Why IT services firms are loosening their purse strings amid AI shift

As the model shifts to AI-led transformation, the $300 bn sector will see more M&As, consolidation & layoffs

A common theme in the recent Q4 FY26 results of Information Technology (IT) services companies has been “Artificial Intelligence (AI)-led deflation” — or decrease in contract values and services costs because of AI. HCLTech’s leadership sees 2-3 per cent annual deflation in traditional services due to AI. TCS reported a 0.5 per cent year-on-year revenue decline to $30 billion in constant currency terms, its first contraction since listing in 2006. Infosys saw sequential revenue fall of about 1.2 per cent to $5.04 billion, and cut its FY27 guidance to conservative 1.5-3.5 per cent growth. Across the industry, the results showed shrinking deal sizes, compressing revenue growth. 

As global clients lean on AI to reshape their business models, shrink project timelines and demand more output with fewer people, they need service partners who can deploy AI not just for IT but to transform business. In response the $300-billion Indian IT services industry, employing nearly 5.5 million people, is trying to come up with some answers: Buying AI assets, domain platforms and engineering firms in a bid to remain relevant in an AI-first world. In fact, with AI threatening the very assumptions on which the labour arbitrage-driven IT services model was built, the hunt for AI assets has started. 

The hunt 

In April Wipro acquired select contracts from California based Alpha Net Consulting for up to $70.8 million. This will deepen Wipro’s AI-led consulting capabilities. In March Infosys announced a $560-million investment in two American technology firms — Optimum Healthcare IT ($465 mn) and insurance technology specialist Stratus ($95 mn). Also, in April Coforge completed its largest acquisition ever by buying engineering services firm Encora for $2.35 bn. And early this year TCS ended a decade-long acquisition pause by buying Coastal Cloud, a Salesforce-focused digital transformation company. 

TCS MD & CEO K Krithivasan said in the Q4 earnings call, “The Coastal Cloud acquisition strengthens TCS’ capabilities in AI-led business transformation. It enhances our ability to combine domain knowledge, platforms and AI-driven execution, which is increasingly where client demand is moving.” 

Megha Chawla, partner and head of global technology services sector, Bain & Company, added, “Indian IT services (sector) is moving from guarded calibration to conviction and execution. You can see that in deal reporting, revenue disclosures, talent 

programmes, AI-focused partnerships and, of course, the step-up in M&A (mergers and acquisitions) activity.” 

According to Bengaluru-based research firm UnearthInsight, Indian IT companies executed 20-25 M&A deals worth nearly $4-5 bn in calendar year 2025, although less than 30 per cent were pure-play AI acquisitions.

 

Nitin Bhatt, technology sector leader at EY India, said, “The IT services sector is confronting the most significant strategic risk it has faced over the last several decades. This is probably the biggest operating model rewrite since offshoring.” 

What AI does 

The trigger is simple: generative AI and agentic AI are breaking the linkage between headcount and growth. There was a time when more people meant more revenue and better valuations. “With AI, that model is history,” Bhatt said. 

The shift is already visible in earnings commentary across the sector. Deal pipelines remain healthy, bookings are strong and margins are largely within guidance. Yet revenue growth has slowed down. Some companies are guiding for sub-5 per cent growth. Others have posted flat or even negative growth. This lower revenue growth is thanks to AI, which is shrinking the contract size. Yesterday’s $100-mn contract is now worth $80 mn, as the $20 mn is being taken care of by AI. If business software projects took a few years to complete earlier, they are now finished in a few months or even weeks.

 

A 2025 study by IT industry body Nasscom and EY examined 1,200 tasks across IT services and business process management and found AI could deliver productivity gains of 40-80 per cent at a task level. These gains are increasingly being priced into contracts. 

As a result, clients are shortening deal tenures by 15-30 per cent, unwilling to lock themselves into long-term technology contracts when AI capabilities are evolving every few months. Fixed-price and outcome-linked contracts are replacing traditional time-and-material (T&M) billing models that charge for hours worked and resources used. Now some of that resource (human effort) is being automated. The result is what analysts describe as “AI-led revenue compression”. 

“AI revenue and AI-led deal narratives are clearly becoming drivers of growth. At the same time AI deflation is beginning to bite into the legacy services book. In many cases it is shaving 3-4 per cent off traditional services demand,” said Chawla. 

Opportunity or threat? 

The fear inside boardrooms is that legacy revenue is shrinking faster than new AI-led business is scaling. That explains why Indian IT firms, historically cautious dealmakers, are suddenly scouting for AI targets. TCS’ Krithivasan noted, “TCS will go for inorganic growth where it directly enhances AI-led transformation outcomes for customers.” 

