Firms may feel heat on lower IT spends, euro crisis

Just as things started to look up for the Indian information technology (IT) services industry, a new report suggests that ongoing euro crisis will impact worldwide IT spending.

Research firm Gartner today reported that worldwide IT spending will touch $3.350 trillion — an increase of 3.9 per cent from 2009. However, it simultaneously lowered its outlook for the IT industry from the first quarter of this calendar year, when it had forecast worldwide IT spending to grow 5.3 per cent. This is primarily due to the devaluation of the euro versus US dollar since the beginning of the year.

“The European sovereign debt crisis is having an impact on the outlook for IT spending. The US dollar has strengthened against the euro during the second quarter of 2010, and this trend will likely continue in the second half of 2010, which will put downward pressure on US-dollar-denominated IT spending growth,” says Richard Gordon, research vice-president at Gartner in his report. He adds that long-term, public-sector spending would be curtailed in Europe, as governments struggle to bring budget deficits under control during the next five years and to reduce debt during the next 10 years.

Other research firms think likewise. Some analysts even predict that any new renewal of contracts will see a price reduction of five to 12 per cent. Avinash Vashistha of Tholons says: “If you look at the ground reality, client business is still not ramping up. Client outlook has stabilised and that was evident in the business that came back in the first quarter of the year. But beyond that it’s the same. What has increased is the quantum of offshoring.”

The thinking is corroborated in the first quarter 2010 Global TPI Index report, which measures commercial outsourcing contracts valued at $25 million or more. While the TPI Index recorded total contract value (TCV) of $19.5 billion, up 25 per cent from the first quarter of 2009, contract restructuring accounted for 42 per cent of TCV, far surpassing the previous record of 29 per cent set in 2006.

Vashistha of Tholons notes that the last quarter of 2009 did see a wave of optimism among analysts but that has not resulted in an equal amount of ramp-ups. “Earlier contracts that were signed (five-year) would see a price increase towards the third or fourth year. But contracts that have been renewed in the last one year or more have no increase in rate. This has resulted in a rate rationality of seven to eight per cent downwards. In large contracts, the price reduction has been in the range of 10-15 per cent. We expect this to continue in the second half of this year,” he adds.

In every quarter, 25-50 contracts come up for renewal, Vashistha expects that all the new renewals “will see five to 12 per cent of rate reduction”.

TPI also anticipates that contract restructuring will continue to have an impact on the outsourcing market. Between $10 billion and $12 billion in annual contract value, due to expire in 2010, will be renegotiated, up 20 to 25 per cent from where the industry stood last year. Further, service providers closed a number of contracts that had been “pushed out” at the end of 2009, and it does not appear there are as many larger contracts coming to market soon.

“We don’t expect a huge rush of new-scope contracting. Instead, we foresee a steady flow of new opportunities as the recovery continues at a slow pace,” says Mark Mayo, partner and president (global operations) at TPI.