AI-led disruption: Indian IT sector should adopt a diversification strategy and accelerate global expansion

Global technology industry is going through a wave of changes, brought in through Artificial Intelligence-led developments. Companies like Anthropic, Open AI and others are coming up with different agentic AI tools, which have the potential to automate many tasks done by current IT services providers and SaaS companies.

In reaction, technology indices in the US and India are facing severe selling pressure. Nifty IT Index has lost more than 15 per cent in last one month with many frontline IT companies losing above 10 per cent of their market cap. Amid such turmoil, Bizz Buzz interacted with industry veteran Pareekh Jain, Founder of Pareekh Consulting, about the state of affairs in the technology industry. Jain said that market is nervous due to uncertainty in growth prospects.

He said that IT services as an industry doesn’t face any existential pressure (as projected by many) as demand for services will always remain owing to the rising complexity in technology stack. According to him, agentic AI tools may automate coding but managing the whole technology stack of enterprises requires the involvement of IT services companies. Jain, however, added that margin profile of IT firms is expected to change, which is spooking the market.

For future growth, IT firms have to diversify geographical reach, revise their pricing model, bring changes in the employee pyramid apart from looking for capacity building through M&A opportunities

What kind of immediate impact that AI tools will have on work done by IT firms and SaaS companies?

There is a strong possibility that agentic AI could disrupt SaaS companies. If that happens, IT service providers—given their deep engagement with SaaS firms—are likely to experience second-order impacts. While both SaaS companies and IT services firms are adopting AI, its integration is largely limited to peripheral functions rather than core operations.

This creates an opportunity for new entrants that have no legacy systems to protect. The market direction is clear: AI is set to disrupt the established technology landscape. The real question is not whether disruption will occur, but how quickly it will unfold.

Various apocalyptic scenarios are being painted by various commentors with regards to impact on Indian IT services companies and SaaS firms. What is your opinion about the possible impact of AI on businesses of domestic IT firms and SaaS companies?

IT Services companies have secured business in long-term than SaaS firms. Theoretically, AI can replace the SaaS firms completely but practically, it is not possible. Because, many concerns with regard to privacy, security, legacy system and others have to be sorted out.

No enterprise is going to completely discontinue the CRM bank overnight. But, capability-wise, AI can replace SaaS firms. However, as far as IT services companies are concerned, they will always be required to manage the IT stack. More complex the IT stack, higher the requirement for services for managing the complexity.

So, a service layer will always be required to orchestrate all these things, suiting the requirement of the enterprise. Usually, coding is considered as the core work in software services.

Now, with AI, that has changed. But services space encompasses end-to-end activity. So, even if 20-25 per cent (which is the coding part) is automated, IT services work is required for all other segments (like maintenance, contextualising etc).

Can Indian IT companies grow when AI is changing the technology market fundamentally? What can be possible growth scenarios going ahead?

The global outsourcing market is worth around $1 trillion and India’s share is around $250 billion. Even if AI disrupts around 20 per cent market but still it will be $800 billion. So, Indian IT industry can still grow from $250 billion to $800 billion. So, it’s a growth path.

So, Indian IT companies can also grow in a declining market. But the main challenge is margin of Indian IT service providers. Because for tapping the $250 billion to $800 billion market, the IT services providers have to tap different markets including Japan, Korea, Latin America, and Africa among others.

So, the incremental revenue for Indian IT companies may not be as profitable as it is as of now.

In that way, margin will be a concern. So, the question is not that what will be the margin model than what is the viability of the IT services model. In worst possible scenario also, IT services providers will always be there. The point is margin may be diluted and the current structure of manpower planning in a project will be changed.

Nifty IT index has fallen close to more than 15% in last one month, making it the worst performer among sectoral indices.Investors are factoring in a very pessimistic scenario. How do you see these market reactions? Can you throw some light into this aspect?

From shareholder perspective, Indian IT companies are seen as giving good growth and keeping high margin. Investors have concerns regarding margin impact. That is the reason that market is reacting this way.

The whole discussions about the Indian IT companies have not invested in products or have not invested in product companies; that is on a different plane.

As services companies, Indian IT firms have done good job in services space. So, some selling off is happening because Indian IT companies have not invested in AI product companies. That kind of argument is not right. So, there is no viability issue on services business due to AI disruption.

How the Indian IT companies can increase their pie of the outsourcing market amid the AI wave? What is your opinion about this matter?

Indian IT companies have to adopt the diversification strategy. When the market declines, usually M&As increase. This can be one of the routes. Indian IT firms, as said earlier, can increase their geographical reach.

They have to change the employee pyramid because with AI, the employee pyramid is undergoing changes. The higher number of junior employees required in a project is changing with AI-led automation. Similarly, they can increase their pricing models. Entering into different industries can be another strategy.

What is the probability of a new company emerging from India and cashing in the AI wave in the services space? Is it a possibility?

All the listed companies face investors’ pressure. Clearly, the risk appetite of Indian investors is not very high. There are many instances where founders have to face the wrath of investors for trying out new things. Moreover, India needs risk capital to support that kind of entity. In the US that kind of capital is available.

So, we need risk capital for creating that kind of company, which aggressively cashes in the AI-led growth. In my opinion, that kind of risk capital is there with family-owned businesses, who if wish, can take that kind of risk.