Lower growth likely at IT cos as GenAI weighs

Bengaluru: Indian IT services companies are not likely to witness a sharp growth recovery in 2024 as Generative AI is fundamentally changing the outsourcing models across the world. According to experts, revenue growth is expected to be in moderate low digits as compared to double digit growth experienced during post pandemic years.

“Unless Indian service providers work on a powerful AI (and Generative AI) proposition, it would be difficult to experience hockey-stick growth (rates) of the past. They need to capitalize on the quadfacta of AI, Automation, Data platforms (such as Snowflake and Databricks), and analytics to showcase value for which they can charge a premium. We are way past the labour and talent arbitrage stage. The future of IT services is dependent on an innovation mindset that can mimic the mindset of today’s tech startups,” AshishChaturvedi, a practice leader at international IT consultancy firm, HFS Research told BizzBuzz.

“We forecast a moderate single digit growth in revenue (for most service providers) this year,” he added.

Indian IT services companies have been experiencing slowdown in revenue growth since the last three quarters of FY24. Most companies are pinning their hopes of a demand recovery towards the later part of 2024.

However, experts opined that unless there is a fundamental shift in the service offerings, cashing in the emerging opportunities in the Gen AI space will be difficult.

“Another reason is now around 55 per cent of spend happens outside the purview of CIO (Chief Information Officer) and IT services providers mostly work through the CIO of an organization. So, providers may not become direct beneficiary of enterprise spending, unless they change their approach,” Chaturvedi said.

Meanwhile, sources in the know said clients continue to defer finalising their IT spend budgets owing to uncertain macroeconomic environment.

“The interest rates are not coming down in the US and war situation is complicating growth forecasts in European region. So, spending is happening in core areas than new initiatives, with sharp focus on cost savings,” said another source in the know.

With the advent of GenAI, the business model of IT outsourcing market is undergoing a change. As Gen AI tools have the potential of automating many processes followed in an IT project, clients are keen to get those offerings integrated in their projects. In turn, this has the potential of changing the nature of IT outsourcing model to be more outcome-based than talent-based. Currently, all service providers are following a model in which they charge clients for number of engineers working in a particular project. Though outcome-based pricing is also being followed, Gen AI is likely to accelerate this process. Sensing this shift, Indian IT firms are investing big on Gen AI offerings along with massive reskilling of their employees.