Greece is not the only issue plaguing the IT sector

IT sector is facing structural issues, such as pricing pressure as well as a bias towards legacy tech even as the competition is moving to digital tech

The Information Technology (IT) sector has been at the receiving end of the Greece crisis. The BSE IT index is one of the worst performing indices, trading at its lowest level over the past month. The Greece contagion is expected to impact all of Europe, which market analysts feel will impact the IT sector the most. The sector has been under pressure since Tech Mahindra along with Persistent Systems and KPIT Cummins warned of weaker results ahead.

If the Greece crisis was not bad enough, technology research firm Gartner pointed out that global technology spending is set to witness a steeper drop this year than was previously expected.

According to Gartner, IT spending is expected to shrink 5.5% from last year to $3.5 trillion, which is higher than the 1.3% reduction the research firm had expected in April 2015. However, Gartner pointed out that the slide is on account of cross-currency fluctuations, saying that there are secondary effects to the rising US dollar. Vendors have to raise prices to protect costs and margins, and consumers will have to make new purchase decisions in light of the new prices.

According to a results preview report on Indian IT companies, UBS has pointed out another quarter of disappointments would erode market confidence. Consistent misses against consensus raised concerns on the FY16 outlook. UBS feels that further misses are likely to erode market confidence.

Though Accenture has recently pointed out that there is broadbased growth in key markets and sectors, UBS says that the company’s revenue trend has been divergent from Indian IT and they would remain cautious on extrapolating it. UBS says that they remain cautious on the IT sector which offer limited upside potential.

IT sector is facing structural issues which are causing pricing pressures on the companies. Higher competition aside, the sector is witnessing a shift to digital technologies by its consumers. Indian companies, as pointed out by UBS are skewed to legacy technologies.

Wipro’s chief technology officer KR Sanjiv pointed out that traditional IT systems are designed to solve problems that are precise and repetitive. However, strong reasoning capabilities and the ability to contextualise will be key to enabling superior business outcome. The company has entered into automation technology space through its in-house artificial intelligence platform, Holmes, developed after four years of research, is built on an open-source technology. This can be used to automate industry specific business process. Wipro expects the platform to create a differentiation in the marketplace.

Few companies in India have the vision, time or money to think along these lines. If there is an overall slowdown in spending as is expected by Gartner, fewer companies would be willing to invest in these technologies.

The key to finding a winner in the IT space thus are those companies who are investing for the future rather than running sweat shops.