GenAI: Catalyst for Revenue Growth or Harbinger of Cannibalization for IT Giants?
GenAI will be largely beneficial for Smaller IT Companies and will Cannibalize Revenues of IT Giants like TCS, Infosys. Let's take a look how👇
Indian IT companies have long been at the forefront of the global technology services industry, offeri wide range of services from software development to business process outsourcing. With the advent of Generative AI (GenAI), these companies face a critical juncture. While GenAI presents opportunities for innovation and efficiency, it also poses significant risks of cannibalizing existing revenue streams.
GenAI is being adopted by enterprises at a faster pace than ever. According to a research by Accenture (Screenshot below), nearly 75% of the companies are considering AI while thinking about their digital transformation plan and about 30% of the pilot AI projects are subsequently being scaled to deliver enterprise-wide projects.
However, with this GenAI adoption , there is emerging two school of thoughts on how this will affect the IT Services companies. One school of thought advocates that GenAI will be beneficial as a lot of coding and support services can be automated and hence the IT services companies would be able to finish the same project with lesser manpower and hence driving up the Net Profits. However, the second school of thought regards the same utilization of lesser manpower as cannibalization of revenues. The clients of these IT Services companies would ultimately realize that the same projects are being completed with lesser manpower and more automation and would negotiate hard on the prices and would ultimately drive down the Total Revenues for the IT Services companies.
But, is it as black and white as it sounds? I think there is more nuance to that which needs to be understood. However, first let’s look at what each side of this debate has to say about GenAI:
GenAI as a Catalyst for Revenue Growth:
Enhanced Capabilities and Offerings: Indian IT companies are rapidly building GenAI capabilities, similar to previous digital transformations. Companies like TCS, Infosys, and Wipro have invested heavily in training their workforce and developing GenAI projects. This investment is expected to drive new revenue streams as these firms offer advanced AI solutions to clients across various sectors.
Market Expansion: The demand for AI and GenAI solutions is growing, driven by the need for automation, improved security, and enhanced customer experiences. This presents opportunities for Indian IT companies to expand their market presence and increase revenues through new service offerings.
Startup Ecosystem Growth: The GenAI startup landscape in India is burgeoning, with a significant increase in the number of startups and funding. This growth indicates a vibrant ecosystem that can drive innovation and collaboration with established IT firms.
GenAI as a Harbinger of Cannibalization:
Revenue Erosion: There are concerns that GenAI could lead to revenue cannibalization by automating tasks traditionally performed by IT professionals, potentially reducing the need for outsourcing. This could lead to a significant loss in market share if companies do not adapt quickly.
Job Displacement Concerns: The adoption of GenAI raises fears of job displacement within the IT sector as automation reduces the need for human intervention in routine tasks. This could impact the traditional business model of Indian IT firms, which relies heavily on manpower.
Opinion: GenAI will be largely beneficial for Smaller IT Companies and will Cannibalize Revenues of IT Giants like TCS, Infosys
The Promise of GenAI for Smaller IT Players:
Generative AI (GenAI) has the potential to level the playing field for smaller IT companies. Traditionally, these firms have struggled to compete with giants like TCS and Infosys due to limited resources, smaller talent pools, and less robust global networks. However, GenAI tools democratize access to advanced capabilities, enabling smaller players to punch above their weight. Here’s how:
Cost-Effective Innovation: Smaller IT companies can use GenAI to automate repetitive coding tasks, streamline workflows, and reduce costs. This allows them to deliver competitive solutions without requiring the vast manpower that larger firms traditionally deploy.
Enhanced Customization: GenAI enables faster prototyping and tailored solutions, making smaller companies agile and more appealing to niche markets or mid-sized enterprises looking for affordable IT solutions.
Focus on Niche Expertise: With GenAI handling routine operations, smaller firms can focus on building expertise in specific industries or technologies, positioning themselves as specialists in areas underserved by IT giants.
Challenges for the Giants: Cannibalization of Revenue
On the other hand, the IT giants —TCS, Infosys, Wipro, etc.—may find themselves facing a double-edged sword with GenAI:
Shrinking Legacy Business: Large IT firms rely significantly on revenue from maintaining legacy systems and offering workforce-heavy services. GenAI’s automation capabilities threaten to render many of these services obsolete or significantly cheaper, directly impacting margins.
Client Insourcing: Enterprises using GenAI may choose to insource services that they once outsourced to IT giants. For example, with AI handling data management and predictive analytics, clients might reduce reliance on external IT vendors.
Commoditization of Offerings: GenAI accelerates commoditization, as even smaller players can now offer competitive solutions. This reduces the pricing power of the big firms, especially in areas like application development and maintenance.
The Strategic Response: Evolve or Risk Irrelevance
For IT giants, the rise of GenAI is both a challenge and an opportunity. Those that embrace it strategically can turn disruption into growth:
Re-Skilling Workforce: IT Giants need to focus on training their workforce to leverage GenAI, ensuring they remain relevant in an AI-driven landscape.
New Revenue Models: Firms must invest in developing proprietary GenAI tools or platforms to create differentiated offerings, rather than relying on third-party solutions.
Focus on Consulting: With commoditized services under threat, giants can pivot towards higher-value consulting roles where human expertise and strategy are still critical.
Okay, Is it mere Speculation or is this Theory in Play?
Saksoft, a small Indian IT company in their Q2FY25 Earnings call illustrated how they would be able to compete with larger players like Persistent using GenAI. Using GenAI, they are able to generate the test cases using AI. These test cases used to be written manually earlier and used to be really time consuming. A small player like Saksoft is now able to compete with Persistent for projects that were earlier out of reach because of the smaller size of Saksoft’s operations.
Conclusion
We are still in the early phases of GenAI adoption across industries. The rise of GenAI is reshaping the IT industry. While smaller IT companies stand to benefit immensely from this democratizing force, the giants face an existential challenge. The winners in this transformation will be those who adapt quickly, investing in AI-driven innovations while redefining their roles in a rapidly changing market. The shift from legacy-driven business models to AI-centric value creation will determine whether companies thrive or falter in the age of GenAI.
Great 👍👍