AI Pushes IT Services to Outcome-Based Deals as Clients Demand Results

Traditionally, the IT services sector, a $282.6bn industry in India, worked on a model where they charged based on the time and resources they provided to enterprise clients. In times of economic growth, the model flourished as companies spent more on modernising their backend systems and taking advantage of low-cost offshore customer support. But during downturns, firms shift focus towards outcomes from their IT investments. 

Today, amid uncertainties over US tariffs and constrained discretionary spending, a similar situation seems to have emerged. Generative artificial intelligence (GenAI) is accelerating the demand for outcome-based deals rather than those based on input. 

The latter is an industry pricing model called time and material (T&M) in which services are billed according to the hours vendors (IT firms such as Infosys, TCS, HCL Tech and others) spend on a project and the number of staff involved. 

While companies do not provide separate data on deal structures, commentary from several leading IT companies and industry analysts has made this shift public. 

“Of late, we are also seeing some of these conversations shift from input-based to outcome-based models where value is measured in tangible business impact,” Tech Mahindra, chief operating officer, Atul Soneja told Outlook Business in an exclusive interview. 

Noida-based IT services company Coforge’s management told brokerage firm Motilal Oswal Financial Services that there is “fatigue” over generic solutioning and traditional T&M-led pitches. 

“Demand recovery is uneven. While discretionary spending is still constrained in some areas, there is enough demand for the right vendors as per management (Coforge). Clients with well-defined budgets are prioritising transformational programmes but fatigue has set in for generic solutioning and traditional T&M-led pitches,” the brokerage said in a note on August 28. 

IT services firm, Tata Consultancy Services (TCS), chief executive K Krithivasan, also noted this during the post-earnings conference call on July 14. 

“There are some cases where we work based on the outcome. Some customers prefer to do it on T&M because as the project evolves, they want to see how they benefit from the results. They start with T&M and then after a period of time move towards a fixed-price model,” he said. 

For a long time, India’s IT services industry’s deals were based on providing manpower to complete projects explains Biswajeet Mahapatra, principal analyst at Forrester, a global research firm. Under this, the standard model was T&M billing, charging clients per hour or per day for each full-time equivalent. For example, $50 per hour for a developer, $25 for a tester and so on. The longer the project ran the higher the billing as charges were directly linked to the time people spent on the project. 

“Fixed-price contracts also existed but mostly for projects that were well-defined. In digital transformation projects however, clients usually had only a broad vision—like deploying systems, applications and products in data processing, Microsoft Dynamics 365 or revamping user and employee experiences without clear details. Since requirements evolved along the way T&M became the safer billing approach,” he said. 

Signs of ‘Softness’

According to Amrinder Singh, president and head of Europe, West Asia and Africa and Asia-Pacific at Hexaware Technologies, a global IT firm, demand for outcome-based deals rises whenever the industry shows signs of "softness". 

"Every time there is a softness, I would say both the clients have started demanding more out of the money they spent and the service providers tend to innovate more," said Singh in a conversation with Outlook Business. He said that the industry has been through at least three or four such cycles of "softness", be it the great financial crisis or the Covid-19 pandemic. 

"The leveraging of automation, leveraging of cloud, all of that has pushed the clients and the service provider and the entire ecosystem more and more towards outcome and output-based models rather than just input-based models," said Singh. He added that "AI will only accelerate that change". 

Global research and advisory company Gartner has observed this transition over several years. The momentum for outcome-centric agreements, however, has increased significantly in recent years, says DD Mishra, its analyst. 
 
"Clients now prioritise specialisation over general capabilities and expect providers to clearly define the expected outcomes—whether IT-specific or business-related—right from the outset. Industry expertise is crucial as clients want assurance that providers understand the unique challenges and nuances of their sector," he noted. 

But Mahapatra noted that while outcome-based or value-linked pricing was seen as attractive, it is hard to implement. 

"The challenge was defining ‘value’: is it a 10% sales increase, 20% more customer interactions or 5% higher profits? Service providers needed deep knowledge of the client’s architecture, dependencies and integration landscape to confidently commit to outcomes," he further added. 

