IT Services Q3-25: AI & cost-optimization deals driving a balanced recovery
A seasonally softer Q3, delivered modest sequential growth, healthy order booking (fueled by cost-optimization + AI-led deals), & margin improvements. Management commentaries were guardedly upbeat
Despite a traditionally softer third quarter, India’s leading IT services providers (including Infosys, TCS, Wipro, HCLTech, LTIMindtree, Tech Mahindra, and Persistent) collectively delivered stable-to-modest sequential revenue growth, strong bookings, and modest margin improvements in Q3 FY25. Management commentaries convey guarded optimism underpinned by the following trends:
1. BFSI Demand Gains Steam
Return of Discretionary Spend: After a period of intense cost management, large banks in North America are gradually reviving budgets for discretionary projects. European financial institutions—previously more cautious—are also showing early signs of expanded activity.
Cost Efficiency + Modernization: While cost-takeout pressures persist (leading to vendor consolidation and managed services deals), there is growing appetite for modernizing core banking, cloud infrastructure, and advanced analytics to drive future ROI.
AI & Data-Driven Focus: BFSI stands out as a frontrunner in adopting Generative AI (GenAI) for real-time risk/fraud analytics and improved customer engagement. Many banks consider data modernization essential for scaling AI, spurring fresh investments in data platforms, governance, and cloud-based analytics.
2. Mixed Picture Across Other Verticals
Retail & Consumer
US Retail Rebound: Retailers benefited from healthy holiday demand, and many have resumed selective discretionary spending. Focus areas include omnichannel modernization, AI-driven personalization, and dynamic pricing strategies.
Europe More Conservative: Retailers remain cautious but continue limited transformation efforts around supply chain and marketing analytics.
Manufacturing
Muted in Auto/Aerospace: Persisting macro uncertainties and supply chain strains have led to delayed decision-making. Cost optimization remains a near-term priority.
Longer-Term Digital Factory Projects: Steady pipeline for Industry 4.0 (smart manufacturing, predictive maintenance) and ERP upgrades (e.g., S/4HANA). Large transformation deals are possible, albeit with extended cycles.
Hi-Tech & Telecom
Efficiency-Led Engagements: With customers under margin pressure, deals emphasize cost reduction, vendor consolidation, and ROI-based modernization (cloud migration, DevOps).
AI Partnerships: Tech players lead in advanced AI solutions such as chip design for ML accelerators and agentic AI capabilities for contact centers or network management.
Telecom Focus: Telcos concentrate on cost-takeout, 5G expansions, and BSS/OSS modernization, often slicing large programs into smaller phases for faster returns.
Healthcare & Life Sciences
Short-Term Hurdles, Medium-Term Optimism: Some client-specific slowdowns (especially smaller pharma/biotech), but top medtech and pharmaceutical majors continue to fund R&D transformation, AI-based drug discovery, digital manufacturing, and connected devices.
Energy & Utilities
Modernization & Decarbonization: Oil/gas and utilities maintain IT spending around predictive maintenance, grid modernization, and renewables-driven projects.
Cloud & Data Analytics: Upstream operations increasingly adopt cloud-based platforms for geospatial analysis and remote asset management.
3. Large Deals & Cost Optimization
High TCV & Modular Deals: Leading vendors announced robust total contract values (TCV), driven by multi-year cost-takeout plus transformation engagements. Many large programs are broken into smaller “compacts” for quicker ROI and risk mitigation.
Shortened Deal Cycles: Several providers reported slightly faster conversion of mid-to-large deals, suggesting improved client confidence. BFSI and retail led in awarding bigger deals, reflecting an uptick in discretionary spend.
4. Generative AI as a Critical Growth Engine
Moving Beyond PoCs: Clients are scaling AI from pilot chatbots toward advanced use cases—fraud detection, drug discovery, predictive maintenance, and “agentic AI” solutions that autonomously manage end-to-end business workflows.
Data Modernization as a Prerequisite: Enterprises realize that building robust data lakes, governance structures, and cloud architectures is essential before deploying enterprise-grade AI. Many new deals bundle data modernization with GenAI implementations.
