AI deals grow, but India’s IT services revenue model faces a reset

India’s $300 billion IT services industry is approaching an inflexion point as artificial intelligence begins to reshape the nature, duration and value of client contracts. During their first-quarter FY2027 earnings, company leaders highlighted a rise in AI-led deal wins even as they remained cautious about a broader slowdown in discretionary spending and revenue growth.

Tata Consultancy Services said annualised AI revenue grew more than 13% to $2.6 billion, while quarterly revenue stood at $7,624 million, up 2.7% year-on-year and flat sequentially. CEO K Krithivasan said the company continued to win multiple AI transformation deals, including an $800 million engagement with SKF. Some clients deferred projects amid geopolitical uncertainty, he said, though a pent-up technology backlog could support demand over the coming quarters.

HCLTech’s revenue declined sequentially but rose 2.6% year-on-year, while new deal wins reached $2.4 billion. The numbers again pointed to a healthy pipeline that was not necessarily translating into broad-based revenue growth.

“We are seeing a clear divergence across different segments of the AI landscape. On one side, we are seeing strong sustained growth both in AI - native and AI - amplified services. On the other side, AI - disrupted services, the more traditional commoditised work, continues to be optimised further as AI- enabled automation takes hold,” HCLTech CEO C Vijayakumar said during the post-results earnings call.

Across the industry, analysts say the rise in AI deals has not produced a corresponding increase in revenue, raising questions about the sustainability of the existing model and whether companies will need new commercial arrangements.

The mismatch matters because large outsourcing contracts have historically provided predictable revenue over several years, supported workforce planning and rewarded scale. AI engagements, by contrast, are narrower, shorter and dependent on providers repeatedly replenishing the order book as projects conclude.

“Most AI deals today are either implementation bolted onto renewal discussions or consolidation plays where clients are collapsing their vendor roster,” said Jimit Arora, CEO of Everest Group. He expects the commercial model to move gradually from labour-intensive delivery to integrated, outcome-based offerings that bundle intellectual property with services.

A different revenue profile

IT services companies are currently monetising AI through transformation programmes, AI-augmented traditional services and proprietary platforms. The central challenge is that these projects have a different revenue profile from conventional outsourcing contracts.

“AI revenue is not like traditional ADM revenue where there is a lot of annuity revenue involved. Many of these projects tend to be one-quarter, two-quarter projects, where we complete and we have to win new projects again to deliver and accrue the revenue,” Krithivasan said during the post-earnings analyst call.

Unlike annuity-based outsourcing contracts, AI revenue can therefore fluctuate sharply from one quarter to another, making it harder for companies to offer concrete annual guidance.

“Clients are pausing transformational commitments while they figure out their own AI investment strategy. That creates a timing gap where services providers have capacity to deliver, but the pipeline for large, multi-year engagements for new scope has compressed,” Arora said. In many cases, spending is also being shifted from traditional technology work to AI projects rather than representing entirely new budgets.

A second challenge is that many customers remain stuck at the pilot stage, without converting experiments into larger deployments.

“Sustainable commercialisation will depend on whether companies can convert experimentation into repeatable, production-scale programs,” said Sandeep Gogia, Managing Director (Tech & Digital), Equirus Capital.

“The long-term opportunity therefore lies in embedding AI into larger transformation and managed-services engagements, while gradually moving pricing away from billing for the number of people deployed and toward measurable outputs and business outcomes,” he said.

That transition remains difficult. Clients are not always moving from AI pilots to long-term programmes, and even where they are, spending is often being redirected from existing digital-transformation work. Scaling a pilot across an organisation also requires clean and accessible data, modern technology architecture, strong cybersecurity and clear governance.

“One of the world’s largest SI has indicated that at least one in two advanced AI projects leads to an additional data-related project, highlighting how data readiness remains a major constraint,” Gogia said.

At the same time, clients expect providers to pass on productivity gains from using AI in areas such as coding and testing, creating additional pressure on margins.

“The macro environment remains resilient, but uncertainty continues to shape decision-making,” said Wipro CEO Srini Pallia. “Technology investment has not slowed. They have become more focused. Clients continue to invest in AI, data, cloud, modernisation, cybersecurity, and productivity-led transformation,” he said.

Wipro reported IT services revenue of $2.61 billion for the quarter, up 0.9% year-on-year and down 1.2% sequentially. Even as companies win new projects, several customers are reducing or deferring discretionary spending.

“Pricing compression in traditional managed services is real and deep. That still represents the majority of their revenue base, so deflation there hits hard regardless of new deal activity,” Arora said.

Breaking the headcount link

Industry watchers expect the shift to alter how IT services companies operate, though they do not foresee the traditional model disappearing immediately.

“It will be an evolution rather than a displacement of the traditional IT-services model,” Gogia said.

The longstanding link between headcount and revenue growth is already beginning to weaken, and widespread AI adoption could accelerate that trend. Companies are likely to deliver greater output with smaller, more focused teams.

“Consequently, the industry is moving toward fixed-price and outcome-based contracts, platform-led delivery, reusable solutions and more non-headcount-linked revenue,” Gogia said.

HCLTech reported a reduction in headcount during the quarter. Wipro also recorded a decline after excluding employees added through its acquisition of Mindsprint.

In the near term, the shift is likely to produce changes in deal sizes, vendor consolidation and competitive positioning.

“We will see the emergence of new challengers, and new winners as every company goes after the same pie. We believe that maximum value creation happens when AI for business meets a services-led agenda… which is why you see consulting majors and BPOs doing well right now, and that trend will continue. This will continue to reshape the sector as we know it,” Arora said.