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Impact on Technology Spending due to Europe Debt Crisis and US Slowdown – TopIndian IT Vendors View2011 has been a turbulent year with on going debt crisis in Europe in countries likeGreece, Ireland, Spain and Portugal and slowdown in US economy with credit ratingdowngrade. These events have significant affect not only on the countries across regionsbut also on major Global financial firms. The whole of BFSI segment has been impactedwith these events and they have announced major staff cuts and fall in the revenues andprofitability. BFSI is the dominant player in the Global Outsourcing market and this hasbeen a cause for concern for all the Indian IT majors who get their majority of theirrevenues from this segment. US region is the major outsourcer for Indian firms and thedowngrade and economic slowdown is a major concern for Indian vendors. NASSCOMin last week of August has stick to its estimate of 16%-18% growth in export revenue andexpects export revenue at $68 billion-$70 billion.TCS in its statement in first week of September has said that demand for outsourcing issolid 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 companiesto trim tech spend and are closely monitoring the situation on a day today basis. Thecompany’s diversified portfolio across other industry segments and strong growthpotential 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 andEurope but warned clients may cut budgets for next year and such cuts will depend onwhat happens in coming months. It also depends on how other sectors fare in the currenteconomic situation as predominantly IT is a support function for other sectors. The worstcase scenario is the IT budgets for next year may come down by 5% and growth mightcome down, but Indian IT vendors will still see some growth.Wipro has said BFSI customers are very concerned about the current economic situationbut they have not cut spend or reduced budgets. Since companies plan their next yearbudgets during the October/November time frame, Wipro is expecting companies will becautious and will cut the budgets for next year. Companies will also focus on more riskmitigation and streamlining of processes during this time. The company is also planningto keep up it operating margins above 20% and expanding fast into other geographies.Cognizant Technology Solutions expects that the current economic environment mayhave some impact on clients information technology budgets in 2012. Cognizant earnsalmost 95% of its revenue from US and European markets. Cognizant has seen bothclients delaying the projects and some new clients expediting the projects. Cognizant alsoexpecting critical maintenance work be outsourced and expects clients to ship more workto low-cost destinations, including discretionary contracts.HCL Technologies on the other hand is looking for opportunities in the current tougheconomic scenario. HCL expects different customers will react differently to the currentsituation 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 ITspend may not rise. BFSI companies are adding new IT vendors to their list and Europeancompanies are opening up to Indian IT vendors. HCL is expecting some mega deals willcarry it through and help in maintain growth.European debt crisis spreading to other European nations, the latest being addition ofItaly to the list of affected countries is a major concern. Germany and France are puttingtheir best efforts to control the crisis and working together to avoid further damage andsave the European Union. US economy has drastically slowed down and worsened due tothe rise in unemployment and poverty levels. President Obama has announced a $440Bnpackage 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 Globalmacroeconomic 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 thegovernment to tackle the problem and maintain the growth levels.The current economic scenario is expected to worsen in near future and what everinitiatives and policies formulated by the governments will take time to show results. Thepresent scenario may not subside soon and is expected to continue to affect the firms andgovernment next year also. India IT vendors are assessing the situation and they areconstantly keeping an eye and preparing themselves for the worst. Already there is a talkof slowing down the hiring and reducing the variable compensation payments. All thevendors are constantly communicating with all the stakeholders through the variousmedia channels and highlighting their respective strategies. The next three months will becrucial for the vendors as the major business decisions in terms of budgets are taken byclients. It is also crucial to see how the governments in all the regions particularly the USand 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 intheir organizations and they are still streamlining their operations due to the changes inthe top managements. Along with such changes they need to also closely keep an eye onthe market and take the necessary decisions so as to avoid serious problems. The markethas seen stiffer competition with new geographies emerging as comparatively lower costdestination and respective governments providing the support, India’s dominance in theOutsourcing is not under immediate threat but a considerable threat to dominance hasevolved. With such changes it will not be easy for Indian IT vendors to keep up theirgrowth.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?