Opinion
AI asymmetry: Can our IT service firms close their gap with GenAI rivals?
Summary
- An information asymmetry needs to be fixed—and fast. Enhancing the skills of employees through AI training could improve the capacity of Indian IT service companies to compete on a more equal footing.
As earnings announcements from Indian and other information technology (IT) service providers have been making headlines, people who have seen their dismal figures have been asking me why generative artificial intelligence (GenAI) companies seem like an existential threat to Indian IT services firms. It’s simple. They ‘know’ more.
Along with OpenAI, giants like Google, Meta and Microsoft lead the AI development race and thus shape the discourse and access to these technologies. This starkly contrasts with traditional IT service companies such as IBM, Infosys and Wipro, which appear to be playing catch-up. This information asymmetry has significant implications and is highlighted by classic economic theories.
Information asymmetry occurs when one party in a transaction has more or superior information than another. This concept was vividly captured in seminal work by George Akerlof, Michael Spence and Joseph Stiglitz, who shared the 2001 Nobel Prize in Economics for their analyses of markets with asymmetric information. In their view, such asymmetries can lead to adverse selection, moral hazard and market inefficiencies. As the chief buy-side negotiator for global clients seeking to dole out billion-dollar contracts to these service providers, I made a living straightening out such asymmetries for many years. Back then, IT firms with specialized knowledge could withhold information from buyers, leading to an unfairly negotiated deal that benefited the service provider. With a specialized sourcing negotiator on the buyer’s side (who has been a service provider before), the client would no longer be at a disadvantage.
In today’s context, firms like Microsoft, OpenAI and Google have amassed vast data-sets and advanced algorithms, bolstered by substantial R&D budgets and strategic partnerships. Their rapid progress in developing GenAI, machine learning models and neural networks is already well-documented.
Conversely, despite their formidable tech prowess and client networks, traditional IT service companies need help in accessing cutting-edge AI technologies and methodologies. This gap is not just technological. There is also a knowledge gap. And so an information asymmetry now exists between these two types of IT firms. The pioneers of AI operate in a milieu where the latest breakthroughs, be they in natural language processing or robotics, are part of their internal discourse well before they reach the broader market (including IT service providers).
This asymmetry can skew the innovation capabilities of IT service companies. Let’s not forget that the latter often rely on established technologies. An SAP or Oracle creates a software product such as Enterprise Resource Planning (ERP), and a Wipro or an Infosys provides the services needed to integrate and maintain it. Now companies like Google or OpenAI are creating new technologies, positioning themselves at the forefront of innovation and defining the direction of the AI market. The difference between those ERP solution providers and GenAI providers is that at the end of the tech integration, they need little maintenance from service providers going forward. Like the praying mantis, they would likely devour their mate—the IT services programmers, i.e., who integrated their systems into their clients’ technology portfolio.
Separately, with superior AI capabilities, companies like Microsoft can offer more advanced solutions to clients, attracting business that might have gone to traditional IT service providers. I would not be surprised to see a Google or an OpenAI consulting arm bloom. This would consolidate power and market share among firms leading the AI revolution. As a result, investors are more likely to place their bets on companies at the cutting edge, exacerbating the disparity between AI innovators and traditional IT service providers. The effect of information asymmetry can already be seen in their diverging valuations.
There is also a stark difference in the attraction of talent. Top AI researchers and engineers are more inclined to work with companies at the cutting edge. This often means choosing companies like OpenAI or Google over traditional IT firms. Meanwhile, most low-cost service providers look to hire fresh graduates, especially in India, where we have far more engineers graduating each year than there is demand for. This has granted Indian IT services firms the luxury of paying abysmally low wages, but at some point, these businesses need to realize that they get what they pay for. At current wages, what they get is a bunch of young employees who, though armed with shiny new degrees, need prolonged training before they can be of any use to clients.
Drawing lessons from economics, it is clear that this disparity could widen without strategic interventions, affecting not just individual companies, but the broader economic landscape. Bridging this gap is essential for fostering a competitive and inclusive AI market. The hope is that IT service companies can form strategic alliances with AI leaders to gain access to advanced technologies and expertise. Partnerships for the development of specific AI applications or research-sharing will probably help.
Enhancing the skills and knowledge base of existing employees through continuous AI training and machine learning can improve the capacity of IT service companies to compete on a more equal footing. As the field evolves, so must the strategies of companies looking to stay relevant in the AI era.
