As AI changes pricing, IT firms see uptick in outcome-based deals

AI is pushing Indian IT companies towards outcome-based pricing, with newer deals increasingly linking payments to measurable business results

Indian information technology (IT) companies are starting to see a small uptick in outcome-based pricing deals, a shift away from the traditional time and material (T&M) and fixed price ones, as artificial intelligence (AI) changes the way how new engagements are structured.

 

Outcome-based pricing marks a fundamental shift from decades-old traditional models by moving from input to output metrics. Under this arrangement, clients pay strictly for actual usage or delivered results. In contrast, conventional models charge for service provider effort, typically billed by daily hours or overall project time.

 

Tata Consultancy Services (TCS), India's largest IT firm, stated that its client engagement models span multiple horizons. These include output commitment-based, outcome-based, fixed-price, and T&M models.

   

“In some cases, you do continue to see T&M requirements coming in. T&M still means that you take accountability for delivering the outcomes. But all three models we are seeing, and especially in agentic GBS, we are seeing a lot more shift… this quarter to more outcome-based commitment,” TCS Chief Operating Officer (COO) Aarthi Subramanian told analysts last month.

 

For Coforge, outcome-based contracts comprise about 6-7 per cent of its total revenue on a run-rate basis, while for Cognizant, 45 per cent of its business process outsourcing (BPO) contracts are now being signed under outcome-based commercial models.

 

Such contracts still make up a small portion of IT services companies’ revenue, with almost everything still skewed towards the traditional T&M and fixed price models. Most companies are yet to share the break-up of these contracts but say that some artificial intelligence (AI) deals are based on outcomes even as they try to build a model around this pricing strategy.

 

Outcome pricing model works well for AI-led deals, which are smaller in size and of a short duration, looking for measurable outcomes. A big reason for this is also that enterprises scrutinise their investments much more heavily since AI is changing both the economics of delivery and what clients believe they should be paying for.

 

Saurabh Gupta, president of HfS Research, said that while large deals still remain a cost play, new deals actually have a hybrid pricing model consisting of subscription, consumption, and some outcomes.

 

“If 80 per cent of the deal is being done by some platform or tool, there will be a subscription cost to that. Then there will be a consumption cost which could be either in terms of a week or the AI agents’ time. So, a week’s time is measured in time and in hours, and AI time is measured in tokens. And, the third is some performance…,” Gupta added.

 

Tech Mahindra, for example, won a deal in the healthcare segment recently, where the commercial model is tied to measurable outcomes with about 40 per cent fewer tickets, 20 per cent lower mean time to resolution, 30-35 per cent reduction in technical debt, and significant productivity improvement over the deal duration.

 

Infosys, however, is yet to see an uptick in such deals. While its clients have a stronger interest in it, and are having more discussions around it, “it is not so much that it has become a large part of our activity”, according to Infosys MD & CEO Salil Parekh.

 

Mayank Verma, global head of data and AI at Xebia, believes the world has to move from the staff augmentation to the pod model, which is agent plus human beings. “People are right now experimenting with it and this may take a couple of years, but the pie will increase because we are in a transition phase,” he said. 

Deal evolution   

• Outcome-based pricing becoming an important part of deal construct in AI era
•  Clients pay for measurable outcomes, actual usage and delivered results 
• Coforge says 6-7% of its revenue comes from outcome-based deals
•  Analysts say few service providers have the operational depth, skill to put skin in the game