External IT services include consulting, systems integration, hardware maintenance, software support, IT outsourcing and process anagement and excludes hardware, software, telecom and internal spending. The BFSI sector continues to contribute almost 40% of the revenues of Indian IT companies.
The BFSI sector in the US, which is the major market for Indian IT companies, spent $84.4 billion for external IT services, while UK spent $19.2 billion in the year 2007. Most of the immediate cuts will be focussed on internal (in-house IT) spend at BFSI firms. Those resources tend to be in high-cost locations like New York City and London. "Indian IT companies should actually benefit in the medium-to-long run because BFSI firms need to get lower costs from off-shoring and variable costs from working with third-parties, rather than the fixed costs associated with captive operations," says Redshaw. He adds that, in the short-run though, there may be a decrease in demand for Indian services from BFSI firms because outsourcing takes a long time to set up and longer to show returns. "BFSI will focus first on quick wins by renegotiating prices downwards, cutting discretionary spend and consolidating the IT applications they run. BFSI will be more risk-averse and may be politically inhibited from using outsourcing. The Satyam scandal will be a negative factor here, especially for banks that have been semi-nationalised," he says.
Redshaw also adds that more regulations are expected to be imposed by the government, like Sarbanes Oxley after Enron. Moreover, the BFSI sector will itself want to take up stringent self-inflected goals to comply with regulations, which will further hurt their IT budgets by 1%.