Davos 2025: IT firms must reinvent with Agentic AI; rethink traditional labour arbitrage, says Francisco D'Souza

Francisco D'Souza, co-founder & managing partner, Recognize

Information technology (IT) firms need to reinvent themselves as nascent technologies such as Agentic Artificial Intelligence (AI), Generative AI (Gen AI), and other future forms are bound to impact the traditional IT services industry, says Francisco D'Souza, co-founder & managing partner of private equity firm Recognize.

He also said that the traditional labour arbitrage and offshoring models will only lead to modest industry growth.

The comments of an IT industry veteran, who has been in the industry for almost three decades, assume significance as it comes at a time when the IT industry is seeing multi-decadal low revenue growth and hiring rate.

“There’s no question in my mind that agentic AI, generative AI, and other forms of AI that will come after will have an impact on the services industry. And this is an opportunity for services companies to differentiate themselves. But also they have to reinvent in the new world,” D'Souza told Moneycontrol at the World Economic Forum in Davos on January 22.

Agentic AI represents a step forward from traditional AI, capable of independently making decisions, planning, and reasoning to accomplish user-defined tasks with minimal human intervention.

D'Souza said that the earlier double-digit growth rates were driven by the offshoring shift, however, that advantage has equalised now across the industry.

He referred to this as “the entitlement growth rate of Indian IT services.”

“Unless individual firms in the industry figure out how to differentiate themselves beyond the traditional differentiation of offshoring and labour arbitrage and so on, their natural entitlement rate will be the industry rate,” he further said.

D'Souza's views also echo with another industry veteran TK Kurien, who led Wipro from 2011 to 2016 as CEO. Kurien told Moneycontrol earlier that the Time and Material (TNM) model used by IT services companies needs a change and those who implement it will be successful.

Data shows that the contribution of TNM contracts to IT firms' revenue has halved to 35 percent over two decades due to a shift towards fixed-price and outcome-based models, signalling a shift in the way the industry works.

Agentic AI

Meanwhile, D'Souza added that Gen AI and Agentic AI are expected to automate certain tasks traditionally performed by technology services firms.

Nonetheless, he caveated that the exact trajectory of this transition still remains hazy. “It’s somewhat of an unknown now.”

Recognising the opportunity as well as the potential challenges, India’s leading IT firms— TCS, Infosys, Wipro, HCLTech, and Tech Mahindra—are betting big on Agentic AI, a technology they believe will transform business operations and drive new value creation in 2025.

For example, Infosys has developed about 100 Agentic AI solutions and increased its small language model’s (SLM) tally to four in Q3 from two in the previous quarter.

Nevertheless, D’Souza highlighted that these nascent technologies are moving “incredibly fast” so whatever state-of-the-art tech we see today will be different and better next year and the year after that and so on.

“We're still at the very early stages of the innovation cycle.”

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He further said that the productivity benefits numbers might be different currently and it will take time to settle.

In 2024, too, the IT industry veteran told Moneycontrol that the seminal shift that AI has brought is going to fundamentally change the IT services industries, especially at a time when the macroeconomic conditions aren’t in favour of the industry.