We're keeping the big story on top of mind because you are going to see the IT pack respond in interesting ways. You might see some buying at lower levels, but the question is: what does Anthropic's new set of tools, what does Palantir's new set of tools—in short, will the AI expansion of the way things are done harm Indian IT companies? Put very simply, before we speak to Fractal, Srikanth Velamakanni is with us. He's the co-founder, group chief executive, and executive vice chairman of Fractal Analytics. He's joining us today, and yes, Fractal is IPO-bound, but we're not talking to Srikanth about his IPO at all. We're talking to him as maybe the only company in its space which is giving AI services in India of that size, and what he makes of it. But before we get to that conversation, Punit is joining in to just set it up and explain why there is such a pain point right now. Punit.
Well, thank you for that. This all started yesterday with the Anthropic news. They are releasing new tools across segments and departments like legal, marketing, amongst others. These tools will make the job easier for a lot of individuals and enterprises, and that threat of AI finally overpowering the traditional tools was the fear on the street. Now, what's interesting is that brokerages, multiple today like Macquarie for example, have come out and said that these are very large enterprises with very complex operations across countries, hence it won't be very easy for them to just switch out, and they have big budgets so they can afford the Indian IT players. I think that's been one of the key analyses. What's interesting will be Fractal's view on it, because new-age AI companies who work with enterprises have their ear to the ground. So I think that would be some of the key takeaways I'll be watching out for from this conversation—what could be the actual conversation with enterprises while it is still fresh, and probably Fractal is best to come in in that space and give us that view.
In fact, this is an exclusive conversation with Srikanth. And really, Srikanth, thank you for taking out the time. I know you're in the middle of your IPO rush, but we're not talking about that right now. We're talking about something very fundamental because your company is also, in that sense, unique in what it does in the Indian landscape. So you have a perspective from the AI side and you also understand the IT services space very well. Should we be as worried as we have been in the last 24 hours about what happens to IT services as an industry?
Look, behind every market exuberance or market fear there is a kernel of truth, and there certainly is a huge kernel of truth here that AI will compress everything. All services—if you're taking 100 hours, it might be possible to do it in 50 hours and then maybe in 25 hours. So what happens when something that takes a certain number of time becomes compressed? It means that you need fewer people. It means that models which involve billing people per hour will suddenly shrink, and therefore there is a threat to revenues through all services companies, including legal services and certainly even IT services. So there is a kernel of truth, but I think there's also somewhat overblown. The capacity of AI, the capability of AI is always over-projected in the short term and maybe under-projected in the long term. So today when Anthropic shows something like this, it's easy to see that okay, this is where the puck is moving and it will compress all of IT services. But realize that IT services are handling some of the most complex transformations inside large companies. They have incredible software complexity, system complexity, user complexity, stakeholder complexity they have to manage. They have to connect all the data pipelines using mostly structured data, not unstructured data. What Anthropic has shown is success over unstructured data, which is video, voice, text. Most of what Indian IT services works with are structured data sets, things in rows and columns and databases, massive number of them. And therefore, to expect that you can just plug in a tool and it'll completely transform something immediately is somewhat overblown. I will want to add one more thing here, which is you have to look at the Palantir earnings as well, not just Anthropic. Anthropic has shown something interesting, but Palantir showed that you can do something like an SAP migration or a cloud migration—things which are high revenue drivers for big IT services companies—in much less time. So they're showing that even in the enterprise complexity, we can compress the amount of work required, amount of time required, and machines can take a greater load. So if I have an IT services company today, I have to think very seriously about how do I transform in the age of AI, because while my short-term is not very threatened, my mid to long-term is very threatened by these AI tools.
Srikanth, effectively the time and material game of IT service vendors—good morning, this is Niraj here—is under medium-term threat, right? So even if the companies are not going away, the traditional model as it used to be, you reckon, is under serious threat, and therefore the revenue pools that they've enjoyed are also under threat over the medium term. Would that be a fair assessment?
Yes, I think the staff augmentation source of revenues, while it is also one of the easiest ones to get and it's also reasonably sticky—that staff augmentation revenue where you build, you find talent, you deploy talent, and you get paid per person per hour or per day or per month—that business model without high-value add will become challenging. Because instead of 100 people required for something, the clients will say, hey, can you do it in 50 people or can you do it in 20 people? And some of the tech services firms are already compressing that and providing productivity gains without seeing super margin enhancement on their side. But if that gets crushed further, you will see revenue pools getting threatened. Just remember one more thing: there's a thing called the Jevons paradox, which means that whenever the price of a good comes down, the demand goes up so much more that eventually you consume a lot more of it. You can see that with cell phone rates—used to be 32 rupees a minute, now it's practically free, and we're using more and more cell phone time or WhatsApp time and things like that. So when the price of a good comes down, the overall demand goes up a lot, and there's a lot of demand for tech services because the world doesn't have nearly enough technology. Therefore, what you have to see is if these IT players are able to transform themselves, move to more output and outcome-based models and even subscription models, and realize that their talent base currently may have to be upgraded, they can go and actually attack the much larger pool of tech that's out there. So this transformation is vital, but it can be done, and Indian players are capable of doing that.
Just going to ask you about that, Srikanth, and good morning. You make a very strong point. We've been talking about the need for some of the largest IT companies in India to transform and to change the way they look at the future, to look further out. And the argument has been made that resources and cash is not a concern—they have the ability to spend. Is this something that can be solved by spending, though? Do we have the capability that it would take to venture into these new areas that you are suggesting? And how long will that take?
