2025 – What to Expect for the Indian IT Services Industry - Industry News

By Narsimha Rao Mannepalli

As we get into December, and with the cloud of US presidential elections clearing up and with the promise of AI, here is what I believe we should expect to see in 2025 for the Indian IT services Industry.

Demand & Growth:

On demand front, we should expect to see some good news, with discretionary spends coming up in some measure. Cuts in the discretionary spends have impacted growth in 2023 and 2024. In 2025, large businesses perforce have to invest into Projects and Programs they have withheld. This coupled with the disruptive nature of AI will mean higher discretionary spends in 2025.
The Fed rate cuts and the pent up demand in the Financial Services sector(with 2 years of negative trajectory) is a definite positive going into 2025 and we should expect demand uptick here. FS, healthcare and Insurance sectors will see demand return in good measure.
One emerging Head-wind to growth however is the stress on bottom-line for the Automotive sector Globally and particularly in Germany – this will possibly impact IT Providers who have a higher exposure on Automotive and to Europe. Manufacturing and Hitech sectors are likely to see lesser traction in the immediate term.
I believe we have seen bottoming out of budget cuts / ramp-downs of large programs. This is positive such sudden ramp downs have impacted growth negatively for 2 years.
The recent commentary from the companies has spoken of some early green-shoots on growth is a good sign going into 2025.
IT service Vendors will see a better demand environment as the budgets and projects open up in Jan/Feb ’25 timeframe.
With this demand environment Tier-1 Vendors should see a mid to high single digit growth rates in 2025 up from the low single digit growth we have seen in 2024. Lack of any mega deals in 2024 will make it difficult for these companies to go into double-digit.
Tier-2 Vendors who have seen double-digit growth in 2023 & 2024 should expect to see growth accelerating in 2025. However, the ability of these companies to scale will be severely tested and we should expect to see some very good performances but equally some of them will struggle to keep pace.
In Tier-2 we will see emergence some very strong players – particularly the specialized ones focusing in ER&D and/or Data & Analytics space.
There is likely to be minimal or no impact on growth due to any US Visa related regulatory changes – if at all it will make some enterprises push for higher off-shoring due to shortage of skills. The established IT Vendors have all built significant local Talent muscle and will tide over any shift in Location-based Talent demands.
On the margin front, however, the higher demand we will see will not ease the pressure on margins. Companies across Tier-1 & Tier-2 will see continuing pressure and the execution excellence of companies will be tested to sustain or improve the margins.
Number of companies in the industry have seen leadership transitions in the last 24 months and effectiveness of these transitions will be visible in 2025. This transition will hurt few companies and now is probably the right time to focus on addressing this.

Job Market

The positive demand situations for 2025 will mean good news for the Job Markets in US, Europe, India and the traditional Tech job markets.
It’s important here to note that in the recent quarters, most companies have seen a positive head count addition after a downtrend for 5-6 quarters. This signals a complete burn down of idle capacities across the industry and from here any demand uptick will straight translate to demand in the Job markets.
The uptick in the Jobs market will be visible both for entry-level hiring from colleges and for lateral hiring of experienced professionals.
We should expect to see a very active job market by mid-2025 with a potential to push up the Attrition levels and Employee costs for organizations. Companies will be better advised to firm up their retention plans from now to tide over this impending situation.
The news on the annual compensation hikes and promotions has not been too great in 2024 from most companies and that could create additional pressure on retention in 2025 if not addressed soon.

AI & Its impact

Businesses and Service Providers both understand what AI can do for them much better now and that is good news.
Spend in AI is likely to grow fastest in % terms in 2025 – but it comes on the back of low base. A big part of this spend will be on software & compute infrastructure and not as much on services.
AI will drive significant growth (in absolute terms) for both Cloud & Data related services & service lines. As per some reports, for every 1$ spend on AI, Enterprises are likely to spend upto 4 $ on Data related programs.
While a lot of current Compute Infrastructure is available on the Public Cloud platforms, for the initial implementations Enterprises are likely to invest into Private & Edge Clouds and this is good news for the Service Providers.
In 2025, the biggest impact of AI will be in driving up efficiencies and productivity with focus on Application, Infrastructure & Business Process Mgmt. These lines of business will see all Vendors make aggressive pitches & bets and offer big Cost savings to Businesses. This is likely to see churn in the business for these service-lines with large re-bids of existing work and market-share shifting across Vendors.
However, the above will come with added pressure on Costs & Margins. The irony of the situation is that the Businesses are expecting (and Vendors also committing to) much higher productivity gains than what AI is able to deliver right now. This mismatch comes with pressure on execution and margins.
AI agents will make their way into many functional areas in an Enterprise. Areas which have not been impacted by Technology in a big way will likely benefit most from this new solution. Functional areas such as Legal, Finance, HR, Recruitment, Procurement will all see significant benefits and they will see superior productivity, but this is unlikely to result in much job reductions.
While the excitement around AI started with ChatGPT and LLMs, 2025 will see greater investments by Enterprises and IT Providers investing in SLMs targeting specific Business domains and/or functional solutions.
The one unresolved issue for AI at this point seems to one of defining and delivering tangible ROI. In this scenario any AI investments by Enterprises is more out of FOMO and that is likely to dampen the enthusiasm beyond a point.
Lastly, the investments into competency build in AI will continue to grow in 2025 across all IT Vendors.

Global Capability Centers (GCCs)

Clearly the last 2 years belonged to the GCCs and they have at the forefront of growth for the IT services industry. This trend will continue into 2025 with most of the new players continuing to grow well into 2025. The higher budgets and higher discretionary projects will lead to more work coming to the GCCs.
However, as we get into the second half of 2025, as the Job Market picks up and the GCCs mature, we should expect to see some of them challenged to scale up. While this may not slow down the upward trend for GCCs the peak would probably have been reached by mid-2025.
GCCs who are investing into Talent Mgmt lifecycle such as Campus hiring and Large scale competency building are likely to emerge successful and those depending on market hiring for specialized skills will hit roadblocks sooner than later.

All in all, as is the case almost at all times, the IT services industry is an interesting times and we should expect to see many positives in 2025 to bring back some of the mojo.

The author is a veteran of the IT industry with 30+yrs of experience and played prominent leadership roles (was the Co-Head of Global Delivery & Executive Vice President at Infosys). He is currently an Angel Investor and advisor to established enterprises and startups in the AI space.

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