s IT industry “obsolete due to the rise of AI.” His view is centred around the need for Indian technology companies to create their own language models, as dependence on open-source models could backfire due to geopolitical issues. Infosys CEO Salil Parekh said it was important to be paranoid and not become complacent. “That is the way we can manage to keep up with what’s going on in the industry.”

The hike in visa fees by the US also sent a message to the domestic IT industry on the need for a reinvention. “First off, we need to create R&D centres in the US, followed by nearshore centres. The third piece is to embrace AI in a much bigger way, and finally, like what Zoho did, we must create more products that are made in India,” says C. P. Gurnani, Co-Founder and Vice Chairman, AIONOS.

TCS’s Krithivasan said they were looking to stay ahead by investing in AI research and innovation centres in key geographies. “These are collaborative spaces where our teams and clients work to build solutions, rapidly prototype ideas, and deploy industry-specific AI capabilities at speed. This ensures our innovations are context-rich, relevant, and immediately deployable,” he said.

According to industry insiders, the IT services business has historically been about “revenue per employee minus cost per employee.” Over time, clients struggled to recognise the company’s distinctive strengths. “It began to get commoditised, leading to revenue dropping and costs increasing. Once the entry barriers disappeared, the situation became extremely challenging,” says a top official. Margins came under pressure, and a lot of time went into cost reduction. “Entry-level salaries hardly moved, and getting high-quality talent was even tougher,” he adds.

Business Today reached out to TCS, Wipro, Infosys and HCL Technologies. However, they declined to comment.

Another challenge to the IT sector has been the rise of GCCs. “Every company is a tech company today,” says Shalini Sankarshana, Managing Director, India, Planview, a platform for strategic portfolio management and digital product development. These centres have evolved over the last 20-30 years from just providing technology support to running operations out of India. “We have moved away from a captive or BPO scenario to becoming centres of excellence. Now, we are a part of a US parent and integral to their operations.” This is taking business away from the IT sector.

GCCs cut across sectors. Sankarshana says her company (Planview has been in India for three years) works with companies in oil and gas, manufacturing, and life sciences, among others. “Our core is business transformation, of which digital, including AI, is a huge chunk,” she says. Around 40% of Planview’s staff strength of 2,000 sits in India, with a clientele that includes Schneider Electric, BT, FedEx and TVS Motor Company. “India has an interesting role in the GCC story, and from our point of view, it brings both scale and speed to the table.” For global companies, GCCs are a way to directly access the offshore labour pool, as opposed to going through one of the IT or consulting majors.

This significant insourcing trend does open an opportunity for all, but not necessarily at ticket values that come with large contracts. Effectively, the overall market share pie will start to look different as more players get smaller chunks, say IT sector experts.

In the process, what one can do with AI will make a difference. “Using AI, the pharmaceutical industry achieved a 15% drop in costs, something that technology could not have done. The time taken to launch a new drug has also dropped,” says Avinash Vashistha, Chairman & CEO, Tholons, which enables other companies to build, manage and scale up global teams using the GCC and outsourcing model.

His view is simple: technology has not been core, but AI is core. Vashistha, earlier Chairman & CEO of Accenture India, says the main challenge before IT companies is that they are a legacy business. They must reinvent. “AI-first or AI-native is the key to success, and they must quickly pivot. Earlier, it was deploying SAP solutions, and now it comes down to integrating solutions at scale.”

With a suite of specialised functions, GCCs have managed to position themselves very effectively. How the IT sector manages to crack this (they have entered the space but will need to scale up) will be closely tracked.

Schumacher says the growth of GCCs is a major challenge for Indian IT services firms. “GCCs are cutting into their revenue growth, attracting their highest-skilled/best qualified professionals, increasing costs and compensation levels and taking on higher-value functions that were once differentiating offerings of leading services firms,” he says. IT services firms, according to him, have been shifting work to Tier II cities to lower costs. The aim is to reduce the effect of cannibalisation and offer GCC services themselves. “While in the short term, these GCC initiatives provide some incremental mitigating benefits, in the longer term, they will only accelerate commoditisation and undermine the ability of firms to maintain meaningful differentiation.”

In today’s dynamic world, a fresh look at the existing approach is not just desirable but mandatory. “Whoever thought Google, with the greatest business model, would be disrupted,” asks Bindra. He says Microsoft is now an AI company, as is any large car manufacturer. “Satya Nadella saw the AI story and moved Microsoft in that direction.” An important part of that journey was an investment of over $13 billion in OpenAI.

Apart from AI-related challenges, the industry is also facing a hike in H-1B visa fees. Experts believe it is, at best, one more small hurdle for an industry that is dealing with more complicated structural issues. According to Peter Bendor-Samuel, Founder & Executive Chairman, Everest Group, a US-headquartered research firm, the $1,00,000 visa fee will have a modest impact on the cost structure and that too only after at least six months. “There is plenty of US talent available for them to hire. In many cases, it will be costlier and require more training and recruiting costs,” he says. The key is the timing, which he terms “inconvenient,” as pricing is collapsing on the back of AI’s impact, making additional costs unwelcome. The industry has long pursued a strategy of hiring local employees and serving US clients via centres in Mexico and Canada. Notably, Mexico offers the highest margins for several Indian IT firms. The decision will hit the second-tier players for whom the proportion of H1B visas is a lot more (estimated to be 40% in some cases).

According to a Motilal Oswal Financial Services report, Indian IT firms today are far less dependent on H-1B visas than a decade ago. With localisation drives and higher local hiring in the US, H-1B holders now form just 3–5% of a vendor’s workforce. Despite reducing dependence, Indians still hold the major share.

The hike in visa fees is also a way of sending out a message to the domestic IT industry. “First off, we need to create R&D centres in the US, followed by setting up nearshore centres. The third piece is to embrace AI in a much bigger way, and finally, like what Zoho did, we must create more products that are made in India,” says C. P. Gurnani.

From a historic perspective, the industry has confronted many a serious hurdle like the internet boom and failure, the global financial crisis and, more recently, the pandemic. “The advent of new technology at each phase is always an opportunity. When cloud came along, everyone spoke of the infrastructure business going away,” says Gurnani. AI may not drive a significant surge in demand in the coming years. Most traditional enterprises remain in the exploratory phase, with a large number of AI projects confined to pilot stages and a few progressing to full production. These dynamics suggest that the demand environment will likely remain subdued,” he says.

Will the sector overcome this existential threat?

(With additional inputs from Palak Agarwal) 

@krishnagopalan