AI Shifts India's IT Outsourcing: From Billable Hours to Performance-Based Deals
Artificial intelligence (AI) is fundamentally altering India's IT services industry, prompting major outsourcing firms to reconsider how they charge clients. Companies such as Tata Consultancy Services (TCS), Infosys, Wipro, HCLTech and Cognizant are increasingly tying their fees to performance outcomes rather than hours worked, as customers push for lower prices and greater productivity.
Industry executives say they are also losing some assignments as clients use AI to handle tasks in-house. The uncertainty introduced by the new technology has led to shorter contracts, and the traditional advantage of having a large employee base is diminishing as AI automates many functions. This has opened opportunities for smaller competitors to win business.
"It's a challenging market for service providers, with the balance of power clearly in favour of clients," said Jimit Arora, CEO of research and advisory firm Everest Group.
India's IT industry, with annual revenue of $315 billion, has been particularly vulnerable because of its historical reliance on billable hours. This year, the Nifty IT index has fallen by a fifth, and its ten constituents have together lost $73 billion in market value.
TCS chief executive K Krithivasan told Reuters that about 80% of the company's contracts in its finance, human resources and other business services segment are now based on outcome performance measures. A person with knowledge of the matter said that this figure has doubled since AI became widely adopted in late 2023. TCS did not respond to a request for comment.
Other examples illustrate the shift. In February, Cognizant signed an AI and automation deal with Daimler Truck that stipulated AI-related cost savings would be shared between the vendor and the client, according to people familiar with the terms. In a statement, Cognizant said: "With AI, the fundamentals are shifting. Clients now expect more value and measurable outcomes, and we are re-forging our model for that reality." Daimler Truck did not respond to a request for comment.
A separate multiyear cloud management deal, finalised in June 2025, will see HCLTech receive no payment from German utility E.ON for the first year. Payments from the second year will be tied to efficiency gains and specific business outcomes, according to two people familiar with the agreement. E.ON and HCLTech did not respond to requests for comment.
As AI drives productivity gains, clients are becoming more vocal about getting better value. Sandeep Kalra, CEO of Persistent Systems, an IT services provider, told Reuters that his company's clients are demanding the same work for 25% to 30% less, while expecting faster delivery and higher productivity. However, AI is also helping Persistent secure larger deals than it would have in the past. "The demarcation of a scale player only by revenue is not necessarily a big thing today," he said.
Competition from mid-sized firms has become intense. Many customers want rapid development of pilot programmes, and smaller firms are winning mandates by deploying senior leaders quickly and offering flexible pricing, said Phil Fersht, CEO and chief analyst at HFS Research. "Many Tier 2 firms have been more agile and hungry in this phase," he said.
Both Persistent and Coforge, another mid-sized IT services provider, have seen double-digit revenue growth in dollar terms for at least eight consecutive quarters. In the April-June period, Persistent's revenue grew 16%, while Coforge's sales increased by double digits as well.
The transition to performance-based pricing marks a significant change for an industry that has long billed by hours. Whether it will restore stability to the sector remains uncertain, but the direction is clear: clients now expect more for less, and IT firms must adapt to survive.
