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Artificial Intelligence (AI) could trigger around 20 per cent revenue deflation in the global IT services sector between calendar years 2025 and 2030, posing significant headwinds for the industry, according to a report by Jefferies.
The report highlighted that AI will impact 20 per cent of IT services revenue by 2030, but a higher productivity boost will be seen in application services and BPOs relative to consulting and infrastructure services. The impact of AI will be particularly pronounced in high-margin streams such as application managed services and business process outsourcing (BPO). "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. Three key reasons were cited 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. "While we expect underlying growth in non-AI related IT services to grow at 1-3% every year, the 20% revenue deflation in these services will result in a 1-3% decline each year. As a result, overall IT services spends globally may grow in the range of 1.5-3.0% CAGR over CY24-29," said the report. The report says mid-sized IT firms have a higher risk of AI-led revenue deflation vs. their larger IT peers, but they are likely to deliver better growth. "Despite mid-sized IT firms having higher risks of AI-led revenue deflation, we believe they are still better placed to deliver higher growth as they are better placed to gain market share," noted the report. (ANI)
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