Global slowdown hits outsource spend hard

Rising Economic Concerns

- Spending on IT and business services slowed down in Q3

- Demand remains high

- But, ISG sees some pullback in spending

- Enterprises delay decision-making due to concerns about the economy

Bengaluru: Indian IT services players will face the true test of demand for technology work towards the end of the year with experts fearing that outsourcing spend is likely to be reduced during the contract renewals.

Annually, most technology outsourcing contracts get renewed in the month of December. That is time when companies take a hard call on their IT spend, ask for discounts or cancel projects. Many in the industry fear that despite the positive commentary by several IT companies, true face of the demand will get revealed during those negotiations.

"Slowdown in the industry will get reflected with a lag. We should see factors playing out in the second half of the current financial year. I think, demand situation will be known during the renewals, which happen towards the end of the year," said V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys.

Global consulting firm ISG, which tracks IT contracts across the world, recently said spending on IT and business services slowed down slightly in the third quarter amid rising economic concerns.

Data from the ISG Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, showed that ACV for the combined global market during July-September period was at $23.2 billion, down 3 per cent compared to last year. It was the first year-over-year decline in a quarter since the fourth quarter of 2016.

"Demand remains at an all-time high, but we are seeing some pullback in spending, as enterprises delay decision-making due to concerns about the economy," ISG had said.

Indian IT players have been gaining market share in the global IT market with increasing share of outsourcing deals. Since the pandemic, Indian IT players have bagged more than half of all mega deals that have come to the market. The momentum continues as reflected in the recent second quarter earnings.

TCS closed outsourcing contracts worth $8.1 billion, a rise of seven per cent over last year. Infosys reported its best large deal wins in seven quarters as its total contract value from large deals stood at $2.7 billion compared to $1.7 billion in the previous quarter.

Similarly, HCL Tech, which reported a stellar set of numbers in Q2, closed deals worth $2.38 billion. Such deal pipeline puts domestic IT firms in a good stead as far as revenue growth in FY23 is concerned. The concerns, however, remain for the next financial year when the slowdown impact will play out in full scale.

"Enterprises don't give prior indications before cancelling or reducing the size of contracts. During renewals, those things come up. So, it is better to see how contract renewals happen than drawing any conclusion," said a highly placed source.

Slowdown in the industry will get reflected with a lag. We should see factors playing out in the second half of the current financial year. I think, demand situation will be known during the renewals, which happen towards the end of the year

-V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys