Impact on Technology Spending due to Europe Debt Crisis and US Slowdown – Top Indian IT Vendors View

2011 has been a turbulent year with on going debt crisis in Europe in countries like Greece, Ireland, Spain and Portugal and slowdown in US economy with credit rating downgrade. These events have significant affect not only on the countries across regions but also on major Global financial firms. The whole of BFSI segment has been impacted with these events and they have announced major staff cuts and fall in the revenues and profitability. BFSI is the dominant player in the Global Outsourcing market and this has been a cause for concern for all the Indian IT majors who get their majority of their revenues from this segment. US region is the major outsourcer for Indian firms and the downgrade and economic slowdown is a major concern for Indian vendors. NASSCOM in last week of August has stick to its estimate of 16%-18% growth in export revenue and expects export revenue at $68 billion-$70 billion.

TCS in its statement in first week of September has said that demand for outsourcing is solid and does not expect any cuts or delays in technology spending by BFSI companies. But the firm is cautious as uncertain economic environment has forced some companies to trim tech spend and are closely monitoring the situation on a day today basis. The company’s diversified portfolio across other industry segments and strong growth potential in Indian market will help the company in keeping up growth rate.

Infosys has not seen any reduction in clients IT budgets due to the slowdown in US and Europe but warned clients may cut budgets for next year and such cuts will depend on what happens in coming months. It also depends on how other sectors fare in the current economic situation as predominantly IT is a support function for other sectors. The worst case scenario is the IT budgets for next year may come down by 5% and growth might come down, but Indian IT vendors will still see some growth.

Wipro has said BFSI customers are very concerned about the current economic situation but they have not cut spend or reduced budgets. Since companies plan their next year budgets during the October/November time frame, Wipro is expecting companies will be cautious and will cut the budgets for next year. Companies will also focus on more risk mitigation and streamlining of processes during this time. The company is also planning to keep up it operating margins above 20% and expanding fast into other geographies.

Cognizant Technology Solutions expects that the current economic environment may have some impact on clients' information technology budgets in 2012. Cognizant earns almost 95% of its revenue from US and European markets. Cognizant has seen both clients delaying the projects and some new clients expediting the projects. Cognizant also expecting critical maintenance work be outsourced and expects clients to ship more work to low-cost destinations, including discretionary contracts.

HCL Technologies on the other hand is looking for opportunities in the current tough economic scenario. HCL expects different customers will react differently to the current situation and is hoping to cash in with big deals in the next three months. HCL is expecting lot of deals and vendor consolidation happening during this time and but IT spend may not rise. BFSI companies are adding new IT vendors to their list and European companies are opening up to Indian IT vendors. HCL is expecting some mega deals will carry it through and help in maintain growth.

European debt crisis spreading to other European nations, the latest being addition of Italy to the list of affected countries is a major concern. Germany and France are putting their best efforts to control the crisis and working together to avoid further damage and save the European Union. US economy has drastically slowed down and worsened due to the rise in unemployment and poverty levels. President Obama has announced a $440Bn package to revive the economy and provide the jobs to reduce unemployment rate. Impact of the proposed package is being widely argued. There seems to be a Global macroeconomic turbulence that has spread across the world and affecting all the nations. India is also affected by this and there has been a major policy initiative by the government to tackle the problem and maintain the growth levels.

The current economic scenario is expected to worsen in near future and what ever initiatives and policies formulated by the governments will take time to show results. The present scenario may not subside soon and is expected to continue to affect the firms and government next year also. India IT vendors are assessing the situation and they are constantly keeping an eye and preparing themselves for the worst. Already there is a talk of slowing down the hiring and reducing the variable compensation payments. All the vendors are constantly communicating with all the stakeholders through the various media channels and highlighting their respective strategies. The next three months will be crucial for the vendors as the major business decisions in terms of budgets are taken by clients. It is also crucial to see how the governments in all the regions particularly the US and European regions do to control the crisis and revive the economic growth.

Some of the Indian IT vendors like Wipro and Infosys have seen some major changes in their organizations and they are still streamlining their operations due to the changes in the top managements. Along with such changes they need to also closely keep an eye on the market and take the necessary decisions so as to avoid serious problems. The market has seen stiffer competition with new geographies emerging as comparatively lower cost destination and respective governments providing the support, India’s dominance in the Outsourcing is not under immediate threat but a considerable threat to dominance has evolved. With such changes it will not be easy for Indian IT vendors to keep up their growth.

Discussion Points:

1. How long wills the current economic scenario persists and what will be its impact?
2. What should the India IT vendors do to protect their growth in terms of revenue and Profitability?
3. Will the IT budgets be drastically cut? If not what other strategy the clients will employ?
4. Will there be consolidation in the Indian IT Services Market?