IT'S WAIT AND WATCH

Vishwanath Kulkarni, October 27, 2008
The Hindu Business Line

The sub-prime crisis in the US that sparked off the first signs of uncertainty in the Indian IT industry has now snowballed into a full-blown economic slowdown across the globe, threatening to thwart growth for the sector.

Though industry players are cautious on the near-term outlook, analysts say a slow recovery could possibly be seen towards the second half of 2009, when the dust would begin to settle and a pick-up in technology spending is predicted.

“It could take at least another five quarters for things to return to normalcy from an IT perspective and potentially beyond that, largely due to the restructuring happening in the financial services industry. It also really depends on whether things worsen from here on not,” says David Furlonger, vice-president and analyst, Gartner.

Despite the economic downturn, research firms such as Forrester and Gartner expect a growth in technology spending for 2009. Gartner recently said though customers would reduce their IT budgets, the cut would not be as dramatic as the one seen during the dotcom bust. Gartner expects technology spending to increase by 2.3 percent in 2009, down from its earlier estimates of 5.8 percent.

Furlonger says most financial institutions have an IT spend in the range of 12-14 percent. “It is extremely difficult to say how this ratio will change in the short-term. Cost cutting means that IT spend may decrease — but if revenues fall faster as a result of the current economic crisis, then the ratio could actually increase,” he adds.

Though the US and Western Europe will be worst affected among the developed economies, the emerging nations will not be immune, says Gartner.

IT budgets will not see more severe reductions because IT is embedded in running all aspects of the business.

Avinash Vashistha chief executive of Tholons Inc, an advisory firm, says the long-term prospects for outsourcing are intact. “We expect to see a pick-up in spending from second half of calendar 2009,” he adds.

“I believe the US economy will recover by mid 2009. The emerging economies will bounce back quickly and the company is gearing up for growth by investing in non-linear initiatives,” says Suresh Senapaty, chief financial officer, Wipro Ltd.

The US crisis has already slowed down the growth momentum for the Indian IT services companies over the past few quarters as customers delay their spending on deployment of new technology applications amidst worsening economic conditions.

The turmoil that intensified in the past four to five weeks had claimed victims of some of the large financial institutions such as Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual and Wachovia, which incidentally happen to be large customers of the Indian IT firms. The liquidation of some of these entities has shrunk the business for Indian IT vendors to that extent, while the shotgun mergers would change the outsourcing landscape, with some vendors gaining new business and others losing it.

Some of the vendors see opportunities in post-merger integration and compliance-related work arising from stringent regulatory processes. However, the impact of the meltdown is yet to be fully seen on these firms as yet.

“The real impact of the downturn is some 60 to 90 days away as companies affected by the turmoil need time to take stock of the situation,” says Sudin Apte, analyst and head of Forrester Research in India.