IT grapples with more than 20% drop in deal pricing on macro, AI impact

India’s top software services exporters are facing a more than 20% drop in final client rates so far this year as elevated caution, tariff-led inflationary pressures and economic uncertainties dent pricing of IT projects, multiple analysts told ET.

This scenario is expected to sustain leading IT firms to sharpen focus on cost efficiencies and vendor consolidation amid continued slowdown in technology spends by most corporate clients, the analysts said.

“We are seeing pricing drops as high as 20% in some competitive situations. It is impacting all major providers who are hustling very hard to renew business and get deals over the line at very favourable rates,” said Phil Fersht, founder and chief analyst at advisory firm HFS Group.

Most experts believe that new pricing models are being proposed as most clients and software services exporters are negotiating hard on existing renewal of projects not just due to the changing business environment but alongside the impact of artificial intelligence (AI)-led efficiencies and productivity gains.

Since the Trump administration took charge in January, there was an expected uptick in spending on software development from businesses in key markets of the US and Europe. However, the seesaw of tariff announcements delayed or paused decision making on existing and new projects, as corporates and consumers tightened spending fearing high-cost pressures.

After Covid’s strong growth period, the over-$280 billion technology services outsourcing industry has seen projects tilt towards cost takeout and vendor consolidation. The industry expects this to continue this year. Such deals inherently come with pricing pressure and therefore are also very competitively fought among companies, said Aparna Iyer, chief financial officer at Wipro, in a post-earnings call with analysts.

“We have seen fees in managed IT services down by 15-23% for the same scope in the last few years, and in the last few weeks, providers have become a lot more aggressive in their pricing,” said Rahul Gehani, partner at US-based technology researcher Everest Group. However, given they can use AI for service delivery, they may be well-positioned this time to offer discounts, Gehani said.

Companies are using real-time market insights to assess whether their proposed pricing and packaging are in line with their peers.

Echoing similar sentiments, Ashutosh Sharma at research and advisory firm Forrester Group said pricing reductions have been significant in managed services work as service providers have committed to significant year-on-year productivity improvements.

“For the new projects we have not seen major changes in the rates. However, thanks to AI-enabled software delivery, we expect some reduction in the price for the same scope of work. This is still early and not very clearly defined,” Sharma added.

About half of the deal wins by IT firms are new projects.

In a post-results conference, Infosys CFO Jayesh Sanghrajka said the IT giant is using pricing advantage across all sectors through automation and margin improvement programmes. “It is about how do you price it? We have had multiple tracks that we are running under the Project Maximus (program), whether it is about new age pricing, whether it is about change requests, rotating our employees, deploying heightened lean automation in projects to get better productivity, which will mean better pricing in a way.”

LTIMindtree’s CEO-designate Venugopal Lambu told ET, “The fact that the technology landscape has changed, and their own business models are evolving, there's an opportunity for a lot of clients to reimagine their vendor landscape.”