Cost saving drive set to benefit Indian IT
As the global industry gearing up for recession ahead, more focus on cost optimisation, which will put emphasis on outsourcing or cost take out programmes
image for illustrative purpose
Rising Demand For Offshoring
- Domestic IT companies had benefitted from slowdown during Covid pandemic
- Mega deals had come to the kitty of Indian IT firms last time
- Experts feel such trend is likely to repeat this time if recession hits global economy
Bengaluru: An impending slowdown in technology spend by global enterprises is likely to create opportunities for many cost-takeout outsourcing contracts in coming quarters. Experts and brokerage firms indicate that Indian IT biggies will be the biggest beneficiary of such trend.
In a recent report by Kotak Institutional Equities, it highlighted that the management of Infosys is witnessing an uptick in cost saving deals as businesses across the world are trying to save cost owing to inflationary pressure and economic slowdown.
"As we are entering into a planned recession period, organisation will likely prepare for cost optimisation aggressively which will put more emphasis on outsourcing or cost take out programme. Product development, revenue maximisation services & large digital transformation deals will likely be on backburner. Slowing demand for hyperscalers and software or SaaS vendors may impact revenue growth of IT services and we have already baked in a slowdown in growth," ICICI Securities said in a note.
During the last two years of the Covid pandemic, Indian IT services companies had bagged multiple cost savings and digital transformation deals. This had resulted in record total contract value (TCV) for most large and many mid-tier IT firms. However, the period of hyper growth and migration to cloud is fading as indicated by slowdown in growth by cloud hyperscalers and global SaaS firms.
Growth of three major cloud hyperscalers- Amazon's AWS, Microsoft's Azure & Google Cloud- are witnessing slowdown for the last three quarters. The big three cloud hyperscalers grew around 31 per cent YoYin July-September period of 2022 as compared to 36 per cent in the second quarter.
"In the near term, focus on costs would likely mean slower cloud consumptiongrowth for hyperscalers," ICICI Securities said. Menawhile, major SaaS (software as a service) firms including ServiceNow, Freshworks, Salesforce, Adobe and many more are witnessing demand for subscription-based offerings coming down as companies defer spending decisions.
"These companies continue to witness slowdown in decision making due to tighter budget scrutiny at clients' end," said the brokerage firm.
Reduction in clients' technology spends is likely to happen in new areas involving digital technologies than on core aspects. From this perspective, a global slowdown may accelerate offshoring to India along with more cost saving deals for Indian IT players.
"Cost take-out programmes will benefit Indian IT. We acknowledge that a recession can lead to a further moderation in global tech spending. A recession will also induce enterprises to embark on mega multi-year outsourcing or offshoring programmes that will yield benefits to Indian IT," Kotak Institutional Equities said.
