TCS layoffs: Is efficiency the new growth strategy?

Mint

4 days ago

On 27 June, Tata Consultancy Services (TCS) made headlines when it announced plans to cut approximately 12,000 jobs, marking the largest layoff in the software services major's history. The move sparked debate, with some industry observers interpreting it as fallout from artificial intelligence (AI), and warning of similar cuts at other major firms.
However, TCS chief executive K. Krithivasan attributed the decision to skill mismatches, not AI. Days later, Infosys CEO Salil Parekh said his company remained committed to hiring 20,000 freshers in FY26. The contrasting statements suggested that the layoffs were likely tied to TCS's internal restructuring rather than indicative of an industry-wide trend.
Still, the sector hasn't resolved the structural challenges that have built up over the past few years. Investor confidence in IT stocks has eroded significantly from a year ago. While major companies have delivered strong returns over five years, their stock prices have declined over the past year—falling further in 2025 and trailing the BSE Sensex's modest 3% year-to-date gain.
Much of the market pessimism stems from softening demand in key Western markets, where clients are tightening budgets while AI capabilities expand. This has forced the industry to focus heavily on cost-cutting and efficiency improvements. Major IT players have dramatically reduced their workforce—TCS, Infosys, HCLTech, Wipro, and Tech Mahindra together employ 56,000 fewer people now than they did two years ago.
Western pressures
Some of this drive comes from the sector's peers in the West. A worldwide efficiency push has driven massive tech layoffs. According to Layoffs.fyi, tech companies eliminated over 80,000 positions in the first half of 2025 alone, following 152,000 cuts in 2024 and 264,000 in 2023. This restructuring wave, spearheaded by industry giants like Microsoft, Google, and Amazon, has established new investor benchmarks for operational efficiency across the sector.
But Indian IT services companies face a different challenge. They can't simply slash costs as product companies do, since revenue depends on billable hours. At the same time, their enterprise clients are reportedly demanding 20-30% price cuts, citing expected AI-driven productivity.
The reality is more tempered. Parekh, for instance, recently told the Times of India that AI and automation are currently yielding productivity gains of only 5–15%. This mismatch between client expectations and actual impact is prompting firms to seek savings elsewhere.
Client squeeze
Part of the efficiency drive is also rooted in sluggish demand.
On TCS's latest earnings call, Krithivasan observed that decision-making delays and project deferrals for discretionary investments had persisted and worsened through the June quarter. Workforce reductions over the past two years have enabled TCS and other tier-I firms to sustain or enhance revenue per employee, a critical performance metric for these companies.
While leading IT services companies have stagnated, growth has been driven by global capability centres (the in-house tech hubs of multinational companies) and smaller players. The number of GCCs expanded by 40% in FY24 alone. Nasscom projected earlier this year that revenues of GCCs in FY25 would roughly match IT service exports, with the total industry headcount growing by 126,000 to reach 5.8 million in FY25, up from 5.58 million in FY23.
Efficiency drive
In effect, IT services majors that once powered the sector's employment boom are now prioritizing profitability over headcount growth.
Margins across leading firms have come under pressure, as pricing constraints and intensifying competition weigh on the sector. TCS, which has consistently reported the highest margins among peers, also made the boldest restructuring move—underscoring how central efficiency will be in the years ahead.
The logic is clear: stronger margins enable more competitive pricing. In a market where demand may return but pricing remains tight, efficiency will be key to success. And as the industry transitions to output-based pricing, the most efficient firms will capture the biggest gains.
But the impact goes beyond margins. The layoffs have triggered legal and social pushback. Karnataka's IT employees' union has filed an industrial dispute against TCS, alleging illegal retrenchment. The episode has also reignited long-standing debates around CEO compensation and employee protections in India's tech sector.
However, there are implications beyond financial metrics. The layoffs have sparked legal and social pushback. Karnataka's IT employees union filed an industrial dispute against TCS, alleging that the company illegally retrenched people. The layoffs have also reignited debates over CEO compensation.
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