IT Services Stocks Plunge Amid AI Fears, But Industry Leaders Push Back
Just days after prominent investors like Vinod Khosla and Citrini Research forecasted a grim future for IT services, the very industry they predicted would perish gathered in Mumbai for the annual Nasscom Technology & Leadership Forum. The halls were packed to capacity, with attendees literally squeezing through crowded corridors, reflecting a sector in vigorous debate about its destiny.
Enterprise Complexity: The Unshakeable Foundation
In discussions, while uncertainty lingered over the precise impact of artificial intelligence on business models, there was absolute unanimity on one critical point: enterprises are immensely complex organisms, and no AI tool can perform miracles without IT services firms stepping in to prepare organizations and manage the entire transformation process.
Vikash Daga, senior partner at McKinsey & Company, emphasized that AI investments yield returns only when enterprises fundamentally reimagine their workflows and possess infrastructure and data that are AI-ready. This reimagining begins with identifying bottlenecks suitable for automation, followed by testing AI solutions, and finally scaling successful implementations. For this to happen, data must be clean and integrated, not trapped in silos across different divisions. IT services companies, Daga asserted, will be indispensable in orchestrating this entire journey.
Akhilesh Tuteja, partner at KPMG in India, highlighted that code generation—where tools like Anthropic's Claude have made significant strides—constitutes only a small fraction of IT services revenue. "Even if the cost of code generation plummets dramatically, the other components are not disappearing. The hardware, network, deployment, integration, security, change management, training, and ongoing maintenance—these costs are two to three times greater than the expense of creating code itself," he explained.
The Jevons Paradox: A Trillion-Dollar Opportunity
Almost every conversation at the forum seemed to touch upon the Jevons Paradox, a concept proposed by economist William Stanley Jevons in 1865. It describes a scenario where technological progress enhances the efficiency of resource use, but the resulting drop in cost leads to an overall increase in consumption rather than a decrease.
The most compelling illustration came from Srikanth Velamakanni, founder and CEO of Fractal Analytics. He referenced Anthropic's claim that Claude can understand and modernize the legacy programming language COBOL. If true, Velamakanni argued, this presents a massive opportunity for Indian IT. Currently, migrating COBOL code costs approximately $15 to $20 per line. For a system with 50 million lines, this translates to $700 million to $1 billion and takes around 18 months. "The risk is high, complexity is immense, and CIOs naturally avoid such high-stakes projects unless absolutely necessary," he noted.
"With AI-assisted modernization, the cost per line could drop to about $2. That turns a $1-billion, 18-month project into a $100 million endeavor," Velamakanni continued. He predicted that many more CIOs would now be eager to undertake such conversions, and modernizing the entire estimated 800 billion lines of COBOL code globally could represent a staggering $1.6 trillion opportunity for the Indian IT sector.
The Boiling Frog Warning: A Call for Evolution
Despite the optimism, industry leaders unanimously acknowledged significant challenges ahead. The metaphor of the boiling frog was repeatedly invoked—a story warning that a frog placed in gradually heated water fails to perceive the danger until it's too late, symbolizing the peril of ignoring slow, incremental changes.
Tuteja applied this analogy to programmers, suggesting that those currently enjoying AI's assistance in making their jobs easier might be "enjoying the warm water" without realizing the risk of becoming irrelevant if they fail to acquire new skills. "We've faced a boiling frog scenario in every major technology shift, but this one is more intense," he cautioned.
Nitin Seth, co-founder and CEO of Incedo, referenced the story in the context of IT services companies themselves. "The path is becoming more difficult. The business model must evolve rapidly," he insisted, particularly toward delivering outcomes rather than just providing personnel to clients.
Sreyssha George, partner at Boston Consulting Group (BCG), observed that while some firms fear AI tools cannibalizing their revenue, others are proactively building new revenue streams through novel roles and offerings. "Even from a leadership perspective, the conversation must shift toward everyone rolling up their sleeves to experiment and understand how this works. I'm engaging in some vibe coding myself right now," she shared, underscoring the hands-on approach required.
The Nasscom forum thus painted a nuanced picture: an industry under stock market pressure and existential scrutiny, yet fiercely confident in its enduring role due to the intricate realities of enterprise operations, while simultaneously grappling with the urgent need for adaptation and skill transformation in the face of accelerating AI adoption.
