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Generative AI: A Hype or Reality for the Technology Services Industry?

July 2023

Read Time: 5 minutes

Generative AI is the next big thing in data-driven digital transformation, enabling faster and more accurate decision-making and driving competitive advantage. The need for generative AI solutions has manifested across all the verticals as it has the potential to create new forms of creative content, accelerate R&D cycles, and bring in a broader business value through contextualization. The race to capture IT budgets is heating up, and IT service providers that will successfully invest in generative AI capabilities will be well-positioned to win new business and capture a larger share of the growing budget.

Cloud - from lift and shift to value generation

As generative AI matures, it is clear that this technology has the potential to be even more transformative than the cloud. While cloud transformation gained significance in the mid-2010s, it was still limited to a group of sectors and industries. For a long time, multiple organizations were not able to understand the value which could have been delivered through cloud computing. Organizations relied heavily on lift and shift and concentrated only on cost optimization and ignored the broader perspective and benefits of cloud infrastructure. However, the COVID-19 pandemic opened up businesses in a big way and forced organizations to think harder about the true value that can be generated. The same organizations had to reorient the cloud architecture to generate value and stay competitive.

Generative AI - a shift larger than cloud

In the future, generative AI will be embedded in every product as the cost dynamics improve and will bring a change in the way developers look at systems and processes and how end users fundamentally do things. What’s important is that organizations across verticals do not make the same mistake of seeing the impact on a shorter horizon but consider the long-term impact of their investments in generative AI-driven processes. IT services providers will play a key role in not only identifying relevant generative AI use cases but also helping in execution. As the industry matures, we will see more horizontal and vertical specific language models which can be embedded in the solutioning of the target use cases and provide more contextualised solutions.

Impact on different sub-segments of IT services

In the long term, AI will disrupt every industry, and as a result, every business will eventually become an AI business with a specific vertical focus. For IT services specifically, the impact of generative AI is going to be tremendous across various sub-segments. The ones that are expected to be most impacted are the likes of backend operations and software development. These industries will have a deflationary impact due to a productivity increase of ~20-40% over the next 5 years. That said, organizations which can show nimbleness will be able to adapt to this new dynamic and create new avenues of demand channels. Eventually, what we expect is a rise in the base of higher-wage employees. On the demand side, we expect more risk to be shared with service providers in the form of outcome-based models and productized offerings.

Initiatives/investments by IT services players

IT Services players have been appreciably quick in announcing initiatives to embrace and develop generative AI capabilities to benefit their customers. In the last 3 months, leading Indian IT firms including TCS, Wipro, Infosys, LTIMindtree, Tech Mahindra, Mphasis, and Cognizant have been on a spree to launch their generative AI platforms, while expanding their partnerships with leading hyper scalers. The focus remains to offer clients an enterprise-scale platform to explore unprecedented use cases with generative AI in a responsible way, along with enhancing internal capabilities to effectively manage workloads.

Emergence of generative AI-specific companies

The advent of generative AI is a fundamental change in the way people used to deliver services. It is a change in the basic assumptions of the way IT services firms used to function and operate. In our view, scale will not be a big competitive advantage for generative AI-led services in the beginning. What it would do is, open a gap for multiple smaller new players targeting select use cases. Players who would win will be the ones which will bring in strong domain understanding, create contextual synthetic data, and find avenues for exclusive data sources for enterprise applications.

Will India be at the forefront of AI?

As per data from LinkedIn, India has the highest concentration of AI talent across all countries. As per NASSCOM, India's tech talent is 3X more likely to have or report AI skills than other countries. In the roadmap to become the next economic powerhouse and spearheading Industry 4.0 initiatives, the Indian government is also taking significant steps to develop the AI ecosystem by implementing regulatory policies. The groundwork and the infrastructure will help cater to the global demand supply gap of existing AI talent needs and put India at the forefront to adapt to new AI roles which will emerge such as domain specific prompt engineering.

There is no doubt that we are in a generative AI hype cycle, but it’s safe to say that we can visualize the impact it can create in our lives in a better way. The same early interest was seen when the internet, mobile, and cloud came in. IT services companies that fail to invest in generative AI capabilities will be left behind and the ones which can adapt will manage to take a pie of budgets allocated for generative AI initiatives by enterprises. Specifically for the Indian ecosystem, with over 1.6 mn AI and Digital talent pool, India has a significant competitive advantage and is in a unique position to play to its strengths and become a global leader in the ecosystem.

(This article was first published by Moneycontrol)

Author: Shobhit Jain, Managing Director and Co-head, Enterprise Technology and Services Investment Banking, Avendus Capital

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