As the newly appointed CEO designate of LTIMindtree, Venu Lambu is tasked with managing client expectations as AI-driven efficiency gains influence deal wins. In the recent earnings commentary, LTIMindtree management spoke about productivity benefits that were passed on to a large client. In this case, LTIMindtree passed on productivity gains to its top customer, Microsoft, by leveraging AI. In fact, revenue growth in the December quarter was driven by accounts outside of the top 10, as revenue from top accounts fell due to productivity gains pass-through. This is expected to have a residual impact in the March quarter.
“The productivity gain we passed back to the top client. The full quarter impact will occur in Q4. From that perspective, our top client is at the forefront of AI. With our top client, there are more opportunities for us to bring in additional productivity gains by leveraging AI. This will probably continue into the next quarter,” its current CEO Debashis Chatterjee told TOI in a recent interaction. Some sources told TOI that the productivity benefits passed on to the client were unusually high, approximately $7 million, representing roughly 15% in the quarter. This percentage, analysts believe, is notably higher than the annual average of around 5%-10% of productivity gains in a year. When TOI reached out to LTIMindtree, the company’s spokesperson pointed TOI to the earnings transcript.
This has become a discussion point in the IT sector about offering such substantial productivity benefits in a quarter, considering other clients might demand similar concessions. Additionally, there are concerns about the feasibility of recovering these revenues, given the precedent it might set for future client negotiations.
Peter Bendor-Samuel, founder and executive chairman of the Everest Group, said there is no doubt that the Microsoft productivity benefit is going to become a standard for all clients over time. “Furthermore, it is unlikely to stop at 15% and we can expect it to rise to at least 20% over the next year. We expect other clients to demand and receive this, but it will likely be spread over a year or two. Over the medium to long run, we don’t think this will be negative for LTIMindtree or the industry as we expect the lower cost of operation to spur a surge in demand more than offsetting the loss of revenue. We also expect margins to rise as the tech enables a higher value set of services. There may be some short-term headwinds as all parties adjust to this new AI-infused reality,” he said.
Ray Wang, CEO of Constellation Research, said LTIMindtree is most likely anticipating that they can generate much more than 15% gains with automation and AI to make that kind of proposal and achieve the target.
HDFC Securities, in a note, said a steep decline in the tech vertical is linked to T1 account decline (mid-teen decline estimated). “The push for AI-driven productivity benefits mirrors past cloud-related revenue cannibalisation. Additionally, the margin improvement goal post seems to be pushed further out with an increase in the pass-through component and greater reliance on the low-margin segment for growth,” the note said.
