AI-Driven Efficiency Gains Force IT Service Providers to Rethink Deal Structures

The rise of artificial intelligence is not just transforming how IT services are delivered; it's fundamentally altering the financial landscape of the industry. Faced with AI-driven efficiency gains that shrink project timelines and reduce the need for large teams, IT service providers are now grappling with pressure to offer significant discounts on contracts. Industry analysts estimate that new and renewed contracts are seeing markdowns of 20-30%. This shift is prompting a wave of innovative deal structures designed to share AI's benefits with clients while safeguarding service provider revenue.

Instead of simply cutting prices, companies are repackaging discounts and productivity gains into value-added services and add-on products. This allows them to maintain revenue streams while still offering competitive pricing. Wipro, for example, highlighted a "self-funded model" in its contract with Dutch telecom operator Odido, where savings from increased productivity are reinvested into new digital initiatives. This approach is becoming increasingly common as companies compete aggressively for clients and market share.

Cognizant CEO Ravi Kumar S emphasized that this trend reflects a change in service delivery rather than a decline in overall tech spending. Clients are reallocating savings into "building agentic capital," suggesting a strategic shift towards leveraging AI for greater autonomy and innovation. Similarly, Shobhit Jain of Avendus Capital noted that self-funded structures enhance the value proposition by using AI to cut operational costs and reinvest those savings into transformative projects.

The pressure to share these productivity gains stems from clients recognizing the quantifiable benefits of AI throughout the software development lifecycle. As Forrester analyst Biswajeet Mahapatra explained, the ability to achieve the same results with fewer full-time employees (FTEs) thanks to AI assistance is prompting clients to demand a share of the savings. This means that all contract renewals and new deals are now being evaluated through the lens of potential discounts.

Companies are experimenting with various approaches to structuring these self-funded deals. L&T Technology Services focuses on delivering rapid-value capabilities in the initial phases of multi-year engagements, such as AI-enabled engineering and predictive insights. These early wins generate tangible savings that can then be reinvested. Happiest Minds establishes a cost baseline in the first year of a contract and shares efficiency gains achieved in subsequent years, typically around 10% of the initial baseline, with the client. A portion of these shared savings is then reinvested into addressing "innovation backlogs," or pending technology projects.

Beyond competitive pricing, IT firms are also looking to protect their revenue streams as legacy businesses shrink due to AI. According to Peter Bendor-Samuel of Everest Group, leading tech services firms are achieving 25% to 45% increases in productivity through AI, potentially leading to a 50% revenue compression for IT firms in the next 3-4 years. This emphasizes the urgency for service providers to adapt and find new ways to structure deals that benefit both themselves and their clients.

This evolution in IT contract structures represents a significant shift in how value is perceived and delivered in the age of AI. As AI continues to mature and drive further efficiencies, expect to see even more innovative deal models emerge, fostering a collaborative ecosystem where both service providers and clients can thrive.

Editor’s note: This article was independently written by the Scoopliner Editorial Team using publicly available information.