The Impact of AI Investments by Hyperscalers on the IT Services Landscape

The rapid rise of artificial intelligence (AI) investments by major hyperscalers is reshaping the enterprise IT landscape, posing significant challenges to traditional software services outsourcing. According to a recent report by HSBC Global Investment Research, the gross impact of AI on IT services could lead to a deflation of 8-10% by the fiscal year 2027. This shift is expected to unfold over the next few years as existing contracts come up for renewal, with an annual impact projected to reach 3-4% during the period from 2025 to 2027.

The Shift in IT Spending

Hyperscalers, which include giants like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform, are increasingly capturing a larger share of enterprise technology spending. The capital expenditure of these top four hyperscalers, including Oracle’s recent announcements, is anticipated to soar from approximately $300 billion in 2025 to $500 billion by 2030. This surge in investment is likely to dominate incremental enterprise tech spending, further consolidating the market.

In stark contrast, the IT services industry reported a modest revenue growth of around $14 billion, or just over 5%, reaching a total of $283 billion. This disparity highlights the growing influence of hyperscalers in the IT ecosystem, as they continue to expand their cloud offerings and AI capabilities.

The Frenemy Dynamic

The relationship between hyperscalers and traditional IT service providers has been characterized as a “frenemy” dynamic. Yugal Joshi, a partner at the US-based consultancy Everest Group, notes that while hyperscalers have generated substantial business for service providers, their technologies have also absorbed significant portions of tech services spending, particularly in operational areas. This duality complicates the landscape for IT service firms, which must navigate both opportunities and threats posed by these powerful players.

As hyperscalers ramp up their focus on AI agents through their platforms, they are poised to capture even more business process spending. This shift raises questions about the future role of traditional IT service providers, as they grapple with the implications of AI-driven automation and the evolving needs of their clients.

Major Contracts and Market Dynamics

A recent landmark deal between OpenAI and Oracle, in which Oracle will provide $300 billion in computing power over the next five years, underscores the escalating competition among hyperscalers. This contract not only positions Oracle as a formidable contender against the leading hyperscalers but also reflects the increasing investment in AI data centers. Such developments signal a broader trend where AI capabilities are becoming integral to enterprise operations.

Joshi emphasizes that the success of AI agents hinges on their ability to function as envisioned. However, historical trends suggest that technological advancements often require more service spending rather than less. As AI systems evolve from single-agent to multi-agent architectures, the complexity of client environments will increase, necessitating more integration, orchestration, and operational support.

Future Growth Projections

Despite the anticipated deflationary impact of AI on IT services, the HSBC report projects a growth rate of 5-6% for the IT services sector in FY27. This growth could translate to an 8-10% increase in the volume of work, indicating that while challenges exist, opportunities for expansion remain.

Historically, the transition from on-premise software to Software-as-a-Service (SaaS) was viewed negatively for IT services. However, the reality proved different, as SaaS implementations often required substantial service support. The current migration from SaaS to AI-driven systems may similarly present challenges, but it could also create new avenues for service providers. As enterprise software architectures and infrastructures undergo redesigns to accommodate AI, the demand for skilled IT services may increase.

Navigating the Transition

Joshi points out that there will be a significant near-term uptick in demand for services firms that assist clients in navigating this transition to AI-driven systems. While many business processes may eventually operate autonomously, the complexity of integrating and managing these systems will require ongoing support from IT service providers.

The total addressable market (TAM) for these providers is expected to expand in the mid-term, allowing them to leverage new revenue streams to offset declines in traditional areas. This adaptability will be crucial as the IT services industry evolves in response to the growing influence of hyperscalers and AI technologies.

Conclusion

The landscape of enterprise IT is undergoing a profound transformation driven by the investments of hyperscalers in AI technologies. While this shift poses challenges for traditional IT service providers, it also presents opportunities for growth and adaptation. As the industry navigates this complex terrain, the ability to integrate and support AI-driven systems will be essential for IT firms looking to thrive in an increasingly competitive environment. The coming years will be pivotal in determining how these dynamics unfold, shaping the future of IT services in a world increasingly dominated by AI.