IT services budget will see a slight improvement

Written by Rachana Khanzode | Updated: Oct 30 2010, 05:11am hrs
Even though most Indian IT services firms giving an indication of higher spending in the next two quarters, John McCarthy, vice-president and principal analyst at Forrester Research, said the overall IT spending will be conservative, but IT services budgets will improve. He adds that the industry is now witnessing a gradual shift from implementation of SAP & Oracle to software-as-a-service (SaaS) and IP led work. In an interaction with FEs Rachana Khanzode, he said that the price improvement is not likely and if it happens, it would be on the back of higher-end work.

IT services firms have indicated improvement in spending in this quarter. Is this recovery sustainable

This recovery looks sustainable in nature. This is because, even though the overall IT budget (hardware, software, IT staffing cost and others) will be conservative, IT services budget will slightly improve. We see discretionary spending happening but we do not see a focus on large deals, at least in the near term.

This is due to a gradual shift from implementation of SAP and Oracle kind of work to software-as-a-service (SaaS) and IP led work in the industry. These deals are largely going to be moving from time and material kind of contracts to fixed price contracts and business outcome based contracts. So spending is happening but at a slower pace.

What are the growth driving factors

The recovery in the US economy has slowed down as compared to our expectations and clients are giving smaller projects. The automotive (manufacturing) sector is improving. The telecom sector too has a challenge as they have a lot of legacy systems. So overall growth is driven by the multi-source (multi-vendor) environment and this has increased by 20%. There are very few clients that are looking at large single deals.

Do we see any improvement in the pricing environment

It is a competitive scenario and therefore, we do not see any major pricing improvement. However, if there are any price improvements, they are not going to be for the same-level of work. It will happen on the back of higher end work being provided to the same client.

A number of tier II and III firms in India are up for sale. Do we see international firms looking at acquiring them

Tech firms are looking at cheap deals but they are cautious when it comes Indian firms. They are more reluctant because of the laws in India. The deal structure here is not as easy as it in geographies like North America.