2026 IT Services budget growth expectations revised down, while AI and cloud migration still provide structural support

Overview

This report is based on Morgan Stanley's 2Q26 CIO Macro Survey and focuses on assessing 2026 enterprise IT budgets, IT Services demand, AI/LLM funding sources, public cloud migration, vendor discounts, and vendor consolidation trends. The core conclusion is that overall IT budget expectations improved slightly, but IT Services budget expectations weakened sequentially, making it likely that Indian IT service providers' F27 revenue growth will be flat versus F26 or lower; at the same time, AI, digital transformation, outsourcing demand, and cloud migration still provide structural support.

Core views

The report maintains a neutral-to-cautious view on IT Services. Positive factors include improved odds of upward revisions to overall IT budgets, a lower share of macro-driven project delays, higher outsourcing utilization, GenAI and digital transformation driving traditional IT outsourcing spend, and continued migration of workloads to the public cloud. Negative factors are that expected 2026 IT Services budget growth fell from 2.0% in 1Q26 to 1.8% in 2Q26, US respondents' expectations slowed notably, and spending willingness on IT Services was revised down across verticals such as technology, services, retail, and manufacturing.

Analysis framework

The report uses CIO survey data for a top-down demand assessment, mapping overall IT budgets, sub-segment budgets, vertical-industry budgets, regional differences, project delays, outsourcing inclination, discount behavior, and vendor consolidation to the revenue growth outlook for Indian IT service providers.

Methodology notes

• 调查研究Morgan Stanley CIO Macro Survey

  Survey of enterprise IT purchasing decision-makers

  This CIO Macro Survey interviewed 100 enterprise IT decision-makers by phone and online from May 8 to June 8, 2026, including 76 from the US and 24 from Europe, reflecting enterprise customer adoption and purchasing behavior in 2Q26.

• 行业需求跟踪IT Services Domain Survey

  Dedicated IT Services survey

  The IT Services domain survey interviewed 60 respondents, including 45 from the US and 15 from Europe, from May 6 to May 27, 2026, to assess changes in professional IT services, outsourcing, digital transformation, and vendor relationships.

• 预算动量分析Up-to-Down Ratio

  Ratio of upward to downward budget revisions

  The report uses the ratio of the probability of budget upgrades to budget downgrades to measure recent budget revision momentum; in 2Q26, the overall IT budget up/down ratio rose to 1.2x from 0.8x in 1Q26.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• India IT Services vendors

  Core covered asset direction

  Strengths

  Higher outsourcing utilization, digital transformation and GenAI driving traditional IT outsourcing spend, and continued public cloud migration provide structural support for bookings and workloads.

  Weaknesses

  Expected 2026 IT Services budget growth was revised down sequentially, and US respondents' expectations slowed, limiting room for broad industry revenue acceleration.

  Comparison

  The report believes F27 revenue growth will be flat versus F26 or lower, with an In-Line industry view.

  Risks

  The macro environment remains fluid, budget reallocation may squeeze traditional software or professional services spending, and vendor discounts and consolidation may intensify competition.

• Tata Consultancy Services

  Potential beneficiary of vendor consolidation

  Strengths

  The survey indicates TCS is a marginal beneficiary relative to covered peers.

  Weaknesses

  The slowdown in overall industry budget growth still limits company-level growth elasticity.

  Comparison

  It is a marginal relative beneficiary versus peers in vendor consolidation, though the report also notes ACN was screened as the biggest beneficiary.

  Risks

  Vendor discounts, customer budget reallocation, and softer US demand may affect pricing and bookings.

• ACN

  Screened beneficiary of vendor consolidation

  Strengths

  Among respondents going through vendor consolidation, ACN and Deloitte were screened as the biggest share gainers, and ACN was viewed overall as the biggest beneficiary.

  Weaknesses

  Some clients also listed ACN as one of the share losers, showing consolidation outcomes are not one-way.

  Comparison

  Compared with other service providers, ACN performed more strongly in this vendor consolidation survey.

  Risks

  Discount competition is stable but still active, and customer vendor consolidation may create pricing pressure.

