25% of IT deal tenures are being cut short with AI, says McKinsey’s Noshir Kaka

Noshir Kaka, senior partner, McKinsey

Nearly 25 percent of IT services deal tenures are getting cut short prematurely, having a significant impact on the financial models of these firms, Noshir Kaka, senior partner at McKinsey, has said, highlighting the impact artificial intelligence is having on the business.

The comments come at a time when IT services companies are looking at a shift towards reducing deal completion timelines with artificial intelligence (AI) getting baked into projects.

“On the deal tenures, about 25 percent of the deals are being cut short prematurely. So, if it was a five-year deal, even though the work is not being completed, the enterprise decides to outsource it again in year four. Now, that has a dramatic impact on the financial model of a deal because there were assumptions going on…,” Kaka told Moneycontrol on the sidelines of the Nasscom Technology and Leadership Forum (NTLF) in Mumbai on February 25.

While deal timelines getting shorter is good for client companies, for IT players, whose billing also includes number of people deployed and time taken to do a project, it can mean a partial loss of revenue.

But, to be able to deliver a project in a shorter timeline “at speed” will in fact become a competitive advantage for the IT companies amid the growing trend of integrating AI into deals to offer productivity gains to clients, Kaka said.

“The second thing that is happening on deal tenures is, generative AI and AI in general is moving from pilots towards more transformation. In the pilots, you see a lot of smaller deals and small pilots. As those move into transformation eventually, you'll see those large deal volumes go up,” Kaka said.

It is still early days. According to Nasscom’s annual tech industry trends report, only 10-15 percent enterprise generative AI proof of concepts have moved into production scale development as of FY25.

Kaka’s views echoed those of HCLTech CEO and MD C Vijayakumar, who in an interview said deal completion timelines would be faster with the implementation of a new software.

“What took a year could be done in nine months potentially. That will reduce the duration of the deals and the deal sizes… that's why we are calling it a smaller deal,” Vijayakumar said.

He added that to balance this out, IT companies will need to look for more volumes, and higher value work.

Headroom for growth

While the technology services industry is seeing some green shoots of recovery after at least two years of slowdown, Kaka said there is headroom for further growth as clients look to invest in emerging technologies.

“People are still investing in some areas. For example, data and AI, is seeing investments. People are still consolidating their platforms and doing a lot of legacy modernisation,” Kaka said.

“There are various things that we've never gone after. For example, when you look at how much an enterprise company spends on technology, 52 percent of that spend is in services and 24 percent is in software. Now, with AI, I can actually have those spends merged because I can provide service as a software (SaaS).”

According to the Nasscom report, India's technology industry's revenue is expected to reach $300 billion at the end of the FY26.

For FY25, Nasscom estimates a growth of 5.1, taking the industry revenue to more than $282.6 billion.

Including hardware, the industry likely added $13.8 billion worth of incremental revenue in FY25.