Much ink has already been spilled about the impact of US President Donald Trump’s tariff policy on IT products and services. This week’s announcement that US GDP was down 0.3% for the first quarter indicates that some imbalances are developing. Of course, any economic damage incurred by industry (and governments) will ultimately be reflected in the fortunes of service providers, but when and how? One of the chief aspects of the policy lies in its indeterminateness. It’s fair to say the element of surprise has been a characteristic of the Trump administration’s approach to tariff negotiations. Here’s how this uncertainty will impact the IT services market:
Unlikely direct impacts on IT services themselves — at least in India. Despite significant revenues associated with services exports, services themselves probably won’t be impacted directly by tariffs (unless the Indian government places a tariff on services exports, which is considered unlikely). The same cannot be said, however, about all relevant import markets, such as EMEA. Large global consulting firms like KPMG have already been consolidating their disparate organizational structures through a process it calls “clustering,” a move that might help them address European supply chain concerns more easily through unified consulting service offerings.
Further reduction of discretionary budgets. Following a post-pandemic boom, IT services providers already face a slowdown. Tariff-induced economic uncertainty will only intensify this trend. Suppliers have already cited weakness in the crucial small-to-medium-sized engagement range as a constraint on their revenues and have relied on large deals while the small and medium deal flow has not picked up the slack. At Wipro’s latest earnings call, CFO Aparna Iyer revealed that even major players are witnessing a lag in smaller deal flows, relying heavily on large contracts to maintain momentum. Difficulty in planning will make a rebound in those deal segments that are unlikely in the near term.
Slowing of large transformational projects. The reliance on large deals may also prove frustrating. Transformational projects lacking immediate returns or demonstrable cost savings will face increased scrutiny in an uncertain economic climate. This includes extensive modernization initiatives with value propositions that are becoming harder to justify. Even secured deals may encounter hurdles in revenue recognition. Fortunately, a significant portion of large-scale migrations has already been completed. Even parts of the portfolio where enterprises desire to maintain current investments — including regulatory maintenance, M&A integrations, AI productivity, CX improvements, and critical tech modernizations — could experience delays in bookings and revenue realization.
Acceleration of internal AI adoption. Slack demand and reduced bookings and revenues will likely translate to reduced hiring and accelerated efforts to improve internal productivity using AI-infused tools and processes, including agentic AI, which will accelerate the widely anticipated restructuring of service providers’ staffing pyramids to more diamond-shaped structures.
Increased investment in global capability centers (GCCs). With the help of global systems integrators (GSI) partners, enterprises are doubling down on “captive” investments. We expect prevailing uncertainty to sustain and even amplify interest in establishing and expanding GCCs. In collaboration with GSI partners, GCCs offer enterprises a flexible resourcing strategy amid constrained hiring budgets.
Take Advantage Of The Opportunity To Reengage With Strategic Providers
The current uncertainty opens the door to closer collaboration with services providers as they themselves adapt to the new realities and opportunities. These include, but are not limited to, successful adaptation to generative AI, where service providers can add significant guidance that can increase trust in this transformative technology. It is also a good time to revisit unsatisfactory engagements, considering that service suppliers will be anxious to shed unprofitable contracts in favor of greener pastures. If your organization is sorting through this, set up an inquiry to understand how you can best meet the moment.