The larger opportunity — and threat — lies in helping clients reinvent their businesses around AI. M&As are increasingly focused on capability builds in both AI for IT and AI for business. Today, much of the conversation revolves around efficiency — how enterprises can do more with fewer people. The next phase will involve using AI to expand markets, redesign workflows and create entirely new business models. Hence the acquisitions.

 

TCS says its AI strategy is centered around becoming the world’s largest AI-led technology services company, embedding AI across its entire services portfolio rather than treating it as a standalone offering.

 

“TCS is executing a five-pillar strategy that spans the entire infrastructure-to-intelligence stack,” noted Krithivasan in the earnings call. The company’s focus areas include AI infrastructure, platforms, data foundations, industry solutions and talent. 

The acquisition of Coastal Cloud strengthens TCS’s capabilities across sales, marketing and service within the Salesforce ecosystem. 

TCS’ annualised AI revenue crossed $2.3 bn in the March quarter, signaling how quickly AI-led services are becoming embedded within deals. Other firms are making similar bets. 

Mid-tier firm Coforge’s acquisition of Encora reflects a broader realisation that the next generation of enterprise technology will be built around AI-native engineering, cloud and data platforms. The combined entity will operate at roughly a $2.5-bn revenue 

run-rate, with nearly $2 bn coming from AI-led engineering, data and cloud services. The deal also gives Coforge expanded nearshore engineering and AI delivery capabilities in Latin America, helping it serve US clients more effectively. 

K-shaped FY27 

UnearthInsight expects top-tier Indian IT firms to continue growing at low single digits in FY27, while select mid-tier firms could deliver 14-17 per cent growth because they are more agile, more engineering-focused and less dependent on legacy outsourcing work. But the broader industry outlook remains uncertain. 

“FY27 is likely to be a K-shaped year,” Chawla said, referring to an uneven recovery where some businesses surge ahead while others struggle. Companies that move aggressively toward AI-led transformation, outcome-based contracts and domain-specific solutions could outperform those still heavily dependent on traditional time-and-material work. 

And then there is the looming question of jobs in the industry’s vast workforce. While AI augments engineers’ tasks, the rapid automation will actually reduce overall roles. According to reports, Cognizant, which employs around 375,000 people, is planning to cut 12,000- 15,000 jobs under its Project Leap restructuring programme.

 

The top-tier IT services companies will likely face the pressures of handing out pink slips as they manage large portfolios, and large teams (over 200,000) with a lot of legacy application development, testing and maintenance (T&M)-type tasks which AI is automating. 

“Given the rapid advancements in AI model capabilities, the T&M business is the one most prone to suddenly fall off a cliff,” Bhatt said. Meanwhile, frontier AI companies themselves are beginning to compete directly with traditional IT services firms. AI models no longer just serve as assistants —  they increasingly execute work and deliver outcomes autonomously. 

Bhatt estimates frontier AI platforms are already absorbing 5-10 per cent of work that previously flowed to IT services firms, particularly. In areas such as application development, testing and documentation, the disruption is 15-25 per cent. One striking example is Anthropic’s Claude model, which now commands roughly 40 per cent of enterprise AI usage, including in regulated environments. 

“That’s quite a statistic,” Bhatt said. “One AI platform captures this level of enterprise adoption and starts redefining how services are delivered and who captures the margin.” 

The implications are profound. The outsourcing giants are no longer just competing against each other – they are competing against the AI infrastructure layer itself. That is why acquiring AI capabilities and even partnering with frontier AI firms — OpenAI, Anthropic and others — will be trending in FY27. 

While shopping for AI capabilities will increase, Bhatt expects the next two years to be critical, with consolidation among mid-tier firms and more private equity and strategic transactions as companies seek AI-native platform capabilities, domain expertise, differentiation and scale. “There will be more M&A, more consolidation and more headcount rationalisation as the sector reinvents itself,” he said.

 

The mid-tier companies could see consolidation, even as the top tier services providers scout for AI targets and reduce headcount. According to Gaurav Vasu, CEO, UnearthInsight, “Mid-tier companies like Persistent, Coforge, Sonata could outperform, while unlisted or smaller IT services companies will struggle due to vendor consolidation and lower margins to invest in AI. Overall, the industry will continue to grow slowly and consolidate.” 

Those who adapt quickly may emerge stronger and more profitable. Those who cling to the old model risk fading into irrelevance. In the AI era, reinvention is no longer a strategy. It is survival. 

 

The writer is a New Delhi-based independent journalist