AI disruption forces Indian IT giants to rethink outsourcing contracts
UTTAR PRADESH, INDIA — Global corporations are reshaping their outsourcing deals with Indian IT firms, shifting from fixed-price contracts to flexible models as AI transforms service delivery.
Tata Consultancy Services (TCS), LTIMindtree, and Wipro have observed changes in client needs, with time-and-material contracts becoming increasingly popular against the backdrop of cost pressure and the need to deliver results in shorter timeframes.
Wipro and TCS recently ranked #3 and #8 in the OA500 2025, an objective index of the world’s top 500 outsourcing companies.
AI drives shift from fixed-price to flexible contracts
According to TCS Chief Executive Officer (CEO) K. Krithivasan, initially, TCS gave preference to time and material (T&M) models, and then switched to fixed-price deals only after evaluating the effects of AI.
This trend is an indicator of the increasing ambiguity of the place of AI in the timeframe of project operations and workforce specifications, as clients are not eager to commit to fixed rates.
The recent earnings report of Wipro shows a similar trend; the proportion of fixed-price contracts continued to decline to 52% of revenue in the first quarter of fiscal year 2025, while time-and-material transactions increased.
This is due to the disruptive nature of AI, according to analysts, because corporations are unwilling to commit to traditional structures when they lack understanding of how applying automation can enhance cost and speed factors.
Pressure mounts for lower costs, fewer employees
IT outsourcers are being asked to decrease prices by as much as 20% by their clients, which prompts companies such as TCS and LTIMindtree to consider the use of AI to sustain their margins.
According to Phil Fersht, Chief Executive of HFS Research, the industry is shifting from the previous approach, where the industry focused on pay-per-fTE, towards a consumption-based pricing model whereby clients are charged on an outcome basis instead of the number of headcounts.
“Net-net, if customers demand a 20% price-cut, the only way the likes of TCS and LTIMindtree can deliver on those savings, while maintaining their own profit margins, is with the smart use of AI to provide the same services with fewer people,” said Fersht.
He then explains, “That means the way these contracts are developed needs to shift from pay-per-FTE (full-time equivalent) to a consumption-based model, which we at HFS are terming ‘Services-as-Software.’”
This aligns with the capabilities of AI in substituting manual work, reducing the workforce size, and transforming billing habits.
LTIMindtree’s Managing Director and Chief Executive Officer (CEO), Venu Lambu, confirmed that clients are eager to transition from time-and-materials (T&M) to outcome-based contracts, viewing AI as a catalyst for leaner operations.
“Our clients are excited about it; so they want to hear more from us, and they want to see how we can help them to transition from the time and material contract to a more outcome or managed services-based construct, and we see that as a big opportunity,” Lambu said.
However, Everest Group’s Founder, Peter Bendor-Samuel, cautions that the trend’s fixed pricing could eventually regain favor despite the current experimentation.
Staggered payments reflect macroeconomic caution
This is due to the economic uncertainty, which causes clients to delay payments. Consequently, IT firms are now receiving a series of payments rather than a single upfront payment. This change mitigates the risk of financial loss to service providers, who must cover cost overruns in the meantime, while providing productivity gains driven by AI.
According to Bendor-Samuel, fixed-price contracts usually protect clients against the surprise of a budget overrun. “Clients agree to this as it shifts the risk to the IT service providers for cost overruns and scope creep, and forces the service providers to generate the productivity that AI promises,” Bendor-Samuel said. Yet, T&M deals are now attractive to corporations that themselves are hesitant about being overcommitted to a turbulent market.
TCS and LTIMindtree’s mixed quarter one results—$7.42 billion, down 0.59% sequentially, and $1.15 billion, up 1.97%, respectively—underscore the sector’s transitional challenges.
As AI reshapes labor dynamics and pricing models, Indian IT firms must strike a balance between innovation and profitability in an era of tighter margins and evolving client expectations.
