IT services firms recently reported their January–March 2025 quarterly numbers, and the results weren’t pretty. Most firms not only reported slower growth for the quarter but also lowered their forecasts for the next financial year. I dug into the details of what’s at play behind this mellow performance, and here’s what I found.
To begin with, let’s go back to the final quarter of 2024 — back then, things had started to look up. The Federal Reserve had just cut interest rates, and AI was driving a surge in enterprise IT spending. Most IT services firms had a robust pipeline of large IT deals. In fact, 2023 and 2024 were the years with the highest number of large deals (of over $100 million in annual spend). And then came January 24.
Tariffs Have Both Direct And Indirect Consequences On Services Businesses
The US government imposed tariffs across a broad spectrum of goods for practically every trading partner. While there was no tariff on services, the IT spend momentum that had started to build suddenly stopped in its tracks. The resulting massive uncertainty in the business environment impacts two fronts:
First, there’s the direct impact of tariffs on IT services business, which is not significant other than the rising prices of technology infrastructure that is used to deliver services. A tariff on imports of services would have had a higher impact, which fortunately is not the case and is also less likely to happen (or at least not be initiated by the US, as it is a significant exporter of services). For example, just for Europe, cloud and marketing services (think Meta or Google Ads) represent $100 billion business for US firms. We cannot completely rule out the possibility of such tariffs being on the table in the future, however.
Next come the second- and third-order effects. These are the key sources of uncertainty right now. We don’t know what the final tariff situation is going to be and when we will reach that normality. This level of uncertainty is not good for any business. Firms are already rethinking their budget allocations. As a result, we are hearing of a lot of discretionary spend getting delayed or canceled.
Large Deals Have Vanished As Clients Take Cautious Steps
Tata Consultancy Services, in its annual results announcement, acknowledged the absence of mega deals during fiscal year 2024–’25. CEO K. Krithivasan, while lauding the firm’s annual result, stated, “This impressive performance stands out in the absence of mega deals.” Meanwhile, Infosys took a more cautious stance, slashing its FY 2026 growth forecast to a modest 0–3%. CEO Salil Parekh attributed the subdued outlook to prevailing uncertainty, saying “The environment is uncertain, and we will execute our plans with agility while keeping a close watch on events as they unfold.”
We are seeing fewer large deals. As clients gravitate toward smaller, targeted investments, market dynamics increasingly favor nimble, adaptive companies that can respond swiftly to evolving needs. This shift has brought medium-sized firms such as Coforge, Hexaware Technologies, and Persistent Systems into the spotlight. These players outperformed their larger peers in year-on-year growth, a clear sign that agility is the new currency in an uncertain business landscape.
Post-Uncertainty, We Expect The Financials To Recover
We believe that this halt in IT spend momentum is going to be temporary. AI stands to be a significant catalyst for increased IT spending, assuming stable economic conditions. Some providers such as Cognizant appear to hold this view: The firm provided FY ’25 revenue growth guidance of 3.5–6%. Our earlier analysis, conducted in late 2024/early 2025, also indicated a positive outlook for tech expenditure, primarily due to the strong correlation between overall tech spending growth and GDP growth.
This relationship holds even as mature economies allocate a larger percentage of their GDP to technology. Given the projected healthy GDP growth in key markets like the US and most of APAC, we anticipate a rise in overall tech spending. Furthermore, AI’s influence on IT purchases is twofold. While it directly prompts budget shifts from existing programs to AI initiatives, it also indirectly fuels broader tech investments across various sectors. Cognizant CEO Ravi Kumar S opined during the company’s latest quarterly earnings call that “the future of IT services will be powered by the double-engine transformation of AI technologies, both for hyper productivity and innovation-led opportunities.” We similarly believe that a return to economic normalcy would likely unlock substantial IT spending growth. While it will be aligned to the underlying strength of respective economies, it will also be significantly amplified by the pervasive impact of AI.
