Discretionary spending will go away in the short to medium term, but the IT vendors must offer highly effective and targeted solutions to find opportunity in adversity
India’s IT companies reacted strongly to the immediate challenges of the Covid-19 pandemic. They swiftly enabled the bulk of their employees to work from home and avoided major disruptions of the services they provide global corporations worldwide. However, in the months to come, they will need to do much more, say analysts.
Discretionary spending—meaning spending on good-to-have tech, but not immediately necessary — will go away as clients focus on the here and now. However, the IT companies will also have to keep one eye on the future and come up with targeted solutions that win customers’ backing. Competition will be fierce for contracts and consolidation is likely, the analysts say.
“The Indian IT companies are entering into a challenging time,” says Peter Bendor-Samuel, founder of the consultancy Everest Group in the US. The global economy could be heading into a recession, and potentially a severe recession. This will eliminate much of the growth driven by discretionary spending.
Therefore, one can also expect a new round of price competition as companies look to lower cost. “We expect this to lead to a new round of portfolio consolidation, in which one vendor wins at the expense of the others,” Bendor-Samuel adds. Taken together this will be a challenging time to grow sales—in some cases, we could see revenues decline, he says.
“The medium-term outlook is flat to negative 5 percent growth in sales,” estimates Ray Wang, founder and principal analyst at Constellation Research in the US. Most of the IT services firms have put in contingency plans to support their clients. The challenge is that India is four to six weeks behind the rest of the world in the passing of the virus. Hopefully work-from-home policies will be enough for non-critical operations, he says.
“We expect that the second quarter of the calendar year (April-June) will be severely impacted but there will be a return to recovery starting in the third quarter,” Wang says.