Euro crisis, lesser IT spends likely to affect Indian tech firms

Even as things seemed to brighten up for the Indian IT sector with the recovery of the economy after a horrid slum, new reports hint that the prevailing currency crisis in Europe may affect the spending on information technology globally.

According to a report released by Gartner, an international research organization, global spending on information technology is expected to be around $3.35 trillion this fiscal – a 3.9 per cent rise from the previous year. Nevertheless, this is being viewed as a climb down, as the research firm had predicted a 5.3 per cent rise in worldwide IT spending during the first quarter of 2010. The lower outlook is said to be owing to the depreciation of euro vis-à-vis the US dollar.

Quoting a report made public by Gartner vice-president (research), Richard Gordon, a financial website says that the currency disaster in Europe has created a negative impact on the IT spending worldwide. According to Gordon, the US-dominated IT spending would remain down as the US dollar braced up against the euro during the first half of 2010 and it will continue to be strong during the second half too. The Gartner report states says that the IT spending by the public sector in Europe would be restricted since the governments would be endeavoring to manage the budget deficits over the subsequent five years as also try to lessen their liabilities over the next decade or so.

Incidentally, Gordon’s views were reflected by other research organizations too and a number of industry experts are of the view that all fresh contract renewals would witness a price cut of anything between 5 and 12 per cent. According to Avinash Vashistha of US-based research firm Tholons, although there has been a significant augmentation in offshoring, basically there has been little enhancement in client business since last year. The Global TPI Index report for the first three months of 2010 substantiates this view. According to the TPI Index, while the commercial outsourcing agreements were worth around $25 million during the first quarter of 2010, the total contract value was worth $19.5 million – an increase of 25 per cent during the corresponding period in 2009.

Vashisth says that though the industry was optimistic during the last quarter of 2009, going by the state of client business, that buoyancy has not been translated in reality. According to him, the agreements signed before the recession for five-year terms or so may witness an increase when they are renewed later, but all recent renewals were done at marked-down rates, resulting to a rate level-headedness. He says that some of the major contracts have been renewed recently at 15 to 20 per cent decreased prices and this trend is likely to persist during the remaining part of the year.

In fact, the TPI partner and president (global operation) Mark Mayo too foresees that the restructuring will persist and will negatively impact the outsourcing industry. Stating that annual deals worth $10 to $12 billion will expire this year and they are likely to be renegotiated at discounted prices ranging between 20 to 25 per cent compared to prices in 2009, he said that it is unlikely that there would be rush for new contracts in the near future, as the growth would be sluggish.