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Artificial Intelligence (AI) could drive nearly 20 per cent revenue deflation in the global IT services industry between 2025 and 2030, creating major challenges for the sector, according to a report by Jefferies.
The report noted that while AI is expected to disrupt about one-fifth of IT services revenue by 2030, the biggest productivity gains will be in application services and business process outsourcing (BPO), compared to consulting and infrastructure services.
The pressure is likely to be most acute in high-margin areas such as application managed services and BPO, it added.
“AI to impact 20% of existing IT services revenues by FY30. We expect AI to drive a 5-35% productivity boost across consulting, Application services, infrastructure services and BPO services,” noted the report.
Jefferies mentioned three reasons for this slowdown. First, enterprises may hold back on fresh IT spending due to concerns that rapid AI advancements could render investments obsolete. Second, productivity gains from AI are expected to reduce revenues from existing IT services by about one-fifth during FY25-30. Third, clients have yet to fully realise returns on the heavy incremental technology spending of about USD 280 billion annually during 2021-24, more than double the average of USD 130 billion in 2016-20.
The report says that AI-led revenue deflation will precede AI-led growth “AI-led revenue deflation is likely to impact growth in FY27 as revenue deflation from AI may be front ended and any new spends driven by AI are likely to be back-ended” the report noted. It said while AI-driven spends may accelerate in the long term, the near-term pressure on legacy revenues could weigh on valuations.
However, the report adds that the deflationary trend is expected to cap overall sectoral growth at just 1.5 per cent to 3 per cent, compounded annual growth rate (CAGR) over 2024-29, compared to the double-digit expansion IT services had enjoyed in previous years. Non-AI related IT services are likely to grow at 1-3 per cent year on year, leading to overall IT services spending to grow.
(With Inputs From ANI)
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