TCS is just the start! Experts expect other IT firms to also cut jobs amid margin pressure and AI push

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Tata Consultancy Services’ (TCS) job cuts have dealt a major blow to the Indian IT industry and could trigger a ripple effect across its peers, industry experts warned. They cited margin pressures, obsolete skills, a sluggish growth environment, and disruption from artificial intelligence (AI) as key drivers behind the impending TCS layoffs.

TCS, which currently has an employee headcount of 6,13,000, is set to reduce about 2 percent of its global workforce in phases across FY26, which will impact roughly 12,200 employees, CEO and MD K Krithivasan told Moneycontrol in an exclusive interview on Sunday.

This will mark one of the biggest layoffs at least in the recent times in corporate India and in the history of TCS.

As of July 28, TCS stock plunged 1.61 percent from previous day, closing at Rs 3,083.95 per share on BSE.

According to Ashutosh Sharma, VP & Research Director at Forrester this move “lowers the threshold” for other IT companies for adopting a similar practice.

“If TCS is doing it then it becomes more acceptable across the board. But, every IT organisation has been taking over some programme for margin improvement in the recent times. Margins have constantly been declining as managed services business is offering fairly low margin,” he said.

Not just TCS, even HCLTech had announced a similar talent ramp down over the next three-four quarters as it plans an organisational restructuring globally to achieve operational agility and protecting margins amid a shifting technology landscape dominated by AI.

“There will be some talent ramp down that has happened, especially in some of the geographies outside India. So that will also be part of the restructuring plan. More details we will share once we have a concrete timeline and plan agreed,” HCLTech CEO and MD C Vijayakumar had said at the company’s Q1 earnings conference earlier this month.

According to Pareekh Jain, CEO of Pareekh Consulting and EIIRTrend, IT companies have already been laying off employees through various practices and reasons such as bench policies, performance-linked layoffs, eligibility tests and so on.

“This is not a micro-level issue, this a macro concern. After TCS, more companies who were not even thinking that long-term will now start seeing this a way to manage headcount and even start speaking about it openly. It won’t stop at TCS’ 2 percent,” Jain told Moneycontrol.

There were also quite a few acquisitions that happened for TCS’ peers including HCLTech, Infosys and Wipro in the past couple of years adding more headcount that could get relooked, Jain said.

IT industry veteran and founder of staffing firm Diamondpick, Sriram Rajagopal expects more trimming to happen at the mid and senior levels across IT companies.

“Post pandemic, a lot of people got promoted and had to be given growth opportunities. Now, with Gen AI, you may not need as many headcount from those categories of people. If properly utilised, some of these co-pilots can drive productivity and lead to companies cutting jobs…when the margins are under stress you will go after non-billable people,” he said.

A Citi Research note said that despite not being the best pay-master, TCS has enjoyed lower-than-industry attrition levels as it offered long-term career path and job-stability to its employees.

"In the near term, the ongoing lay-offs will hurt employee morale and could potentially lead to execution slippages. In the longer run, such policies could drive a sharp rise in attrition, similar to what was seen at Cognizant during 2020-22," analysts at Citi wrote.

Also read: Not cutting jobs because of AI, says TCS CEO Krithivasan on 2% workforce layoff plans

Managing margin pressures

This comes weeks after the IT services behemoth updated its HR policy by mandating employees to have 225 days of billability in a year and limiting bench time to up to 35 days.

Industry analysts believe even though TCS CEO and MD K Krithivasan has maintained that the job cuts are “not driven by margins” or “AI productivity gains”, it is still a significant factor to take such a step as IT firms are also facing pricing pressures and demand uncertainty amid the US government imposition tariffs across industries and geographies.

“The impact of AI is eating into the people-heavy services model and forcing the large service providers such as TCS to rebalance their workforces to maintain their profit margins and stay price competitive in a cut throat market, where clients are demanding 20-30% price reductions on deals,” said Phil Fersht, CEO of HFS Research told Moneycontrol.

He added, “The fact that TCS has taken this step is a major indicator of this trend, considering its culture of being a very stable place to work.”

Following Moneycontrol’s newsbreak on the layoffs, analysts at Citi Research said that this is likely happening due to multiple factors including “productivity asks (AI & otherwise) at a time when clients are diverting significant incremental tech investment into AI related spends; certain skills becoming less relevant and fewer opportunities for deployment of employees in those areas; reskilling has been a focus but not easy for all skills/employees; and pressure on margins given slowing growth, technology changes & need for investments.”

Skill gaps, changing operating models

During the interview Krithivasan had said, “We have been calling out new technologies, particularly AI and operating model changes. The ways of working are changing. We need to be future-ready and agile. We have been deploying AI at scale and evaluating skills we will be requiring for the future. We have invested a lot in associates in terms of how we can provide them with career growth and deployment opportunities. Still, we find that there are roles where redeployment has not been effective.”

“This will impact roughly 2 percent of our global workforce, primarily at middle and senior levels. It has not been an easy decision and one of the toughest decisions I have had to take as CEO,” he added.

“The leadership of Tata Sons and TCS are very margin focussed. Their target margins are also significantly higher than the industry average. Consequently, they decided to do these layoffs,” said Forrester’s Sharma.

Sharma emphasised that TCS had projected huge growth prospects and forecasts that led to over-hiring causing a deployment mismatch.

His thoughts were echoed by TCS CHRO Milind Lakkad too at the company’s earning’s conference on July 10, where Lakkad said that “hiring shouldn’t be connected to quarterly growth. It’s is planned on a yearly basis.”

“We had earlier hired during initial quarters then we faced some business challenges. That had caused some imbalance, but we are not that bothered as we will leverage this going forward,” he said.

Fersht believes that this trend will last for about a year as the leading providers focus on training junior talent to work with AI solutions, and are forced to move on people who will struggle to align with the new AI model that he would call “services-as-software”.

“The new emerging services industry of services-as-software will be based on those same principles, the only difference being the skills are changing and they will be tied to common AI platforms,” Fersht said.

According to market intelligence firm UnearthInsight, the IT industry is facing double whammy of demand slowdown (historically industry was used to growing at 7-10% which is now down to 3-5%) plus AI led transformation which is changing demand versus supply situation within these companies.

“Skill mismatch clearly indicates inability of experienced talent to upskill or cross skill themselves. So either TCS is selling something unique or the existing workforce doesn't have skills in demand in market,” said Gaurav Vasu, founder and CEO at UnearthInsight.

Read the full interview: Had to take 'difficult call' to build stronger TCS, says CEO K Krithivasan after cutting 12,000 jobs