Share Of Emerging Economies Sees Rise Of Revenue In IT Firms

2025 is likely to be a year of transition for the global IT outsourcing industry. After two years of tepid demand, the technology outsourcing industry is showing signs of an early revival, though it may not be a full-fledged one. As indicated from the earnings of the country’s largest outsourcer, Tata Consultancy Services (TCS), there are some verticals where demand recovery is already visible. For instance, the BFSI (banking, financial services and insurance) vertical is witnessing increasing spend by enterprises, especially of financial institutions in the United States. Similarly, retail- another important vertical for IT firms- is seeing some spend coming back. Incidentally, these two sectors contribute more than half of the total revenue of several large firms.

This development spells good news for the industry. The TCS management has indicated that discretionary spend is coming back in one form or the other. “The point we wanted to emphasise here is the total contract value (TCV) growing after two quarters and in North America, BFSI, CPG, and this gives us the confidence in the medium term. We have also observed early trends in other verticals as well. This is what gives us confidence,” TCS CEO, K Krithivasan said.

These observations show that the country’s IT services companies may see better times this year. The rising discretionary spend augurs well for those companies, which have a large pie of digital services. Notably, many mid-tier IT services companies provide specialised digital services in new technology areas like AI, data analytics and others. Hence, this trend is likely to favour them. Moreover, despite the buzz around AI and GenAI, revenue translation from the new areas remains low.

The year may see some break from that trend and the industry may earn more revenue from these emerging areas. However, all is not as rosy as it appears. There are still some significant risks that may derail the growth revival. Firstly, most companies are betting on demand recovery in North America. However, this may get delayed if the US Federal Reserve does not reduce the interest rates aggressively. All indications are that it is now not keen to cut rates as aggressively as projected earlier.

Secondly, the economic health of many European economies is deteriorating. Germany, France and UK are struggling under high inflation. Unless European economy recovers, a full-fledged recovery remains a far cry. Against this backdrop, there is a distinct trend of growing importance of emerging economies. As TCS results indicate, geographies like India, the Middle East and South America are showing faster growth than traditional geographies. No wonder, IT firms have started betting big on these geographies with increasing engagement with enterprises in APAC, MENA and South America. The share of revenue from these geographies will definitely increase for IT services companies in the coming years. The January-March period of each year is usually the time when clients finalise their technology budgets. So, by the end of this financial year (FY25), it will be clear about how technology spending will evolve this year.