IT firms are seeing a change in how clients engage their services

Fortune 500 clients waking up to AI’s gains from fewer people and faster work are considering so-called time and material contracts which are based on actual time and labour spent—At least, before committing to the traditional fixed-price pacts.

A time and material (T&M) contract is an agreement where a client pays a service provider based on the actual hours worked by their team and the cost of materials or resources used, rather than a fixed upfront price for the entire project.

“There are some (contracts) where we do based on the outcome. There are some customers that expect that this is better to do it on T&M (time and material),” said K. Krithivasan, managing director and chief executive of TCS, during the company’s post-earnings conference call with analysts on 10 July.

As agentic AI evolved, clients also want to see how they are able to benefit from the results,” Krithivasan said.

“So, they want to do it on T&M. And then after a period of time, move towards the fixed-price model. So, we are seeing both options here.”

The change reflects the disruption that AI is causing for India’s $280-billion information technology services industry. And it comes when clients are still cautious about discretionary spending amid global uncertainty and AI risks.

LTIMindtree, too, saw similar changes in its contracts with clients.

“I saw a positive response when the discussion was about converting some of the time and material contracts to managed services and output-based construct,” said Venu Lambu, managing director and chief executive officer of LTIMindtree, in an interview with Mint on 18 July. According to Lambu, this was driven by an AI-led solution provided by the company.

“Our clients are excited about it; so they want to hear more from us, and they want to see how we can help them to transition from the time and material contract to a more outcome or managed services-based construct, and we see that as a big opportunity,” said Lambu.

Both TCS and LTIMindree had a mixed first quarter of FY26. TCS ended with $7.42 billion in revenue in the three months through June, down 0.59% sequentially, whereas LTI Mindtree reported a revenue of $1.15 billion, up 1.97% on a quarterly basis.

The revenue breakup of Wipro Ltd, India’s fourth-largest IT services firm, over the last two years also shows how IT sector contracts are changing.

Wipro’s share of fixed price contracts reduced to 52% of overall revenue at the end of the three months through June from 56% at the end of the April-June 2023. During the same time, its share of time and materials contracts increased to 48% from 43%.

“Clients agree to this as it shifts the risk to the IT service providers for cost overruns and scope creep, and forces the service providers to generate the productivity that AI promises,” said Peter Bendor-Samuel, founder of Everest Group.

As of now, IT service providers get paid in a staggered manner rather than a lump-sum amount at the end of the year. Such instances of deferring payments arise due to macroeconomic uncertainties, which might compel companies to service their payment obligations to their IT vendors at a later date.

According to Phil Fersht, chief executive of HFS Research, the change in ways through which companies engage with IT firms is brought about as clients seek lower prices from IT outsourcers.

“Enterprise customers are demanding lower prices from their service partners, which is shifting the focus away from the provision of people-based effort to the provision of the actual work,” said Fersht.

AI is also prompting companies worldwide to use fewer people in operations as automation is replacing manual, redundant labour. For IT outsourcers, this poses a challenge as they are traditionally billed on the basis of the number of employees deployed for the client.

“Net-net, if customers demand a 20% price-cut, the only way the likes of TCS and LTIMindtree can deliver on those savings, while maintaining their own profit margins, is with the smart use of AI to provide the same services with fewer people,” said Fersht. “That means the way these contracts are developed needs to shift from pay-per-FTE (full-time equivalent) to a consumption-based model, which we at HFS are terming ‘Services-as-Software.’”

Bendor-Samuel, however, expects the trend of changing contracts to fizzle out: “It is unlikely to be a permanent trend as outcome and fixed pricing is more complicated and, over time, the FTE or time-based models, which are far simpler, are likely to win out.”