India’s information technology services industry is facing heightened cost pressures on account of a fundamental shift in its pricing models, especially triggered by the productivity boost from artificial intelligence (AI), said industry executives and experts.
The industry, which is estimated to have clocked revenue of about Rs 24.3 lakh crore ($283 billion) in 2024-25, is moving towards outcome-based pricing models, they said.
With generative AI and agentic AI boosting productivity by 20-40%, leading to swifter outcomes at lower costs, clients are asking why they are still paying the same per full-time equivalent (FTE).
“Pricing is shifting from effort to outcomes, and that means a full-stack transformation—not just of how services are delivered, but how they're sold, priced and measured,” said Saurabh Gupta, president, HFS Research.
The traditional software services pricing model, he said, has largely revolved around rate-cards, FTEs and T&M (time and material). FTE refers to a unit of workload of a full-time working employee where clients pay per person based on the workload. T&M is a billing model where the client pays for the actual time spent and resources used.
“Pricing and legacy baggage are not something new. What has changed is the pressure and the intensity of it. The key drivers are AI-led productivity uplift clients are seeking and the ongoing macro uncertainty,” said Yugal Joshi, partner at US-based technology consultant Everest Group.
The announcement last week of the beginning of more than 12,000 layoffs by the country’s largest IT company, Tata Consultancy Services (TCS), underscored the pricing pressure in the industry, experts said, adding that IT players are forced to cannibalise their revenues even as they are yet to see returns on investments from their large bets on AI.
“Currently, a significant portion of the revenue comes from ‘run the business’ as opposed to ‘change the business’, from T&M contracts as opposed to outcome or risk-reward based contracts, from pass-through revenue from product licence sale as opposed to newer service opportunities such as cybersecurity, interactive and platforms,” said Ramkumar Ramamoorthy, partner at Catalincs, a tech growth advisory firm.
While not all top companies give a break-up, the new deals are moving towards T&M and hybrid engagement models, away from FTE and fixed pricing contracts, as clients prefer payments linked to actual consumption or value outcomes.
“A number of players such as Persistent Systems are moving towards AI-first, platform-led services which anchors on outcome-based contracts. However, we have observed that several players such as Wipro, Coforge and Happiest Minds have bucked the trend with T&M pricing remaining consistent as a percentage of revenue or even increasing,” said Shobhit Jain, managing director and head of enterprise technology and services for investment banking at Avendus Capital.
Ramamoorthy, also former head at Cognizant India, said companies need to take bold, unconventional decisions to cannibalise revenue, where appropriate, and invest their way out. If they don’t act now, they risk looking back in regret for having missed a generational opportunity, he added.
With the rapid advances of AI, many companies at the mid-tier, small-tier and startup level are getting higher output with the same number of people. This is sure to mount pricing pressure on larger companies. Companies such as TCS, Infosys and HCLTech have recently acknowledged the emergence of new pricing models.
TCS chief executive K Krithivasan said on an earnings call last month, “You will see multiple opportunities. There are some where we do based on the outcome, some customers that expect that this is better to do it on T&M. Because as it is evolving, they also want to see how they are able to benefit from the results. So, they want to do it on T&M. And then after a period of time, move towards the fixed-price model. So, we are seeing both options here.”
In a similar call with analysts, Infosys chief financial officer Jayesh Sanghrajka, said “I do not think delivery model will change in a short period of a couple of quarters. Over a longer period of time, on the back of AI, etc., we may expect some part of newer pricing models emerging. It could be outcome-based pricing model. It could be pod-based or studio-based pricing model, etc. So there are various new pricing models that are emerging.”
The industry, which is estimated to have clocked revenue of about Rs 24.3 lakh crore ($283 billion) in 2024-25, is moving towards outcome-based pricing models, they said.
With generative AI and agentic AI boosting productivity by 20-40%, leading to swifter outcomes at lower costs, clients are asking why they are still paying the same per full-time equivalent (FTE).
“Pricing is shifting from effort to outcomes, and that means a full-stack transformation—not just of how services are delivered, but how they're sold, priced and measured,” said Saurabh Gupta, president, HFS Research.
The traditional software services pricing model, he said, has largely revolved around rate-cards, FTEs and T&M (time and material). FTE refers to a unit of workload of a full-time working employee where clients pay per person based on the workload. T&M is a billing model where the client pays for the actual time spent and resources used.
“Pricing and legacy baggage are not something new. What has changed is the pressure and the intensity of it. The key drivers are AI-led productivity uplift clients are seeking and the ongoing macro uncertainty,” said Yugal Joshi, partner at US-based technology consultant Everest Group.
The announcement last week of the beginning of more than 12,000 layoffs by the country’s largest IT company, Tata Consultancy Services (TCS), underscored the pricing pressure in the industry, experts said, adding that IT players are forced to cannibalise their revenues even as they are yet to see returns on investments from their large bets on AI.
“Currently, a significant portion of the revenue comes from ‘run the business’ as opposed to ‘change the business’, from T&M contracts as opposed to outcome or risk-reward based contracts, from pass-through revenue from product licence sale as opposed to newer service opportunities such as cybersecurity, interactive and platforms,” said Ramkumar Ramamoorthy, partner at Catalincs, a tech growth advisory firm.
While not all top companies give a break-up, the new deals are moving towards T&M and hybrid engagement models, away from FTE and fixed pricing contracts, as clients prefer payments linked to actual consumption or value outcomes.
“A number of players such as Persistent Systems are moving towards AI-first, platform-led services which anchors on outcome-based contracts. However, we have observed that several players such as Wipro, Coforge and Happiest Minds have bucked the trend with T&M pricing remaining consistent as a percentage of revenue or even increasing,” said Shobhit Jain, managing director and head of enterprise technology and services for investment banking at Avendus Capital.
Ramamoorthy, also former head at Cognizant India, said companies need to take bold, unconventional decisions to cannibalise revenue, where appropriate, and invest their way out. If they don’t act now, they risk looking back in regret for having missed a generational opportunity, he added.
With the rapid advances of AI, many companies at the mid-tier, small-tier and startup level are getting higher output with the same number of people. This is sure to mount pricing pressure on larger companies. Companies such as TCS, Infosys and HCLTech have recently acknowledged the emergence of new pricing models.
TCS chief executive K Krithivasan said on an earnings call last month, “You will see multiple opportunities. There are some where we do based on the outcome, some customers that expect that this is better to do it on T&M. Because as it is evolving, they also want to see how they are able to benefit from the results. So, they want to do it on T&M. And then after a period of time, move towards the fixed-price model. So, we are seeing both options here.”
In a similar call with analysts, Infosys chief financial officer Jayesh Sanghrajka, said “I do not think delivery model will change in a short period of a couple of quarters. Over a longer period of time, on the back of AI, etc., we may expect some part of newer pricing models emerging. It could be outcome-based pricing model. It could be pod-based or studio-based pricing model, etc. So there are various new pricing models that are emerging.”
