IT Firms Struggle to Define Benchmarks for Outcome-Based Deals

IT firms in India are shifting from traditional time-and-material pricing to outcome-based models, but lack new benchmarks. Analysts say clients seek measurable outcomes such as cost savings, efficiency, and customer satisfaction. Emerging patterns include 20-30% of fees linked to defined business outcomes, productivity gains priced 25-40% below legacy run costs, and subscription-style models with flat fees covering AI-enabled services.

Generative AI is reshaping the landscape of IT services contracts in India, prompting top firms to reassess their approaches to pricing, workforce planning, and contract types. According to a report by Jas Bardia for Mint, companies are increasingly investing in IT services to leverage AI and hardware benefits, despite current sluggish investments How Gen AI is changing IT services contracts in India^[1].

Historically, firms like Cognizant have seen approximately 15% to 20% of contracts come up for renegotiations annually, with around 15-20% of discounts or productivity benefits passed on to customers. However, the advent of AI is leading to a significant shift in contract types, with Fortune 500 clients rewriting their agreements to prioritize time-and-material arrangements over traditional fixed-price pacts. This shift is driven by the desire to gain from AI-driven efficiency How Gen AI is changing IT services contracts in India^[1].

Analysts from Nomura and Jefferies predict that AI will limit the growth in the IT services market to 1.5%-3% CAGR over 2024-29 due to several key reasons. Clients may delay IT spends due to concerns about rapid AI advancements rendering current investments obsolete. AI-led productivity gains could impact existing IT services revenues by 20% over FY25-30. Additionally, growth opportunities arising from AI may be back-ended How Gen AI is changing IT services contracts in India^[1].

Mid-sized firms are particularly affected by AI, as it reduces IT operations and software development costs. This deflationary effect is causing some firms to struggle, while larger firms are leveraging AI to increase efficiency and reduce costs How Gen AI is changing IT services contracts in India^[1].

In response to these changes, IT firms in India are shifting from traditional time-and-material pricing to outcome-based models. Analysts suggest that clients are increasingly seeking measurable outcomes such as cost savings, efficiency, and customer satisfaction. Emerging patterns include 20-30% of fees linked to defined business outcomes, productivity gains priced 25-40% below legacy run costs, and subscription-style models with flat fees covering AI-enabled services .

The shift to outcome-based models is a significant change for the IT services industry. While it presents new opportunities for growth and efficiency, it also poses challenges, particularly for firms that lack new benchmarks and metrics to measure success. As AI continues to evolve, it is likely that the IT services industry will see further changes in contract types and pricing models.