Indian IT Cannot Escape AI Cannibalisation

For India’s $250-billion IT services industry, artificial intelligence is no longer just a growth lever; it is beginning to eat into the very foundations that built it.

That tension came into sharp focus during Tata Consultancy Services’ earnings call, where the country’s largest IT services firm effectively acknowledged what many in the industry have been reluctant to say openly: AI will cannibalise traditional revenue before it replaces it.

When an analyst asked whether the current AI cycle mirrors the digital transformation wave—where initial cannibalisation eventually gave way to stronger growth—TCS CEO K Krithivasan was unequivocal on the structural shift.

“You would expect AI revenues to increase, and some of the traditional revenues to gradually taper down. Over time, AI revenues should more than compensate for the reduction in other parts of the services,” he said, cautioning that timelines may vary depending on different cycles.

The admission underscores a fundamental reset underway in Indian IT, where firms are being forced to rethink long-held assumptions around linear growth, utilisation, and headcount-driven expansion.

TCS Chief Operating Officer Aarthi Subramanian expanded on how this shift is playing out on the ground, noting that enterprises are now reclassifying technology budgets under AI.

She outlined three distinct buckets of spending—ongoing digital transformation, AI-led modernisation, such as tech debt reduction, and pure-play AI transformation. These are directly impacting business outcomes, slashing the share of legacy services.

That creates a structural tension. AI-led services are growing rapidly, but from a small base, while traditional services—application development, infrastructure management, and support—face pricing pressure as productivity gains are passed on to clients.

Executives estimate that AI could drive 1–3% deflation in these core services, compressing revenues even as efficiency improves.

At a recent virtual interaction organised by Zinnov, Infosys CEO Salil Parekh acknowledged both sides of the equation. “We see clearly… the areas where we see the growth and equally we also share that we see the compression,” he said, highlighting the dual impact of AI on revenues.

HCLTech CEO C Vijayakumar went further, framing cannibalisation as a necessity rather than a risk. “We truly believe AI is the biggest disruption moment for the services industry, and we need to reinvent ourselves, which means don’t be afraid of cannibalising your revenues,” he said.

He also sent a striking message to his teams. “If you don’t meet your numbers, I am happy to adjust your numbers as long as that’s due to you passing on the AI benefits.”

Even TCS has signalled a similar willingness to prioritise long-term positioning over short-term revenue protection. At a Nasscom event, Krithivasan said the company is encouraging employees to proactively pass on AI-led efficiencies to clients—even if it impacts revenue.

“We are telling associates that if you find that you can do something faster, better, cheaper with AI, you should probably go and tell your customers, even if it cannibalises revenue,” he said.

This marks a decisive shift for an industry historically built on billing for effort rather than outcomes.

Shaky Foundations

Phil Fersht, CEO of HFS Research, believes the disruption goes deeper than pricing pressure—it challenges the very economics of the services model.

“What killed EDS (Electronic Data Systems) wasn’t demand. It was the collapse of the unit economics they were built on, and their inability to reinvent fast enough as the model shifted,” he tells AIM.

EDS was one of the world’s earliest and most influential IT services companies, a pioneer of outsourcing long before it became mainstream.

“AI doesn’t just lower costs—it redefines what clients are buying altogether. This is no longer a labour arbitrage versus onshore conversation. The real question is whether you’re selling effort at all,” he adds.

Fersht argues that the winners in this cycle will be those willing to disrupt themselves early. “The firms that thrive… will be the ones that aggressively pivot to IP, platforms, and AI-led outcomes, even when it compresses short-term revenue,” he notes.

Jagdish Mitra, the former Chief Strategy Officer at Tech Mahindra and Founder of HumanizeTech.ai, says that the impact of AI goes far beyond previous technology shifts, striking at the core of the services model itself. 

“The game is changing such that one person can do three people’s job… the team size is no longer relevant,” he adds, underlining how AI is directly reducing the need for human effort—the foundation of IT services revenues. That, he argues, makes cannibalisation unavoidable. 

“You will have to cannibalise some of your own work,” he notes, adding that companies will be forced to use technology to deliver the same services at lower cost, even if it hurts revenues. 

“My revenues will go down… I am using technology to offer the same thing at a lower cost.” The transition, he warns, will be painful, with firms facing the dual burden of investing in AI while dealing with excess capacity. 

“Most likely I have to let go of these 15% [workforce],” he puts it bluntly. “There is no other way out… there is no gradual answer to it.”

The industry sits at an inflection point. AI is driving new demand, faster deal cycles, and fresh opportunities—but it is also compressing pricing, shortening project durations, and reducing the need for large-scale human effort.

For companies like TCS, Infosys, HCLTech, and others, the challenge is whether they can reinvent their business models fast enough.