Bitter-sweet times

These are disconcerting signals for the Indian IT industry. Studies now show that the global economic slowdown has started to impact IT spends in key markets. A recent survey of some 950 senior IT managers by technology research firm Forrester has revealed that more than 40 per cent of large businesses have cut their IT budgets as a result of a global economic slowdown.

Responding to the challenges of a tougher economic environment, IT managers are preparing to cut rates paid to their IT vendors, with over 70 per cent of respondents to this survey likely to bargain for lower rates from their suppliers. As expected, the beleaguered financial services industry (the largest spender on IT and biggest contributor to the Indian IT industry), has been worst hit, with nearly half the companies in that space slashing IT spend.

Rough with the smooth • There are challenges, and opportunities, for IT companies. • Forrester survey reveals big IT companies, particularly in North America, are cutting spends • Clients are negotiating with vendors for lower rates • Financial services are the worst hit • Gartner study shows new opportunities emerging in the domestic market

Worryingly for Indian vendors, 49 per cent of companies based in North America (the largest geographical contributor to Indian IT) have pared their budgets and even in Europe, nearly a third of firms have reduced their spend. “There is definite caution among our clients as the economic situation worsens,” says Wipro’s Joint CEO Suresh Vaswani. He adds that clients, though, have not yet begun to cancel or defer contracts on a large scale. Rather than cut their core IT budget, other industry executives claim that it is the “discretionary spend” that will get cut first. “The slowdown has firms renegotiating rates, being more selective in choosing vendors, and examining spending plans more thoroughly,” says Forrester Research Vice President and Principal Analyst John C. McCarthy. According to Infosys CFO V. Balakrishnan, customers are opting for fewer vendors and looking for global delivery capabilities when they finally make a choice.

Despite cutting back on their IT spending (top IT executives BT spoke to insist a full-blown slowdown is not yet underway) and most companies in North America and Europe only have a passing interest in offshoring, despite its obvious cost benefits. Only 9 per cent use offshore resources, 14 per cent are just beginning to use it and 22 per cent are piloting a project. Rather than concerns over a political backlash over movement of jobs to India, poor quality of services seems to be the biggest factor holding back the growth of offshoring.

However, there is some encouraging news as well. Even as Indian IT faces up to the challenge of air pockets in their main target markets, other reports point to emerging opportunities in the domestic market. According to a Gartner report, end user spending in India is expected to grow at a CAGR of about 15 per cent from 2007 to 2012 and reach $110 billion from $64.7 billion currently. Naveen Mishra, Senior Research Analyst at Gartner says “small and midsize businesses (SMBs) will drive the growth of various IT-related industries… the Indian government’s pro-business policies and their own increasing use of IT will continue to build confidence among local companies seeking to invest in and use IT”. All said and done, these are tough times for the Indian IT industry with a slowdown in crucial markets of North America and Europe impacting the business environment.

—Rahul Sachitanand