India Outsourcing Industry - View on IT Budgets/IT Spending in 2012

Causes for IT spending decline

European debt crisis which intensified in early 2010 is still continuing to affect the Global economy in 2011 and is expected to continue into 2012. Euro zone countries and IMF agreed on a €110 billion loan for Greece in May 2010, with a condition of implementing strong austerity measures by the Greek government. After Greece, a €85 billion rescue package for Ireland in November and a €78 billion bail-out for Portugal in May 2011 were announced, as an effort to tackle the crisis. Recently in October, Euro zone leaders agreed on a package that included a proposal to write off 50% of Greek debt owed to private creditors, increasing the EFSF to about €1 trillion and requiring European banks to achieve 9% capitalization.

US economy is slowing down with rising unemployment levels, shrinking corporate profits and widening trade deficit. President Obama announced US$447 billion jobs package that's intended to spur business hiring and consumer spending in an economy that has sputtered almost to a halt. The package includes spending US$140 billion to save the jobs of state and local teachers and first responders, repair deteriorating schools and rebuild roads, railways and airports. Also includes 50% reduction in the payroll tax which will cost US$240 billion. Critics question whether the package will stop slowdown and kick start growth. These two factors have a significant impact on the overall IT spending/IT Budgets by the businesses on which the IT/BPO Industry depends for the revenues. 70% of the revenues for Indian Outsourcing vendors come from US and Europe.

IT spending view by IT India Outsourcing Industry  

TCS CEO said there was a lot of “negativism” among clients amid economic uncertainty. The macroeconomic situation in Europe is “worrisome,” but they are getting positive vibes from customers in terms of their IT spends going forward. Clients are investing significantly to drive efficiencies and also making commitments for discretionary spending.

Infosys said clients are becoming cautious about investments. There are delays in decision-making. At the same time, they are not seeing project cancellations. Clients continue to look for cost-cutting steps even as decision cycles were getting delayed by a few weeks. When it comes to discretionary spends, clients had become “extremely tight”.

Greece defaulting on its debt is inevitable; the impact of this on the European banks in terms of IT budgets would be low as European banks will put in a strategy to tackle the crisis.

Wipro said macroeconomic sentiments continue to remain uncertain but they have seen growth momentum build up in IT business with healthy volume growth. Exposure to Southern Europe is minimal, they have not seen the impact of the so-called recession, but as far as the rest of Continental Europe is concerned and the UK is concerned, given the portfolio that they are in, they don’t see any secular decline or any cause for concern. Asia-Pac and Latin America continue to remain a growth market, because they still seem to be going through the investment cycle, so a lot of opportunity out there, but in a different kind of business.

Cognizant says that clients’ IT budgets are likely to be flat or marginally up next year, and that the shift towards increased outsourcing will continue. Cognizant continue to see a robust pipeline. Clients are not slowing down their decision-making processes. Clients are clearly indicating that they will continue to ship work to global delivery models. Clients are working hard to protect investments that are directed towards building agility into their businesses.

The macroeconomic indicators were “troublesome” and there are concerns over the euro zone debt situation said HCL Tech CEO. Overall, IT budgets have been down for some time and the economic environment looks bleak. The activity is now around churn. Clients were unhappy and they are looking to change their vendors, which throws up more opportunities for companies like HCL. HCL expects flat or negative budgets next year.

Genpact said it's an uncertain and volatile economic environment. The difference from 2008 is that the leadership in most companies continues to be stable. They expect quick decision-making in 2012 around IT budgets, compared to 2008-2009 when decisions almost froze.

Slowdown in IT spend

Overall IT spending will slow down in 2012. With no end to be seen for European Debt crisis and question being raised on President Obama stimulus package’s effectiveness in kick starting US economic growth from current slow down levels. Business and governments are skeptical about the IT spends as of now but there is a positive upward bias in terms of IT spending growth all but at a slow pace compared to 2011. With overall revenue growth slowing business may not spend much on IT but will be looking at IT as a way of improving the efficiency and reducing costs. IT spend will definitely help the businesses and governments to overcome the slowing the revenue growth and increase profits through cutting costs using IT. Emerging economies particularly BRIC countries will be driving the overall IT spend growth compared to US and European countries. European countries are definitely going to see reduced IT spend due to the debt crisis.

Discussion Points:

1. What will be the affect of the European Debt crisis & US Economic slowdown on the Indian Outsourcing industry?
2. What strategy should be adopted to overcome the reduction in IT Budgets/Spending?