Recession And Its Impact

On IT Industry

WIPRO COUNCIL FOR INDUSTRY RESEARCH

Background
The booming Indian IT sector is set for a slower growth in the current fiscal due to global economic slowdown,
surge in crude oil prices and lower technology spending in the US.

The near-term impact is non-trivial for the Indian service providers, who enjoy a relatively higher
concentration of discretionary, staff-oriented, contractual relationships. Compared to some of the Western
providers, Indian IT service providers are also less well-diversified geographically and vertically. Going forward,
service providers are likely to see their sales cycles lengthen; witness a slow or delayed ramping up of projects,
experience consolidation in multi-sourced deals and not be able to command better prices from their clients.

Large IT services players will be able to cope with tighter client spends, but it's the smaller IT companies which
will face the heat. SMEs with commodity type offerings will find the business unsustainable.

With a recession in the US, which accounts for over 60% of the business, - Fortune 500 and other companies
may reduce overall IT budgets marginally and are unlikely to commit to new systems upgrades. Lower
technology spending and rising unemployment rate in the US will lower the export growth rate by 5-6 percent.

Its full effect will become known only a couple of quarters later. Within the financial services sector, and
related industries that are dependent on consumer credit for spending, there is likely to be a pull back on
investments for the next several months. The return to growth for applications-oriented projects will come in
all likelihood through a new paradigm for making such investment decisions, one that looks to maximise
leverage in development, maintenance and operations.

Analyst Forecast

Gartner Views:

The top 20 IT services exporters saw a dip in their growth, growing 29 percent as against the 45 percent
recorded in 2006-07, according to the Dataquest Indian IT Industry Survey 2008

Technology budgets worldwide are expected to increase 3.3% this year, slightly higher than in 2007.

Many U.S. companies are taking steps to speed up their offshoring programs in order to contain their labor by
sending more of their IT jobs offshore. In the worst-case scenario, the slowdown will turn into a prolonged
recession that will indefinitely delay non-critical projects and lead to enhancement and innovation projects
being cancelled.

Gartner recommends that companies considering offshoring work to India either look at branching out their
offshoring facilities to more countries, or that they negotiate multiyear annuity-based outsourcing contracts
with vendors that let them raise rates by between 3% and 5% per year to account for employee salary
increases.

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Forrester Views:

US IT buyers may spend less than projected this year, reducing worldwide demand for computers, software and
services. While US spending will climb 2.8 percent to $552 billion, missing an earlier forecast for 4.6 percent
growth, global spending will rise 6 percent to $1.7 trillion, instead of the 9 percent originally predicted, the
report said.

The spend on IT services and outsourcing is expected to be $162 billion out of the $552 billion on total IT
purchases in 2008. This is a 4% growth over the previous year and is the lowest rate since 2003
.
'Indian services firms will feel the heat from the meltdown in financial services for sure,' Forrester Research
analyst John McCarthy says. But Forrester analyst Christine Ferrusi Ross says the industry has to diversify from
financials – where most of them make their money at the moment – and seek growth opportunities in utilities,
manufacturing, telecoms and health care.

Nasscom Views:
The global financial meltdown following the collapse of US investment banks will have limited impact on the
Indian IT sector in the short and medium terms, but poses a challenge in the long term. In the long term, the
export-driven software sector has to become risk-protected from such uncertainties by penetrating other
geographies and expanding its service offerings to diverse verticals so as to retain its competitive edge and
sustain the growth momentum – Som Mittal, president Nasscom.

“In IT budgets, non-discretionary spend, which is about 70 percent, will continue to happen. In a downturn,
discretionary spend on new projects, innovation or upgradation gets affected. The impact, if any, will be on the
latter,” Mittal explained.

“The UK and other European markets will recover in 2-3 years while the US will take another 12-18 months to
emerge from the current gloomy conditions. The Indian IT industry may have suffered from the recessionary
trends but it will recover in another 12 months. Moreover, after 12 months, the Indian IT industry will focus
more on domestic market and less on international markets," said Ganesh Natarajan, chairman of NASSCOM
and CEO of Zensar Technologies.

As per the Nasscom forecast in June-July 2008, software exports are projected to grow by $9 billion to $50
billion in fiscal 2008-09 from $41 billion in fiscal 2007-08 and $32 billion in fiscal 2006-07. As per the
McKinsey report, exports are set to touch $60 billion by fiscal 2009-10 even if the growth rate remains lower at
23-25 percent.

Recruitment trends –
Lowering of attrition levels by 6-7 per cent; broadening of the manpower base – over the past five years the
industry has grown from employing 4,30,114 in 2000-2001 to 2 million in 2007-08, thereby the percentage of
new additions is tapering;

increase in productivity and utilization levels – hires are now being made closer to deals.

The growth in salary hike has come down from 13.5 per cent last year to 9 per cent this year.

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What It Means To India
“Buyers will aggressively move toward offshore destinations and service providers that can offer a global
delivery model to access lower-cost IT labor for routine IT work that must continue for the business to operate.
However, non-critical projects may be delayed indefinitely, and for most organizations, any discretionary IT
spending will be cancelled", said Allie Young, vice president and distinguished analyst at Gartner.

"Plenty of opportunities are available in Latin America, Japan, China, Europe and also in some African nations,"
Ganesh Natrajan, Chairman of Nasscom added, urging the IT industry leaders to not be constrained by just US
markets, but look elsewhere too. "By 2020, India can alone fulfil the need of technical talent of the whole
world. By that time the whole world would need 43 billion technocrats while India will have 47 billion surplus
technocrats. Huge investments have to be made to train the available talent," he added.

At a time when customers in the US and Europe are tightening their IT budgets, leading Indian tech firms are
betting on their huge pile of cash to steer through the global economic crisis and also to explore M&A
opportunities in a world reeling under severe liquidity crunch.

Larger spends on training, R&D, a focus on consulting and higher value services could be the only way out for
the IT services players.

In turbulent times, clients expect greater flexibility and business value from service providers. The tighter
governance and regulatory environment that will evolve as a result of the financial turmoil will offer
opportunities to service providers in the medium to long-term.

Sources:
http://www.techtree.com/India/Techtree_Notes/Indian_IT_industry_safe_from_global_recession/551-95122-889.html
http://www.traderji.com/current-affairs/19742-spend-indian-firms-likely-feel-us-recession-heat.html
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growth_10058256.html
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report_10076573.html
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firms_100134397.html
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http://www.articlearchives.com/economy-economic-indicators/economic-conditions-recession/1705286-1.html

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