Domain-Focused & Responsible AI: Providers increasingly offer vertical-specific or “small language models” (SLMs), ensuring specialized solutions for BFSI, retail, healthcare, and others. Governance and security measures remain top concerns, prompting emphasis on “responsible AI.”
5. Margins & Headcount: Stable to Improving
Sequential Margin Gains: Despite Q3 headwinds (furloughs, fewer working days), most firms reported margin upticks. Wage and subcontracting costs have eased; enhanced productivity, utilization, and selective AI-based premium pricing also boosted profitability.
Moderate Headcount Movement: Net additions were modest or slightly negative, reflecting both seasonal patterns and efficiency drives. Yet, companies underscored intact campus hiring plans and stable or declining attrition from earlier peaks.
6. Geographic & Outlook Highlights
North America: BFSI and retail are the principal bright spots; new US government leadership and stable economic indicators could further reduce client hesitancy.
Europe: Mixed macro but encouraging pipeline in BFSI, manufacturing, and the public sector. Discretionary spends remain cautious but show early signals of revival.
Growth Markets (India, Middle East, Latin America): Double-digit growth continues, buoyed by government digitization projects, BFS expansions, and cloud/data transformations.
7. Future View (CY25/FY26)
Macroeconomic Stabilization Boosts Spending Confidence
With inflation easing and interest rates stabilizing in key markets, most IT providers anticipate a more supportive business climate.
Clients appear incrementally more willing to undertake discretionary programs, especially in verticals like BFSI and Retail, though caution persists in Manufacturing and Hi-Tech.
AI/GenAI Set to Remain a Growth Engine
Generative AI demand is poised to expand beyond proofs-of-concept, with enterprise-wide deployments for intelligent automation, data-driven insights, and predictive capabilities.
Providers expect increased deal sizes and faster decision cycles for AI-led transformation, underpinned by robust data modernization initiatives.
Steady to Rising Large Deals and Pipeline
Momentum in large cost-takeout + transformation deals is expected to continue.
Many clients are also committing multi-year budgets for legacy modernization, cloud adoption, and advanced analytics, with a strategic goal of building “digital-ready” infrastructure.
Consolidation and Efficiency Priorities
Enterprises will persist with vendor consolidation and “do more with less” themes, bundling run-cost optimization with big transformation mandates.
Outcome-based and risk–reward–linked engagements could see wider adoption as clients push for measurable returns and value metrics.
Vertical-Specific Rebound Timelines
BFSI: Likely to remain among the fastest adopters of AI and a key source of large transformation wins.
Retail: US retailers’ improved holiday performance and e-commerce modernization bodes well for near-term growth.
Manufacturing: Outlook remains muted near term but broad-based digital factory initiatives suggest potential improvement in late 2025.
Hi-Tech & Telecom: More cautious spending on new projects, though efficiency and next-gen network modernization deals will persist.
Healthcare & Life Sciences: Should see a gradual pickup as pharma invests in AI-based R&D, though some near-term headwinds linger.
Margin Tailwinds
Wage cost pressures are easing, subcontractor use is down, and attrition has normalized. Providers aim to leverage operational improvements (higher utilization, automation) plus selective price improvements (particularly for GenAI and specialized skill sets) to bolster margins.
Currency volatility remains a wild card, but overall, the margin environment is expected to remain supportive or improve slightly.
Investments in Talent and Partnerships
Providers are scaling up AI, cloud, cybersecurity, and engineering talent pipelines, along with forging deeper alliances with hyperscalers and specialized AI solution partners.
Training, internal IP development, and selective tuck-in acquisitions (especially for domain-based AI) may continue to accelerate.
Overall Conclusion
The IT services sector enters calendar 2025 with tempered optimism. While near-term budget scrutiny persists in some pockets, the overall direction is positive, bolstered by robust large deals, a resurgent BFSI segment, stable or improving pipeline conversion, and strong AI/GenAI adoption.
As global macro uncertainties recede, enterprises’ willingness to invest in digital modernization and data-driven transformation is expected to sustain IT services growth over the coming quarters.
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