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 IT outsourcing to moderate in 2009: Forrester

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PostSubject: IT outsourcing to moderate in 2009: Forrester   Sat Dec 13, 2008 8:51 pm

IT outsourcing to moderate in 2009: Forrester

Independent research firm Forrester Research has in its latest tech market report titled ‘US IT Market Outlook: Q4 2008’ revised its 2009 US IT spending forecast. It is now projecting 1.6 per cent annual growth as against 6.1 per cent in US IT spending in 2009, stating that the US IT market outlook is down but not as bad as the 2001-02 tech depression. On the other hand, the report notes that the IT consulting and systems integration services will hit the wall in 2009 and IT outsourcing growth will remain moderate in 2009 and 2010.

While IT outsourcing will get a small lift from the economic slowdown in 2008 as companies turn to vendors that can help cut IT costs, the growth in IT outsourcing revenues will remain moderate. This will be owing to trends toward use of lower-cost offshore resources, smaller scale outsourcing deals and the 9-15 month lag from the decision to outsource. One area of growth is likely to be demand for managed network services offerings, which vendors are pushing and clients are increasingly adopting, the report said.

The US tech market forecast assumes that the decline in US real GDP in Q3 2008 will accelerate in Q4 2008 and the first half of 2009 before a weak recovery starts in the second half.

The report is based on analysis of US Department of Commerce data and financial reports of 49 IT vendors, and details the current IT spending across computer hardware, software, communications equipment, and services. Andrew Bartels, vice-president, Forrester Research, who authored the report said in a statement that the recession in the US would last into mid-2009, with declines in real GDP of as much as 3.6 per cent on a quarterly basis. “This kind of decline in the economy will pull growth in US business and government purchases of IT goods and services down to 1.6 per cent in 2009, from 4.1 per cent growth in 2008. The weakening of the US tech market was already evident in the Q3 2008 data, which showed US revenues of large vendors down by 2 per cent,” Bartels noted.

The report states that the recession will not be a replay of the 2001-2002 downturn, when tech vendors saw big drops in revenues. “This time, computer equipment vendors will see declines of 5-10 per cent in US revenues on a quarterly basis, not the 20-25 per cent drops of the early 2000s. Sellers of communications equipment, software, and IT consulting and outsourcing services will see one or two quarters of declining revenues, but on average will still grow modestly in 2009. So, IT vendors need to have a plan that mirrors what will happen in their sector,” Bartels cautioned.

The report expects financial services, consumer durables, construction and housing, retail, and industrial products (including automobiles) to be the industries most likely to cut back IT purchases in 2008 and 2009. The financial services industry is expected to cut IT purchases by 3 per cent in 2008 and 4 per cent in 2009, and the construction industry by 2 per cent in 2008 and 2009. The retail industry will have no growth in IT purchases in 2009, and IT buying by industrial manufacturing will slow to 1 per cent in 2009, Forrester says, adding that state and local government IT spending will also be weak.

The report notes that the BRIC (Brazil, Russia, India and China) markets are still growing, raising hopes for US export growth to continue. While the major industrial economies have gone into recession, emerging markets like BRIC are still growing, though at a slower pace than in 2007 and early 2008.

The combination of a somewhat weaker dollar in the near term and still-growing emerging markets suggest that US export growth may not collapse.

Indian IT outsourcing and consulting services vendors have seen 3 per cent decline in US revenues in the third quarter (ended September) of 2008. Even Indian vendors saw revenue growth slip to less than 20 per cent, with Tata Consultancy Services (TCS) posting just a 6 per cent increase )see table). Infosys and Accenture had the strongest growth in US IT services revenues at 17 per cent, though still below Q2 figures, Forrester said.

Source: Business Standard
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