The spectre of AI is staring Indian IT in the face

Mint

2 days ago

The advance of artificial intelligence (AI) may shrink some business and lead to reshuffle of employees, but it will also create new revenue streams, Hexaware Technologies Ltd CEO Srikrishna Ramakarthikeyan said.
His comments came after Hexaware slipped two places in the Indian IT pecking order to No.10, ending the June quarter with $382 million in revenue, up 2.8% sequentially.
'On the negative side, I think there will be some compression in IT operations when new deals are done or when deals are renewed. There's some compression in software development as a consequence of AI," Ramakarthikeyan said on Friday.
New opportunities
Still, he said AI is going to create new revenue, even as the negative impacts are not 'significant enough." 'On the other hand, I think AI is going to unleash a number of new revenue opportunities for our business. The first and foremost is data," he added.
Hexaware is not the first to note the impact of disruption. GenAI's impact will be the highest in business process outsourcing, HCL Technologies Ltd MD and CEO C. Vijayakumar said at an event two years ago. "Second will be application development, as the role of Gen AI was minimal here. Application and infrastructure operations, incremental benefit would be marginal," Vijayakumar had said. While Gen AI was not depressing prices for existing services, it could start in 2024, Vijayakumar had said then.
In February this year, he said HCL Tech has been trying to "deliver twice the revenue with half the people."
Reshuffles
While AI isn't currently changing staffing, future AI-powered coding may shift Hexaware's needs from junior staff to those with specialized knowledge, leading to minor workforce adjustments, all within the context of a global talent shortage," Ramakarthikeyan said. 'So, there could be marginal reshuffling, but that's what it takes to deliver service."
"We also believe that AI/Gen AI will lead to compression of revenue for the industry in the next 24-36 months as companies self-cannibalize to hold on to their existing clients," Girish Pai, head of equity research for Bank of Baroda Capital Markets wrote in a note dated 26 July.
Companies will look to achieve more with fewer people, an analyst said.
'It is very possible that a 1,000-person IT services startup using AI could achieve $1 billion in the next five years," said R. Wang, founder of Constellation Research. He said IT outsourcers may adjust headcount going forward.
Recalibrating
'Expect more reductions over time as these tech majors have to recalibrate their workforces and also adjust to changing client expectations. We are in the midst of a massive transition that will transform white-collar work as we know it," Wang added.
The Big Five of Indian IT reported revenue growth of 15-25% in FY22. Three years later, growth slowed to 3.8-4.3% for the full year, and two of them saw a revenue decline.
At least one has analyst called out this trend in the past.
"In particular, we believe that renewals will be challenging since customers will seek, and likely get, lower renewal prices than historical norms as the power and capabilities of generative AI increase," said Keith Bachman, an analyst at BMO Capital Advisors, in a note dated 5 December, 2024.
Headcount
This is prompting them to adopt different measures. On Sunday, TCS said it would cut 2% of jobs, partly attributing its decision to AI. Earlier, HCL Technologies said it would reduce headcount outside India as automation takes up lower-end skills. Wipro has asked many employees to complete a mandatory English assessment. Mint had reported in February that pay hikes for several senior executives at LTIMindtree would depend on a coding and general math-based assessment.
"Our view is that AI-related productivity benefits could be meaningful in the 20-30% range over time. Hence, all services providers will need to 1) gain share and/ or 2) enable and capture new addressable market opportunities to sustain growth. We remain concerned on impact to long-term growth from AI efficiency," said BMO Capital Markets analysts Keith Bachman, Adam J. Holets, and Bradley Clark, in a note dated 23 July.