40% of large firms cut IT budgets

But survey of 950 IT senior managers finds outsourcing increasing

BANGALORE/ MUMBAI:  Technology vendors are feeling the pinch as their financial services customers pull back IT spend on existing and new projects, recent data from US-based research Forrester Research show.

Forrester said almost half of financial services companies — which typically are the biggest spenders on technology and hence account for a bulk of revenues for Indian IT majors —- have cut their IT budgets.

On a broader level, over 40% of large businesses across sectors have cut their IT budgets this year due to the global economic slowdown. Forrester spoke to 950 senior IT managers in the US and Europe, geographies which account for over three-fourth of India’s software exports.

North America seems to be the hardest hit — 49% firms there have cut their IT budgets — than Europe, where 31% of respondents have done so. Forrester found that 43% of firms have already cut their overall IT budgets in 2008, while 24% have put discretionary spending on hold.

Only 28% of respondents said the economy has had no impact on their IT budgets.
Such bleak numbers, however, have not taken the domestic IT majors by surprise.
V Balakrishnan, chief financial officer (CFO), Infosys, said, “We have always been maintaining that the economic situation continues to be challenging. Every day, bad news has been coming out of the US.”

He said such a scenario has been factored in the company’s guidance for the current fiscal. Balakrishnan said with 6.1% unemployment in the US, it would be some time before people get the comfort level to spend.

“We may have to weather the rough times in the short term but in the medium to long term basis, the outlook is positive,” said Suresh C Senapathy, CFO, Wipro.
He said the Forrester report was on expected lines. “These economic happenings would work to our benefit. Less demand and more supply would mean companies would try to differentiate. That (differentiation) would require IT. Higher unemployment would also increase reliance on IT.”

But the bad news for Indian tech players does not end with clients cutting IT budget.
The prices of these smaller spend could also get renegotiated.

In what could spell gloom for IT vendors, 70% of respondents that Forrester surveyed said they would likely negotiate lower rates with suppliers, and 16% said they have already cut their IT services spending.

TCS Financial Solution president N Ganapathy Subramaniam confirmed that a few customers were looking at slashing prices but a majority of them were holding to the current price.

Although the overall figures indicate a reduction in IT spending, the report highlighted wide differences between countries, sectors and types of IT spending.

“This is not an across-the-board spending slowdown; the impact of the economy on IT budgets varies widely by industry and geography,” said Forrester vice president and principal analyst John C McCarthy.

On the positive side, outsourcing is seen increasing. 45% of firms plan to increase their use of applications outsourcing, while 43% would increase infrastructure outsourcing. 43% said they are moving more work offshore.

This is seen encouraging for Indian offshore players since only 9% of firms use offshore resources. Interestingly, over half — 52% —- of respondents who have outsourced say cost savings are lower than expected.

Nasscom chairman Ganesh Natrajan also sees a silver lining in the overall slump in the IT expenditure. “We will have many instances, where the component of offshoring in the shrunken budget will be much higher than what it today. That is because in the current environment, every large company would be looking at enhancing its efficiency and optimisation,” said Natarajan.

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