As IT spending intent across European enterprises turns negative due to the worsening eurozone crisis, Indian software services exporters, particularly mid-tier firms, may have to rethink their strategies for the continent. Market watchers and analysts said firms will have to put off investment plans as growth slows in the coming months. Smaller IT firms are likely to switch to a cash-preservation mode, spending much less on top-notch hires and marketing than they would ideally want to.
Indian firms have been looking forward to intensifying sales activities in Europe. Some companies were even scouting for acquisitions, but these decisions are likely to be delayed given the slowdown of stronger economies such as Germany.
?Europe is a comparatively newer playground for Indian IT players, and this uncertainty will hamper their strategies,? Amneet Singh, VP of global sourcing at Everest Group, said.
The strategy re-look will be particularly relevant to tier-II and tier-III players, said Sathish Nanu of QS Advisory, an European global sourcing consulting firm. ?Tier-II and tier-III firms will be cautious in appointing geography heads and will continue to run their operations from the UK, where they first established their base. This is in contrast to tier-I firms who have stopped seeing Europe as a single bucket and have country managers for all their focus countries,? he said.
Europe constitutes 32% of worldwide IT spend, but hasn?t yielded much for Indian IT players who have always grappled with cultural and labour issues in the continent. Offshore Insights, an independent advisory, estimates the UK, Germany and France to account for $60-65 billion each in available market. However, the offshore penetration in France is a poor 2% and in Germany, only 5%. This is in sharp contrast to the offshore penetration of North America, which is between 12% and 15%.
Analysts said it would be much more difficult for mid-tier IT firms to penetrate the continent?s offshore market as they may not match up to the investments their larger rivals would make. ?In Europe, you need a local presence to hire local people. Companies require a minimum threshold investment. Mid-tier firms have to take a call on whether they can achieve that in Europe now,? Sudin Apte, principal analyst and CEO of Offshore Insights said.
Kishore Kumar of outsourcing advisory Tholons said, ?If the crisis worsens, it makes sense for European enterprises to accelerate offshore efforts. However, from the vendor perspective, it would require significant marketing and sales investment to drive the message. Mid-tier IT players will lose out and the situation will be advantageous to large players.?
Biju Davis, GM of French software firm Cegedim Software India, told FE that there is a sense of caution across sectors. ?This will definitely impact decision makers when they sit down to chart the 2012 budgets,? he said. ?I think a more realistic picture would be visible towards the end of 2011 or Q1 of calendar year 2012.?
Davis said there was more evidence of the slowdown spreading in Europe. ?Italy and Spain are next,? he warned.
Referring to a recent ?stress test? done by European banks, he said French banks came out unscathed, and so did German ones. ?From a pharma industry perspective, I think it?s the last industry to be affected. Financial services would be the first to show indications,? he added.
Analysts said that at the moment, they have not noticed any changes in request for proposals in Europe. However, customers were reducing the scope of work. Typically, BPO work may be offshored first, followed by infra and applications. UBS Investment Research polled 40 European CIOs and reported a deteriorating IT outlook and predicted near-term headwinds from weaker than expected IT spending.