Bangalore: Even as the uncertainty over the US economic situation continues, a recent survey has forecast that spending on information technology or IT by the world’s biggest economy will shrink in the April-June quarter for the first time in nearly seven years.
Although worries have been aired about a possible slowdown in demand for tech services and products in a slowing US economy, this is the first time a survey has flagged a contraction in tech budgets this year. Surveys by International Data Corp. until now have predicted a slower expansion of 5% in IT spending worldwide this year, down from 2007’s 6.9%, while Forrester Research Inc. had forecast a growth of 2.8% in 2008, down from the earlier 4.6% growth projected in December.
The latest survey conducted by ChangeWave Research, polled 2,013 executives involved with IT spending decisions in companies across all sizes mainly in the US and Canada in early February. Some 23% of respondents, a three percentage point increase since its previous survey in November 2007, said they expected IT spends to decrease or companies to not spend at all. About 56% saw no change in spending, while only about one-sixth of the respondents said spending will increase, an unprecedented 9 percentage point drop.
Besides this data, ChangeWave has based its prediction of a drop in demand for IT services and products on its survey finding that just 43% of respondents, a 9 percentage point dip from the previous quarter, said IT spending was normal. The last time this number had dipped below 50% was in September 2004.
Tech spending, which accounts for about half of capital expenditure in the US, will remain subdued in first half of 2008, said Paul Carton, director research at ChangeWave. “It’s a sea of red within the US capital spending. We are still seeing a pullback in IT spending and overall capital spending,” he said on phone from the Washington D.C., office of ChangeWave, which specializes in tracking spending behaviour on a quarterly basis.
ChangeWave founder Tobin Smith said all sectors other than agriculture, oil and gas, basic materials and military and commercial airline manufacturing would be affected. “US corporations have the cash but they have the 2000-2002 downturn in their rear view mirror. Our numbers say ‘better safe than sorry’,” he said in an email.
For the January-March quarter, only a tenth of the respondents have spent more than they planned, down 7 percentage points from previously, while 27% have spent less than planned, 3 points worse. Spending in storage was down 6 points registering the biggest drop, followed by software enterprise applications, down 4 points.
The contraction in spending does not augur well for the Indian tech services firms, which count on the clients from the US as their biggest market. According to the National Association of Software and Services Companies, the US market accounted for two-thirds of the $32 billion (Rs1.27 trillion) revenues Indian IT firms reported in 2006-07.
Indian vendors such as Tata Consultancy Services Ltd have already begun feeling the impact and the company said on Wednesday that two of its top 15 clients have delayed some engagements which would have got under way in the current quarter. But, the Indian vendors are optimistic about long-term prospects as they expect offshoring to increase.
“Budgets are still getting finalized and there’s a delay, that could put pressure in the short term,” said V. Balakrishnan, chief financial officer, Infosys Technologies Ltd, India’s second largest software services firm. “Even if there is an impact, it will be for the short term, say for a couple of quarters.”
Srinivas Vadlamani, chief financial officer of Satyam Computer Services Ltd, said he was not in a position to exactly quantify the effect. “Although we have not noticed any significant impact of the slowdown at present, we do feel the need to be cautious of the emerging scenario.”
President and managing director of Cognizant Technology Solutions Corp., R. Chandrasekaran, citing a recent survey, said more than 80% of top 50 clients have finalized their budgets at this point of time.
“We believe that today’s market conditions present an opportunity to capitalize on demand for new and traditional services,” he said. While most studies point to a degree of belt tightening within IT groups, they also indicate that spending on offshoring will increase as clients seek to be more effective in their spends. ”We have seen this pattern of behaviour with our client base,” Chandrasekaran said.