IT sector braces for a rough ride as ISG predicts delay in client spending

IT services industry is up for a rough ride this year as global technology research firm ISG sees majority of the global enterprises delaying their spending decisions by up to three months owing to the Covid-19 pandemic.

According to ISG, the demand contraction is likely to be felt the most in the second quarter (April-June) period of this year, leading to decline in annual contract value (ACV) of IT services firm. The sector, however, is expected to see a gradual recovery in the second half of 2020.

“ISG estimates 17 per cent QoQ and 21 per cent YoY decline in annual contract value of managed services deals in the second quarter of 2020 due to supply and demand challenges caused by the pandemic. Travel, transportation and hospitality will be the most-affected verticals followed by retail,” Kotak Institutional Equities said in a note after attending ISG event.

“Telecom vertical IT spends are likely be more resilient compared to other verticals,” it said.

According to ISG, while January and February saw good growth in overall technology outsourcing contracts, it fell sharply in March with the disease spreading across key geographies of the US and Europe.

Due to such demand slump, overall ACV for 2020 is likely to fall by 7 per cent this year from $55.7 billion worth of contracts that had been executed last year.  ISG also sharply revised its outlook for managed services, IaaS (infrastructure as a service) and SaaS for the whole year.

The global research firm also predicted significant cut in discretionary spend this year, which accounts for around 30 per cent of the total IT budget for most enterprises.

“Quantum of discretionary spends can fall by 15-30 per cent in the near term. Application modernisation initiatives, while a critical part of digital transformation, will take a backseat due to pullback in discretionary spending,” the Kotak note said.

The ISG report also predicts a significant pricing pressure on the IT services firms is going ahead. “ISG estimates that 60 per cent of clients will ask providers to reduce prices by 20-50 per cent,” the note stated.

As productivity levels come down because of work from home by majority of employees, clients are also expected to ask for a price rebates citing lower productivity levels in the coming quarters.