Software services companies in India are experiencing a shift in contract work due to client expectations due to AI productivity improvements or global macroeconomic uncertainty. According to experts, such contract changes could weaken the margins of these companies.
At least three major IT companies – Infosys, Tata Consultancy Services and HCLTech have talked about either changing the scope of customer contracts or passing on productivity benefits to customers by doing the same amount of work for less in the last two quarters.
IT companies pass on productivity gains to customers on contract anniversaries, but now customers are asking them to increase workloads when their contracts are extended. In a note on HCLTech’s Q1 earnings, Kotak Institutional Equities said, “IT service revenue declined by 1.5% due to anniversaries of some mega-hits in the financial services sector.”
It added that the company’s earnings before interest and tax (EBIT) were under pressure in the June quarter as it passed on productivity gains from select contracts to customers.
TCS CEO K. Krithivasan said during the company’s quarterly earnings call that customers expect productivity improvements during the project renewal. “What they also do with the upgrade is usually increase the operational capacity during the upgrade to maintain overhead neutrality.”
Peter Bendor Samuel, CEO of Everest Group, a consulting and research firm, said: “Enterprises are clearly asking IT companies to increase genAI productivity. These requests predict the maturation and refinement of both technology and operations that need to be developed. to take advantage of the next generation of AI that technology services companies are currently offering. Therefore, there is a risk that any lack of agreement on their demands will affect profits.”
“However, there is also the possibility that they may exceed the demands and obtain additional profits for themselves. In general, the additional risk is not good for technology services companies, because the current requirements require significant investments and create uncertainty about the functionality of technology companies,” he said.
According to experts, productivity gains will be passed on. contract anniversaries for customers are also affecting the margins of IT service companies
Nomura analysts noted, according to HCLTech: “The 50bp decline in overall operating profit margin was driven by a decline in ERandD service margin and YoY. productivity gains for customers, partially offset by operational efficiencies and currency fluctuations.
Pareekh Jain, CEO of Engineering Insight Platform EIIRTrend, said, “Customers expect the service providers to increase productivity year after year and especially during renewal. Customer expectations have now increased due to the excitement of genAI. Traditional productivity tools have been process improvement, automation and offshoring, analytics, artificial intelligence. But now genAI has become a new lever and is expected to increase productivity.”
While customers are not only adding work at the same cost, they are also reducing the volume of some work, experts said. Infosys said during its work. . Earnings call of March: “We negotiated and renegotiated an agreement with one of our financial services clients, which resulted in a little more than a 1% impact on the fourth quarter’s earnings. Although some of the work has been fixed, more than 85% of the contract has yet to be completed is in our hands.
