Return of uncertainty in the demand environment and increasing adoption of artificial intelligence by clients are squeezing the pricing power of India’s $280 billion information technology sector, where many deal renewals and new signings are happening at a discount to existing rates, according to industry watchers.
Clients maintaining moderation in their IT budgets while focusing on cost efficiency is impacting the pricing of deals, said analysts. With competition too intensifying, major IT service providers are also renegotiating contracts, assessing productivity gains through automation and AI in their own processes and pricing deals accordingly.
“The environment continues to be extremely tight with limited opportunity for price hikes across services,” said Yugal Joshi, partner at US technology advisory firm Everest Group. The rates go up only in projects requiring specialised skills, he said.
For a typical IT-ADM (application data management) project, pricing in the last nine to 12 months ranged from a 1% reduction to a 1.2% increase compared with the existing rates, Joshi said. For IT-infrastructure, it was a 1.3% fall to 0.5% growth.
“For specialised skills such as Kubernetes, cyber, etc., offshore and nearshore locations generally witnessed a 0.2-1.5% increase,” Joshi said.
Such pricing is likely to impact not just the revenue but also profitability of top-tier companies.
Last week, during an earnings call with analysts, Accenture chief executive Julie Sweet said while pricing was relatively stable, it was a “super competitive market”.
The comment from the CEO of the Ireland-based company, often called the bellwether of the global IT industry, indicates the challenges that Indian companies too face.
“Interestingly, though we expect pricing to remain very competitive, the cost base for this talent especially in large delivery locations is expected to go up, further compressing profitability of service providers,” Everest Group’s Joshi said. “This is especially relevant for tech services whereas BPS (business process services) will continue to witness pricing compression.”
IT companies are now leveraging tier-2 locations, especially in large delivery countries such as India, to offset the impact, he said.
Most stakeholders believe that with growing competition and the accelerated adoption of AI, automation and offshoring, managed services or outsourcing deals have witnessed a 15-20% decline in the last three years.
“The competition would be fierce given a modest increase in spending and a focus on spend efficiency by clients. These factors could impact pricing in new contracts,” a recent report by Kotak Institutional Equities on the IT services sector said.
“While AI has primarily fuelled new business opportunities and service expansion for IT services firms, we’re now seeing early signs of customers redefining engagement models,” said Akhilesh Tuteja, partner & national leader – clients and markets and technology, media & telecommunications at KPMG India.
Enterprises are demanding enhanced service-level agreements, flexible pricing models such as pay-as-you-go and outcome-linked contracts, and AI-powered efficiency gains to translate into cost savings, he said. “Notably, while clients are willing to pay a premium for GenAI expertise, they expect measurable productivity gains to offset overall costs.”
Ramkumar Ramamoorthy, a former chairman of IT company Cognizant India who is now a partner at growth advisory firm Catalincs, said AI is fundamentally redefining the “how” of technology service delivery and is getting embedded in every step of the lifecycle. “Depending on adoption maturity, IT services companies are pricing multi-year contracts based on estimated productivity gains through automation and AI,” he said.
“Over time, as AI becomes the default industry standard, pricing may abate (deflationary effect on some outsourcing rates),” a Centrum report on IT services said.
However, the brokerage firm expects volume of deals to increase because lower costs spur demand and new types of projects, as clients utilise savings to further drive tech transformation.
“Net-net, expect cost per unit service to drop, but volume to rise — good quality IT firms will manage this to still expand absolute margins by taking on more work,” the Centrum report said.
Clients maintaining moderation in their IT budgets while focusing on cost efficiency is impacting the pricing of deals, said analysts. With competition too intensifying, major IT service providers are also renegotiating contracts, assessing productivity gains through automation and AI in their own processes and pricing deals accordingly.
“The environment continues to be extremely tight with limited opportunity for price hikes across services,” said Yugal Joshi, partner at US technology advisory firm Everest Group. The rates go up only in projects requiring specialised skills, he said.
For a typical IT-ADM (application data management) project, pricing in the last nine to 12 months ranged from a 1% reduction to a 1.2% increase compared with the existing rates, Joshi said. For IT-infrastructure, it was a 1.3% fall to 0.5% growth.
“For specialised skills such as Kubernetes, cyber, etc., offshore and nearshore locations generally witnessed a 0.2-1.5% increase,” Joshi said.
Such pricing is likely to impact not just the revenue but also profitability of top-tier companies.
Last week, during an earnings call with analysts, Accenture chief executive Julie Sweet said while pricing was relatively stable, it was a “super competitive market”.
The comment from the CEO of the Ireland-based company, often called the bellwether of the global IT industry, indicates the challenges that Indian companies too face.
“Interestingly, though we expect pricing to remain very competitive, the cost base for this talent especially in large delivery locations is expected to go up, further compressing profitability of service providers,” Everest Group’s Joshi said. “This is especially relevant for tech services whereas BPS (business process services) will continue to witness pricing compression.”
IT companies are now leveraging tier-2 locations, especially in large delivery countries such as India, to offset the impact, he said.
Most stakeholders believe that with growing competition and the accelerated adoption of AI, automation and offshoring, managed services or outsourcing deals have witnessed a 15-20% decline in the last three years.
“The competition would be fierce given a modest increase in spending and a focus on spend efficiency by clients. These factors could impact pricing in new contracts,” a recent report by Kotak Institutional Equities on the IT services sector said.
“While AI has primarily fuelled new business opportunities and service expansion for IT services firms, we’re now seeing early signs of customers redefining engagement models,” said Akhilesh Tuteja, partner & national leader – clients and markets and technology, media & telecommunications at KPMG India.
Enterprises are demanding enhanced service-level agreements, flexible pricing models such as pay-as-you-go and outcome-linked contracts, and AI-powered efficiency gains to translate into cost savings, he said. “Notably, while clients are willing to pay a premium for GenAI expertise, they expect measurable productivity gains to offset overall costs.”
Ramkumar Ramamoorthy, a former chairman of IT company Cognizant India who is now a partner at growth advisory firm Catalincs, said AI is fundamentally redefining the “how” of technology service delivery and is getting embedded in every step of the lifecycle. “Depending on adoption maturity, IT services companies are pricing multi-year contracts based on estimated productivity gains through automation and AI,” he said.
“Over time, as AI becomes the default industry standard, pricing may abate (deflationary effect on some outsourcing rates),” a Centrum report on IT services said.
However, the brokerage firm expects volume of deals to increase because lower costs spur demand and new types of projects, as clients utilise savings to further drive tech transformation.
“Net-net, expect cost per unit service to drop, but volume to rise — good quality IT firms will manage this to still expand absolute margins by taking on more work,” the Centrum report said.