• Public Cloud ecosystem

  Structural demand beneficiary

  Strengths

  The share of workloads on public cloud is expected to rise from 48% currently to 52% by end-2026 and 66% by end-2028, supporting demand for cloud migration, managed services, and related offerings.

  Weaknesses

  Cloud migration spending may compete with other IT budgets, and part of AI spending comes from reallocation of existing budgets.

  Comparison

  The public cloud migration trend is stronger than traditional on-premise workload deployment.

  Risks

  Macro budget pressure or shifts in project priorities may delay the migration pace.

Key data

• Expected overall IT budget growth in 20263.8%Above the 3.7% in the 1Q26 survey, but below the 2010-2019 average of 4.1%.
• Expected 2026 IT Services budget growth1.8%Down 20 bps from 2.0% in 1Q26.
• US IT Services growth expectation1.9%Down 40 bps from 2.3% in 1Q26.
• EU IT Services growth expectation1.3%Up 40 bps from 0.9% in 1Q26.
• Share of AI/LLM funded by net-new IT budget33%Below 37% in 4Q25, indicating AI funding increasingly relies on reallocation from existing IT budgets.
• Share of IT budget reallocated to support AI32%Above 23% in 4Q25, of which 15% comes from existing software budgets, 6% from professional services, 6% from other IT budgets, 3% from hardware, and 2% from communications/data networks.
• Main GenAI deployment areasIT Operations 47%, Software Development 44%, Customer Service 33%, Supply Chain and Inventory Management 15%Reflects the main enterprise use cases where GenAI is being deployed internally.
• Current share of workloads on public cloud48%Above 47% in 4Q25 and 44% in 2Q25.
• Expected share of workloads on public cloud52% by end-2026, 66% by end-2028Shows that public cloud migration momentum remains ongoing.
• Share delaying IT Services projects due to macro or geopolitical concerns23%Significantly below 42% in 4Q25.
• Share not delaying projects due to macro or geopolitical concerns73%Above 57% in 4Q25.
• Share of CIOs planning to increase use of outsourced services54%Above 47% in 4Q25, while the share planning to shift in-house is 10%.
• Share expecting digital transformation to increase traditional IT outsourcing spend63%Respondents expect digital transformation to increase traditional IT outsourcing spend by at least 1%.
• Share expecting GenAI to increase traditional IT outsourcing spend59%At the same time, 19% of respondents plan to reduce traditional IT outsourcing spend because of GenAI.
• Vendor consolidation ratio52%Slightly below 54% in 4Q25, but still shows a trend toward more concentrated vendor relationships.

Impact & implications

For Indian IT service providers, the report sends a mixed signal: there is no clear sign of further deterioration on the demand side, the share of delayed projects has fallen, outsourcing inclination has improved, and AI and cloud migration still support medium- to long-term workloads; however, the downward revision to 2026 IT Services budget growth, softer US demand, and downward revisions in some vertical budgets mean limited elasticity in F27 revenue growth, and the market is more likely to reward companies with share-gain capability in vendor consolidation, cloud migration, AI implementation, and cost efficiency.

Risks

• The macro environment remains fluid and may again trigger delays in IT Services projects or budget downgrades.
• US IT Services spending expectations slowed sequentially and may drag on demand for global service providers.
• AI spending is increasingly funded by reallocation from existing IT budgets, which may squeeze software, professional services, hardware, or communications budgets.
• Vendor discounts and vendor consolidation may intensify pricing pressure, with share gains concentrated among a small number of leading service providers.
• Downward revisions in willingness to spend on IT Services across verticals such as technology, services, retail, and manufacturing may affect the breadth of the industry's recovery.

What to watch

• Whether expected 2026 IT Services budget growth continues to be revised down or stabilizes in subsequent CIO surveys.
• Whether bookings, revenue growth, and management guidance for Indian IT service providers after 1QF27 confirm a demand rebound.
• Whether the share of net-new budget in AI/LLM funding sources rebounds or continues to tilt toward reallocation from existing IT budgets.
• Whether the gap between US and European IT Services spending expectations widens.
• Share changes among Indian IT service providers such as TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra during vendor consolidation.
• Whether public cloud workload migration proceeds along the path to 52% by end-2026 and 66% by end-2028.