Decline in global client spending may put Indian IT sector under stress

Though global IT services spending is likely to cross the $1-trillion mark to reach $1.031 trillion, growth rate will slow to 3.8% in 2019, compared to 6.7% last year according to reports.

Illustration: Dominic Xavier/Rediff.com

The Indian information technology (IT) industry may be in for a rough ride this year, as the overall IT services market is likely to face slowdown pangs, owing to lingering uncertainty on Brexit, apart from rising trade war tensions.

According to a report by global research firm Gartner, though global IT services spending is likely to cross the $1-trillion mark to reach $1.031 trillion, growth rate will slow to 3.8 per cent in 2019, compared to 6.7 per cent last year.

In its earlier report released a quarter ago, Gartner had projected a growth rate of 4.7 per cent in the IT services spending for 2019.

Such downward revision in a span of three months reflects the fast-changing dynamics influencing demand in the industry.

“Although an economic downturn is not the likely scenario for either 2019 or 2020, the risk is currently high enough to warrant preparation and planning,” said John-David Lovelock, research vice-president at Gartner.

“Technology general managers and product managers should plan out product mix and operational models that will optimally position product portfolios in a downturn (should one occur),” he added.

According to various estimates, of the $1-trillion IT services market, close to 30 per cent is outsourced.

Of this outsourcing pie, Indian firms grab more than 60 per cent share, which translates to around $ 180-$ 200 billion worth of contracts.

In its earlier report released in October, Gartner had said that 46 per cent of organisations had indicated a consolidate IT services supplier as one of the effective measures of cost optimisation.

Also, the rising trend of setting up global in-house centres in India was reflective of narrowing outsourcing opportunity for IT services players globally.

The first sign of softness in client spending is already evident, with the management commentary coming from IT majors such as Accenture and Tata Consultancy Services (TCS).

For instance, Accenture reported an outsourcing book-to-bill ratio of 0.96 in the quarter ended May, against 1.08 in the preceding quarter.

The company, which follows a September-August financial year cycle, said demand softness in banking, financial services, insurance in Europe, apart from the manufacturing vertical, is responsible for this slowing book.

“Even as the demand environment is reasonable for offshore pure-plays (IT services firms), we expect rough edges to performance of companies with volatile financial services and uncertain manufacturing,” Kotak Institutional Equities said in a note.

“Though broader demand is still reasonable, a slowing market is also a reality,” it added.

Apart from Accenture, even TCS’ growth figures carried some signs of the ongoing demand slowdown as the IT major surprised the market with less-than-expected rise in revenue with margin squeeze.

“We see some stress in capital market segment and among European banks. (This financial year), we are looking to sustain growth more than acceleration,” Rajesh Gopinathan, chief executive officer and managing director at TCS, had said in a post-earnings conference.

On the overall IT spending comprising segments like data centre systems, enterprise software, IT services, communication services, and devices, Gartner said global spending is projected to grow 0.6 per cent to touch $3.74 trillion in 2019.

However, this forecast low, compared to 5.1 per cent growth rate posted in 2018.

According to the global research firm, enterprise software is likely to grow at the highest rate of 9 per cent this year among all five segments.

Apart from enterprise software and IT services, all other segments are likely to see degrowth, the report added.