Rapid adoption of generative AI (GenAI) is reshaping spending patterns in the IT services industry, however, this technological change is accelerating pricing pressures for providers. Despite growing demand for GenAI-related services, clients are increasingly demanding that the efficiency gains be passed on to them, creating a challenging pricing environment.

“People are spending more money on new technologies like GenAI, but we now have to do more for the same amount of money,” said Venkatraman Narayanan, managing director and CFO, Happiest Minds.

As GenAI tools, such as copilot, increase coding efficiency and reduce training time, clients are taking advantage of these developments to demand more value for their investment, explained Narayanan.

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“For example, if a year-long project previously required 20 people, now the expectation is that the same project can be delivered by 18 people because of the utility of generative AI. from,” he said.

Also, with GenAI commanding a premium as a skill set, clients are resistant to higher prices, seeing the same resources as capable of delivering more, he added.

“Clients are asking IT companies to pass on whatever efficiency gains they are getting from GenAI,” said Parekh Jain, CEO of Parekh Consulting. He added that while clients are willing to pay more for GenAI resources on an hourly basis, they expect the overall productivity gains to translate into significant cost savings.

For example, a task that used to take 100 hours may now take 70 hours. Hourly rates may increase, but overall deal rates are becoming weaker at the margins,” Jain said. This trend is particularly evident during contract renewals, where clients are seeking the same price or less. Emphasis on extended scope on deal values.

“You can get the best price but still make lower margins. Clients now expect more savings, especially with GenAI. On renewal, they’re either coming with the same scope at lower prices. Or with increased scope at the same price,” adds Jain.

This increasing pricing pressure forces IT companies to shift their strategies. Instead of relying on price increases, firms are focusing on expanding customer relationships and increasing business volume to sustain growth.

“The demand side offers opportunities, but the supply side is witnessing an adjustment, with clients expecting companies to deliver more with fewer resources,” Narayanan said.

Julie Sweet, CEO, Accenture, also hinted at the competitive landscape during the company’s recent post-earnings call with analysts. “It’s a very competitive market, which we’ve been saying every quarter, and we’ve seen lower prices across the business, which have been pretty consistent. Clients have held back spending, especially on smaller deals. It is,” he said.

Sweet further highlighted how Accenture is tackling these challenges by combining GenAI capabilities with modernization initiatives. “We have talent, full-stack engineers, GenAI, and a platform called GenWizard. Clients are coming to us not to decommission legacy applications, but to modernize while reducing costs.