AI Pushing Outcome Demand 

 AI can analyse infrastructure, applications and integrations to provide a clear view of challenges and benchmarks, said Mahapatra. 

"This makes it easier to estimate outcomes and move towards value-based pricing. While time and material remain dominant—because projects are often unpredictable—outcome-based models are gaining traction as digital transformation evolves from traditional business software projects to cloud, data analytics and UI/UX initiatives," he said. 

While it is unclear how many deals are being done under outcome-based agreements, some IT firms have started reporting their GenAI deals. In its latest quarter (Q3, 2024–25), Accenture booked $1.5bn in new GenAI bookings. TCS management said during its Q1 earnings that it has about $1.5bn worth of AI and GenAI projects in the pipeline as of the quarter ended June 30. In the same period, Capgemini, a global consulting, technology and professional services company, reported that “GenAI and agentic AI” made up more than 6% of its bookings. 

"They may have deployed AI in many projects or used AI-based solutions or accelerators in many others but that does not mean the project was on outcome-based pricing," said Mahapatra. 

AI Productivity Gains 

According to Mishra, with advancements in AI, productivity improvements are more readily attainable, prompting clients to demand immediate cost reductions at the start of engagements to capture these efficiencies. 

"It is now common for providers to commit to upfront annual cost reductions of 5–10% in many service areas. Whereas providers previously retained much of the benefit, clients are increasingly insisting that these gains be passed on to them," he said. 

A report by investment banking firm Jefferies this month explained the productivity gains AI can bring to different IT services projects. For instance, in application services it sees a 15% productivity benefit, noting that "over 20% of code output is being generated using AI tools". The brokerage adds that companies are "already sharing 10–15% productivity benefits with clients on application services". 

In the infrastructure services segment, the US brokerage expects 5–10% productivity benefit—lower than application services. It adds that GenAI can help drive efficiency in automating manual workloads such as creating documentation, log monitoring and audit. 

In the lucrative business process services, they estimate a total productivity benefit of about 35% over the next five years. In consulting services, productivity benefits are limited to 5%. 

But these gains, according to Jefferies, would impact IT firms’ revenue growth in 2026–27. It projects IT services revenue to grow at 4–5% annually between 2023–24 to 2028–29, driven by 14.7% growth in AI-related services while non-AI spends remain subdued at around 1–2%. 

It further adds that AI is likely to limit growth in the IT services market to 1.5–3% compound annual growth rate (CAGR) during the same period for three key reasons. 

"Clients may delay IT spends on concerns of rapid AI advancements rendering current investments obsolete. AI-led productivity gains may impact existing IT services revenues by 20% over 2024–25 to 2029–30 while growth opportunities arising from AI may be back-ended. Clients have not fully realised return on investments on elevated incremental tech spends," the report notes. It says that companies spent over $280bn between 2021 and 2024 on IT services compared to just $130bn between 2016 and 2020. 

Rise of Agile Deals 

Mahapatra says earlier IT companies chased mega-deals worth $500mn or more. Those are less common now. With AI and related technologies deal sizes are still large but are broken down into smaller chunks—like separate projects for migration, AI implementation or data analytics. This has opened opportunities for smaller firms which are now getting more traction. 

"Smaller firms benefit because decision-making is faster, they adopt new technologies like AI more quickly and they can deliver quality solutions at lower entry costs. Larger firms are no longer expected to repeatedly land huge $500mn contracts like in the 1990s or early 2000s. Instead, the trend is shifting towards smaller more agile deals," he noted. 

That is why Jefferies expects mid-sized IT firms "to grow their earnings faster at 11–26% CAGR (between 2025–26 to 2027–28) driven by their higher revenue growth and margins that have scope to improve" even amid overall lacklustre aggregate earnings growth. 

Given the muted revenue growth and margin pressures, aggregate earnings growth for the overall IT firms Jefferies cover is likely to remain subdued at 6–7% levels.