IT Industry Faces Cost Pressures Amid Shift to Outcome-Based Pricing Models

India's IT services industry is facing cost pressures due to a shift from effort-based to outcome-based pricing models, driven by AI's productivity boost. This shift is causing clients to question why they are still paying the same per FTE. Industry experts predict a full-stack transformation, with a move away from rate-cards, FTEs, and T&M billing models. IT players are being forced to cannibalize their revenues, even as they have yet to see returns on investments from AI.

The Indian IT services industry is experiencing heightened cost pressures due to a fundamental shift in pricing models, driven by the productivity boost from artificial intelligence (AI). This transformation is causing clients to question the current per full-time equivalent (FTE) pricing structure, as AI technologies are enabling swifter outcomes at lower costs.

The industry, which clocked revenue of about Rs 24.3 lakh crore ($283 billion) in 2024-25, is moving towards outcome-based pricing models. According to industry executives and experts, this shift is not just about how services are delivered but also how they are sold, priced, and measured. Saurabh Gupta, president of HFS Research, noted, "Pricing is shifting from effort to outcomes, and that means a full-stack transformation" [2].

The traditional software services pricing model has largely revolved around rate-cards, FTEs, and time and material (T&M) billing. However, with generative AI and agentic AI boosting productivity by 20-40%, clients are demanding a more value-based pricing structure. This has led to a situation where IT players are forced to cannibalize their revenues, even as they have yet to see significant returns on their investments in AI.

The announcement of more than 12,000 layoffs by Tata Consultancy Services (TCS) underscores the pricing pressure in the industry. Companies like TCS, Infosys, and HCLTech have acknowledged the emergence of new pricing models, with TCS chief executive K Krithivasan noting that the industry is seeing both outcome-based and T&M pricing models [2].

While not all top companies are moving away from T&M pricing, some are adopting AI-first, platform-led services anchored on outcome-based contracts. However, the industry is still grappling with the challenge of integrating these new pricing models without cannibalizing their existing revenues.

Looking ahead, industry experts predict that many mid-tier, small-tier, and startup companies will continue to benefit from higher output with the same number of people, further mounting pricing pressure on larger companies. Companies will need to take bold, unconventional decisions to adapt to this new reality and ensure their long-term success.

References:
[1] https://theoutpost.ai/news-story/grid-dynamics-reports-strong-q2-2025-growth-driven-by-ai-and-finance-services-18567/
[2] https://m.economictimes.com/tech/information-tech/it-grappling-with-cost-pressures-as-pricing-shifts-from-effort-to-outcomes/articleshow/123080094.cms