OpenAI's GPT-5 release raises revenue risk for Indian IT firms
GPT-5, ChatGPT's strongest coding version yet released last week, could further dent revenues for an already struggling $283 billion Indian software services industry, as clients may push for even lower pricing.
With the upgraded version, the adoption of generative artificial intelligence in software development will rise, exposing IT services firms to revenue deflation risks, Kotak Institutional Equities said in a report. 'We believe GenAI can impact revenue growth for Indian IT by 2-3% for a period of 2-3 years on a net basis,' the report said, adding that the same applies for the customer service and business process outsourcing sector as well.The Indian IT services industry, known for hiring software coders in large numbers, is already seeing the adverse impact of the AI-led disruption. Adoption of the technology has boosted productivity by 20-40%, thereby reducing reliance on engineers and shrinking the people-based billing for Indian IT companies. Besides, the tariffs-induced macro slowdown is also now weighing on the companies that reported negative to flat growth in the last two years.'If your business still depends on armies of coders grinding through routine builds, your margins are about to get hammered,' said Phil Fersht, founder and chief executive of technology consultancy firm HFS Research. 'The smart services players will use this tech to slash delivery times, reinvent pricing and ship services like software products.'
Also Read: 'GPT-5 feels dumber': Users on OpenAI's newest model Clients, he said, will push for lower rates as AI boosts productivity, and services providers will need 12–18 months to retool delivery models and replace lost headcount-based revenue with higher-value, AI-augmented services. 'In the short term, expect margin compression before revenue growth,' Fersht added.While launching GPT-5, OpenAI said it is 'our best AI system yet'. According to the company, GPT-5 is a significant leap in intelligence over all its previous models when it comes to coding, math, writing, health, visual perception and more areas.Experts said GPT-5 has substantial advances in reasoning, accuracy and improved instruction following, along with a drop in hallucination rates. This will reduce efforts, costs and risks around legacy modernisation for clients' technology infrastructure providing an edge for IT service providers, they said.
Software service providers including large companies like Tata Consultancy Services, Infosys, HCLTech and Wipro are cannibalising their own revenues, as they are hit by a fundamental shift in the pricing model of the industry to outcome-based from employee-based. 'GPT-5 fundamentally lowers the cost structure for enterprise AI by significantly reducing API usage fees,' research firm Gartner said in a separate report.'OpenAI's enhancements — including 65% reduction in hallucination rates, and more transparent uncertainty communications — can reduce compliance risks and make GPT-5 more suitable for enterprise use cases (with the necessary guardrails), it added.
Also Read: Is the AI hype justified? OpenAI's GPT-5 will be a potential barometer But not all is doomed. The likes of upgraded GPT versions could accelerate modernisation in the longer-term, aiding IT services firms provide end-to-end services of viable AI-enabled use cases for businesses.'This is the year of advanced models, and GPT-5 is designed to address the needs of developers by reducing hallucinations and simplifying coding through intelligent dynamic routing. While this introduces risks for traditional IT, it also creates new opportunities for innovative AI business use cases,' said Anushree Verma, senior director analyst at Gartner.GPT-5 also unlocks new enterprise use cases and efficiencies through its improved correctness, steerability and productivity gains. But transformative business value requires thoughtful integration, strong governance and realistic expectations about current limitations, Verma said.Further, according to Verma, it is important to note that GPT-5 does not achieve artificial general intelligence and is an incremental improvement over previous models. And organisations should remain vigilant and proactive in addressing potential vulnerabilities.Despite the improvements, its malicious activity support remains similar to GTP-4 and hallucinations continue. 'GPT-5's advanced reasoning, multimodal processing and lower hallucination rates amplify misuse risks, like advanced scam and phishing generation or harmful outputs that risk bypassing restrictions across sessions,' the Gartner report added.Kotak also believes that new opportunities from GenAI adoption will offset revenue deflation in existing volumes over time.'However, we expect a lag in the pickup of new opportunities and for savings in software development to be deployed into these new opportunities, leading to a period of net headwinds,' it said.
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