Global technology spending is anticipated to experience a “moderate” slowdown due to concerns about high inflation and the possibility of a recession, particularly in markets like the United States. Despite these challenges, industry experts in the IT sector predict an overall increase of 11% in global technology spending for the upcoming year.
According to experts interviewed by ET, discretionary spending, constituting 15-20% of a typical IT annual budget, will face significant pressure. However, they emphasize that mission-critical IT services projects will persist.
The annual technology budgets for the next year are typically decided by most large companies in December or January. For Indian IT firms with substantial presence in the UK and continental Europe, especially in sectors like mortgage processing and automotive, the coming year is expected to pose considerable challenges.
A pulse survey of 600 major enterprises from the Global 2,000 reveals an anticipated 11% increase in project budgets over the next year, as reported by Phil Fersht, CEO of HfS Research. Sectors such as energy, utilities, food suppliers, and healthcare are projected to sustain growth, with increased spending from digital-native and software firms turning to outsourcing.
However, in sectors heavily impacted by inflation and recession, such as mortgage processing, automotive, and consumer packaged goods (CPG), Indian IT services are likely to face difficulties in FY23. The challenges are expected to be more pronounced for Indian IT companies with substantial exposure to the UK and continental European markets.
IT service providers like Tata Consultancy Services (TCS) and Infosys, although diversified in their customer base, may encounter hurdles in segments like mortgage processing. During the second quarter, leading IT service companies acknowledged client concerns about the recession, expecting more clarity by December or January when finalizing client budgets.
The beginning of 2023 is predicted to be soft for the Indian IT industry due to the impact on overall spending caused by lower discretionary spending, according to Ganesh Natarajan, former CEO of Zensar Technologies and current chairman of 5F World.
The pressure on discretionary spending implies that service providers will need to shift their focus from transformation deals to emphasize cost-saving and traditional legacy projects, which will drive demand for outsourcing.
Harish Krishnakumar, senior market analyst at IDC India, notes a decline in mega-deals among Indian IT service providers, suggesting delays or indefinite postponement of investments in large-scale transformations and discretionary projects. Despite the looming recession, Krishnakumar anticipates moderate growth in the global IT services market in 2023.
An ICICI Securities report on November 23 highlights slowing demand for hyper-scalers like AWS, Microsoft Azure, and Google Cloud, which may impact revenue growth for IT services. While the shift towards optimizing spending on the cloud is expected to benefit IT services companies, the report suggests that the size of the opportunity may not be substantial due to clients’ focus on cost optimization.