Generative AI will be disappointing in the short term, says Noshir Kaka

Noshir Kaka, Senior Partner and Co-lead of global Technology, Media & Telecommunications Practice, McKinsey & Company, says that GenerativeAI (GenAI) is like a double-edged sword

Generative artificial intelligence (GenAI) is a double-edged sword and even as the buzz around it grows, its short-term impact will be disappointing due to a mismatch of talent and business expectations, said Noshir Kaka, Senior Partner and Co-lead of Global Technology, Media & Telecommunications Practice, McKinsey & Company. 

“In the short term, there will be disappointment with GenerativeAI (GenAI). Everyone's seeing this incredible productivity lift in the pilots. But, we're seeing very few companies scale it to production. This delay is not about technology, it’s because of humans. Human learning and that transition is almost always going to slow the speed of technology,” Kaka told Business Standard on the sidelines of the Nasscom Technology Leadership Forum.

“In an environment, that is more demand-constrained, companies want to win large deals and in order to win, many want to price in the productivity gains of generative AI. Companies are pricing in a future potential when it is still not enabled to scale. That's why in the short term, it's a double-edged sword,” he said.

Foundationally, GenAI as a technology is going to change the operating model of the IT services companies, he said, adding that this goes beyond productivity gains.

“This will impact how the management team interacts, how decisions are taken, and finally,  the talent. The developer's experience with GenAI increased by 80 per cent. Any company that doesn't have that today will actually be at a significant loss,” said Kaka.

On the IT budgets, Kaka said the outlook for the industry continues to be uncertain.

“Our research shows that discretionary spending is coming under increasing pressure. Second, the number of large deals that are getting re-bid is much earlier than the original tenure. And the incumbent is losing 25 to 30 per cent of these deals.  As a result, the core is coming under pressure,” he said.

Last year Tata Consultancy Services (TCS) announced that it's contract with Transamerica, in its eighth year, has been terminated. The US insurance firm decided to move its IT needs in-house. The original period of the deal was 10 years.

In another case, clients have backed out of a masters agreement. In December of 2023, Infosys in a regulatory filing said that a deal worth $1.5billion that was signed in September got cancelled.

Despite some of the headwinds, Kaka says that both GenAI and technology is a long term play. According to McKinsey research, the total addressable market (TAM) of new service lines from generative AI is about $60 to $70 billion, Kaka said.

“We think within the existing service lines the TAM is about $120 to $140 billion, much of this will have to be restructured to get a GenAI flavour,” he added.

Other than GenAI-related work, the industry also has green shoots such as resilient spending coming from segments like auto. “There are some company cohorts which are growing very well. Geographies like Asia are seeing immense opportunity,” he added.