The rise in artificial intelligence investments by hyperscalers is targeting a large share of enterprise IT spending, potentially undercutting the traditional software services outsourcing industry in the near term.
“The gross impact of AI on IT services will be a deflation of 8-10% (by FY2027), by our estimates,” HSBC Global Investment Research said in a recent report. It estimates this to be realised over three-four years as deals come up for renewal, and projects the annual impact to be as high as 3-4% during 2025-27.
IT companies have so far been able to compensate for this impact through higher volumes from customers, which allowed revenues to grow. In 2026, there will be a push and pull between this deflationary impact and macro tailwind, according to Yogesh Aggarwal, Prateek Maheshwari and Sagar Desai, who wrote the HSBC report.
Capital expenditure of the top four hyperscalers, including the latest announcement by Oracle, is likely to be around $300 billion in 2025, going up to $500 billion in 2030, which may take-up the majority of incremental enterprise tech spending.
The top three hyperscalers (Amazon Web Services, Microsoft Azure and Google cloud platform) have added nearly $46 billion with total revenue of about $260 billion of cloud revenues last year.
In comparison, the IT services industry revenue grew by around $14 billion, or just over 5%, to $283 billion.
For now, consolidation of enterprise spending to hyperscalers and agentic AI is expected to significantly impact IT services, analysts told ET.
“Hyperscalers have been the single most frenemy of the services industry. On one hand they have generated multi-billion businesses for service providers, on the other, their technologies have subsumed significant tech services spend, especially on the operations side,” said Yugal Joshi, partner at US-based consultancy and research firm Everest Group.
“With their significant push on (AI) agents through their platforms, they now plan to capture the business process spend as well,” Joshi added.
In one of the largest cloud contracts, OpenAI last month signed a deal with Oracle to purchase $300 billion in computing power over roughly five years. While the contract positions Oracle as a serious competitor to the dominant top three hyperscalers, it also reflects the increasing spending on AI data centres.
Most of the thesis, Joshi said, is playing on the belief that AI agents will work the way envisioned. “That is a big ‘if’ and technology changes have told us they need more services spend than less. The shape and form may change from labour to assets and IP. More complexity is good for services and agents will make client environments a lot more complex to integrate, orchestrate, and operate.”
The HSBC report still expects 5-6% growth in IT services in FY27, which could mean about an 8-10% expansion in the volume of work.
Historically, the shift of on-premise software to SaaS (software-as-a-service) was considered very negative for IT services as well. However, in reality, SaaS was commensurately services-intensive, the HSBC report pointed out. “Now SaaS to agentic AI migration is theoretically quite negative for IT services, though easier said than done. We believe, as the current AI agents move to multi-agentic AI systems, enterprise software architectures and infrastructure may need redesign, which is more work for Indian IT.”
According to Joshi, there will be meaningful near-term uptick for services firms who will help clients in this journey, but most of these business processes will run on their own at some point.
“There will be significant uptick in the TAM (total addressable market) these providers can address in the mid-term, and they will use this revenue to offset other declines and reinvest into their business,” Joshi said.
Add Now!
“The gross impact of AI on IT services will be a deflation of 8-10% (by FY2027), by our estimates,” HSBC Global Investment Research said in a recent report. It estimates this to be realised over three-four years as deals come up for renewal, and projects the annual impact to be as high as 3-4% during 2025-27.
IT companies have so far been able to compensate for this impact through higher volumes from customers, which allowed revenues to grow. In 2026, there will be a push and pull between this deflationary impact and macro tailwind, according to Yogesh Aggarwal, Prateek Maheshwari and Sagar Desai, who wrote the HSBC report.
Capital expenditure of the top four hyperscalers, including the latest announcement by Oracle, is likely to be around $300 billion in 2025, going up to $500 billion in 2030, which may take-up the majority of incremental enterprise tech spending.
The top three hyperscalers (Amazon Web Services, Microsoft Azure and Google cloud platform) have added nearly $46 billion with total revenue of about $260 billion of cloud revenues last year.
In comparison, the IT services industry revenue grew by around $14 billion, or just over 5%, to $283 billion.
For now, consolidation of enterprise spending to hyperscalers and agentic AI is expected to significantly impact IT services, analysts told ET.
“Hyperscalers have been the single most frenemy of the services industry. On one hand they have generated multi-billion businesses for service providers, on the other, their technologies have subsumed significant tech services spend, especially on the operations side,” said Yugal Joshi, partner at US-based consultancy and research firm Everest Group.
“With their significant push on (AI) agents through their platforms, they now plan to capture the business process spend as well,” Joshi added.
In one of the largest cloud contracts, OpenAI last month signed a deal with Oracle to purchase $300 billion in computing power over roughly five years. While the contract positions Oracle as a serious competitor to the dominant top three hyperscalers, it also reflects the increasing spending on AI data centres.
Most of the thesis, Joshi said, is playing on the belief that AI agents will work the way envisioned. “That is a big ‘if’ and technology changes have told us they need more services spend than less. The shape and form may change from labour to assets and IP. More complexity is good for services and agents will make client environments a lot more complex to integrate, orchestrate, and operate.”
The HSBC report still expects 5-6% growth in IT services in FY27, which could mean about an 8-10% expansion in the volume of work.
Historically, the shift of on-premise software to SaaS (software-as-a-service) was considered very negative for IT services as well. However, in reality, SaaS was commensurately services-intensive, the HSBC report pointed out. “Now SaaS to agentic AI migration is theoretically quite negative for IT services, though easier said than done. We believe, as the current AI agents move to multi-agentic AI systems, enterprise software architectures and infrastructure may need redesign, which is more work for Indian IT.”
According to Joshi, there will be meaningful near-term uptick for services firms who will help clients in this journey, but most of these business processes will run on their own at some point.
“There will be significant uptick in the TAM (total addressable market) these providers can address in the mid-term, and they will use this revenue to offset other declines and reinvest into their business,” Joshi said.
Add 
as a Reliable and Trusted News Source
as a Reliable and Trusted News Source Add Now!
