India’s small and mid-sized technology firms are facing one of their biggest challenges yet. Artificial intelligence (AI) is forcing them to dismantle decades-old business models that have relied on low-cost delivery and headcount scale. For many, survival now depends on reinvention.
Industry experts say the shift is unlike previous technology waves. “The Indian tech SME industry has weathered many technology waves,” said Irshad Syed, partner at consultancy Slingshot. “But this AI wave questions the very basis of the predominant business model, which is based on cost arbitrage. Hence, this warrants a first principles approach.”
According to a Nasscom report, SMEs are expected to contribute 6–7% of India’s technology sector revenues in FY25, roughly $280 billion. The segment employs more than 1.3 lakh digital services professionals, including AI specialists, and has grown at 12% annually since FY20. The US remains the largest market, though many firms have diversified to Japan, Australia, and Southeast Asia.
Yet the report found that most of these firms are at an early stage of AI monetisation. Adoption is “largely reactive”, with companies embedding AI incrementally into existing services. Unclear use cases, steep costs, and talent shortages are slowing progress, while fragmented funding makes scaling difficult.
“Any tech SME is a composition of multiple value layers,” said Parameswaran E K, principal at Slingshot. “The very motivation that drives the entity is one of them. Precise segmentation is another. Deliberate focus on the business impact delivered and prudent choice of the technology drivers are the others.”
This need to rethink fundamentals comes as clients, especially in the US, push for greater value at lower costs. Contracts are now being reshaped around outcomes rather than hours billed, a shift that many SMEs admit they are struggling to keep pace with. One southern SME founder, whose company provides software solutions to US enterprises, said client expectations had changed dramatically. Buyers, he explained, “are all concentrating on getting more for less due to the AI disruption. Most importantly, they are discussing outcomes.”
Early Movers Show the Way
Some SMEs, however, are already demonstrating how to turn AI disruption into opportunity. Chennai-based Archimedis Digital has built its strategy around the life sciences industry, embedding AI into every stage of the value chain. By moving beyond the linear model of growth, it delivers outcome-based intelligent IT solutions.
“This allows us to future-proof our position in the industry and create lasting value for our clients,” said CEO and founder Duraisamy Rajan Palani. The company has restructured delivery teams into AI-powered pods that concentrate on business outcomes rather than just deliverables. Even when billing is by the hour, it reports performance against client KPIs and OKRs.
Internally, Archimedis is investing heavily in upskilling. Its Agentic AI Ninjas programme prepares every engineer and domain expert to think in terms of agentic AI, use-case development, and consultative problem-solving. Alongside this, the company is selectively hiring AI specialists, data scientists, and hybrid professionals who combine domain and technology expertise. Partnerships are also helping strengthen its workforce, with the aim of building managed services as disciplined Centres of Excellence.
Inferenz, another tech SME, has also moved decisively away from competing on cost. The company builds custom agentic AI solutions for healthcare and hi-tech industries. “We’ve consciously moved away from competing purely on low-cost delivery or headcount scale,” said CEO and founder Gayatri Thakkar. “Instead, we’ve invested 10% of our revenue into R&D, built solution accelerators and platforms to reduce time-to-market, bring the value at optimum cost that directly ties to our customer’s business goals and KPIs.”
Inferenz positions itself as “small enough to care, large enough to scale”. It combines deep domain expertise with a strong partner ecosystem, including Snowflake, Databricks, AWS, and Microsoft. Its teams are trained and certified to design productised AI-driven solutions that integrate with enterprise systems, comply with regulations, and deliver measurable ROI.
“Our unique proposition is not just building AI solutions but ensuring they integrate with enterprise systems, comply with regulations, and deliver ROI,” Thakkar said. She added that this value proposition has helped the company retain over 95% of its global clients.
Inferenz now begins engagements by co-creating success metrics with clients. Internally, delivery is structured around accelerators, technology-led centres of excellence, and outcome-driven AI agents. “This allows us to confidently enter into outcome-based engagement models,” Thakkar explained.
AI at Work in Traditional Sectors
Vasista Enterprise Solutions Pvt Ltd has shown how AI can transform even traditional industries. The Hyderabad-based company, known for its ERP and mobile app development, worked with a dairy client facing severe inefficiencies. The client struggled with outdated systems, delayed deliveries, and wasted resources due to poor route planning.
Vasista deployed an AI-enabled route planner that generated comprehensive truck schedules by aligning vehicles with routes, delivery points, travel times, and stops. The impact was striking: operational costs fell by over Rs 2.3 lakh per day, manual effort decreased by 66%, and the client’s carbon footprint shrank by 95%. Environmental sustainability improved by 100%.
An Era of Methodical Reinvention
While examples like Archimedis, Inferenz, and Vasista highlight what is possible, they remain outliers. For the majority of SMEs, AI adoption is still incremental and defensive. High costs, unclear use cases, and talent shortages persist.
Yet experts argue that SMEs are better placed than they realise. AI reduces the primacy of cost, shifting the conversation towards value-based partnerships. For smaller firms, the challenge is to carve out niches and rebuild their business models around measurable outcomes.
“The game involves carving out a niche of one’s own,” Syed said. For many SMEs, this means disassembling their existing business identity, experimenting with new value combinations, and moving swiftly to capture AI-driven opportunities.The pressures are undeniable. But the reinvention, though methodical, is underway. For India’s smaller tech firms, AI is no longer a threat to sidestep but a fundamental force demanding transformation, one that could ultimately redefine their place in the global technology ecosystem.
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