For the first time since the launch of ChatGPT took the world by storm, the world’s largest IT services firms, led by Accenture Plc., Cognizant Technology Solutions Corp. and Capgemini SE have flagged the rise of AI and GenAI tools as a risk factor in their annual reports.
Tagging AI and Gen AI as potential risks signals the rising role of these disruptive technologies at technology leaders. This may also prompt homegrown IT firms like Tata Consultancy Services Ltd, Infosys Ltd and HCL Technologies Ltd to flag similar risks, at least two industry executives said on condition of anonymity. These companies, which follow the April to March financial year, issue their annual reports in the coming months.
Nasdaq-listed Cognizant, which follows a January-December financial year, cited potential risks associated with the rise of AI in its annual report released in February.
“Financial, legal risks”
“Our use of AI Technologies may not be successful and may present business, financial, legal and reputational risks,” said Cognizant.
“We increasingly use AI-based technologies, including GenAI, in our client offerings and our own internal operations. As with many innovations, AI presents risks and challenges that could adversely impact our business,” the company said.
After OpenAI released ChatGPT in 2022, Meta, Google and Microsoft have followed with similar tools. Meanwhile, Apple is in talks to build Google’s Gemini AI engine into the iPhone.
“The development, adoption, and use of AI technologies are still in their early stages and ineffective or inadequate AI development or deployment practices by us, our clients, or third parties with whom we do business could result in unintended consequences….We plan to incur significant development and operational costs to build and support our AI capabilities to meet of our clients,” said Cognizant.
“Failure to appropriately conform to this evolving landscape may result in legal liability, regulatory action, or brand and reputational harm,” said Cognizant, which saw its revenue slip 0.4% to $19.35 billion in the year ended December 2023.
AI may exacerbate social divides
Capgemini flagged the “rapid deployment of generative artificial intelligence” among emerging risks when the French IT services firm disclosed its annual report on 29 March. “Generative AI will transform numerous jobs and create new ones in both our organization and our clients’ organization… From a societal point of view, generative AI threatens to exacerbate social divides and raises challenges for democracy and human rights, particularly as its workings lack transparency and results may be inappropriate or biased,” said Capgemini, which ended with $24.1 billion in revenue in the year ended December 2023.
Meanwhile, Accenture, which follows a September-August financial year, warned that Gen AI could hurt its profitability. “The introduction of new technologies (such as Generative AI), services or products by competitors could reduce our ability to obtain favourable pricing and impact our overall economics for the services or solutions we offer,” said Accenture, which reported a 4% revenue growth to end with $64.1 billion in the year ended August 2023. It ended the year with an operating margin of 13.7%, down 150 basis points from the 15.2% profitability in 2022.
“As cyberattacks become increasingly sophisticated (e.g. deepfakes and AI generated social engineering), the risk of security incidents and cyberattacks has increased. Such incidents could lead to shutdowns or disruptions of or damage to our systems and those of our clients, ecosystem partners and vendors, and unauthorized disclosure of sensitive or confidential information,” said Accenture.
From difficulties in retaining people to visa-related issues, technology outsourcing firms list several potential risks to their businesses so that investors can decide if they want to invest in the company. But it is for the first time Accenture, Capgemini and Cognizant have highlighted risks associated with AI and Gen AI in their annual reports.
AI is beginning to take a central role
“Inclusion of AI and Gen AI as a risk factor suggests that these technologies are increasingly coming to play a role in the business of IT outsourcing firms,” said a Bengaluru-based partner at a venture capital firm. “Now, depending on the maturity level of these technologies inside Indian IT firms, it will be logical to expect some of them to describe it a potential area of risk.”
Accenture claims to have won $1.1 billion in GenAI projects or 2.8% of the total order book during the first half of the current fiscal year. Its early success in GenAI is in contrast with Indian IT services majors such as TCS, Infosys and HCL Tech, many of which are still navigating their AI strategies and have not disclosed their earnings from this technology, considered by many as the biggest risk to the outsourcing industry.
Last month, TCS for the first time disclosed that it had $900 million worth of GenAI contracts. Like Accenture, TCS’s share of GenAI projects remains tiny: 2.1% of $42.7 billion of order book at the end of March last year.
“A full realization of GenAI’s benefits will take time and enterprises and society still have considerable challenges to address,” said TCS CEO K. Krithivasan in a post-earnings interaction with analysts on 12 April. “These include managing the risks inherent in Gen AI, reskilling and upskilling the workforce and reimagining core business processes. Customers are looking at scaling out POCs (proofs of concept) and pilots by implementing necessary guardrails,” he said.
“I believe it is still early days, but it is a prudent practice to describe it, just like in the past when the rise of cloud computing firms came with the risk of self-cannibalization of business for IT services firms,” said Apurva Prasad, vice-president of institutional research at brokerage firm HDFC Securities.