The Hindu Business Line : Forrester downgrades 2008 spending estimates

Overall findings
Consulting and integration services would be sluggish, growing at 3 per cent, compared with an earlier estimate of 9.4 per cent.
Outsourcing and salary & benefits remained stable, compared to estimates again, at 5.8 per cent and 5.7 per cent, respectively.

Our Bureau

Chennai, Jan. 9

Forrester Research, in its latest report has said that it is downgrading its forecast for 2008 IT spending (including operational budgets for equipment, IT consulting and outsourcing services as well as IT salaries) from 6.4 per cent to 5.2 per cent while its forecast for IT equipment (including capital purchases) spending is down from 7.8 per cent to a growth of 4.8 per cent.

In other words, it is saying that IT spending – be it on goods, products or services would grow, but at lower than earlier estimated rates.

Interestingly, the report said that within the IT spending category, IT consulting and integration services would be sluggish, growing at 3 per cent, compared with an earlier estimate of 9.4 per cent. Meanwhile, IT outsourcing and IT salary & benefits remained stable, compared to estimates again, at 5.8 per cent and 5.7 per cent, respectively.

Top Indian vendors depend more on outsourcing services for revenues than they do on consulting or integration.

The report said that IT outsourcing has shifted from large mega deals, “which have been declining in numbers to smaller, more focused deals, a move that has slowed revenue growth. The growing presence of Indian vendors such as Infosys, TCS and Wipro and a build up by US and European IT vendors of their own offshore resources have driven price points down, which has also limited growth in outsource revenues.”

Software investments

Software investments are less impacted, with 2008 growth estimates revised from 9.6 per cent to a “still strong” 8.1 per cent. This is an increase from 7 per cent in 2007.

Service oriented architecture, the report said, continues to be the main catalyst for new investment in software, both for infrastructure and for applications.

Overall, IT spending would grow slower at 5.2 per cent in 2008, compared with 5.7 per cent growth in 2007 versus a 5.4 per cent growth in 2006.

Reasons cited

The research report, prepared by Andrew Bartels of Forrester, said that the revisions were due to two reasons: one, bigger and longer-lasting impacts from the bursting of the housing bubble; and two, the ratcheting downward of 2008 forecasts by economists at the Federal Reserve, OECD as well as by those of the National Association for Business Economists.

While 2008 could see a repeat of 2007, with its weak start and then improved IT spending, the good news is that Forrester expects a significant pick up in IT investment and spending in 2009, “as companies invest in new technologies that can deliver improved business results.”

US scenario

The report says that the US may slowdown but would avoid a recession in 2008. The reasons are:

1. The US economy has a strong consumer services sector. Spending on housing and utilities, healthcare, education, entertainment, transportation and insurance and financial services represents 40 per cent of the US economy and has been growing at a steady rate of 2.7 per cent in real terms. There is little likelihood that this would change in 2008.

2. Solid spending by Federal, state and local governments: This sector represents 17 per cent of US GDP and has been growing at around 2.5-3 per cent. In an election year, this sector would continue to grow at these rates.

3. US exports are strong: Representing about 12 per cent of US GDP, a weak US dollar has led to 9 per cent growth in recent quarters.

Other factors that make up the remaining 40 per cent of US GDP would need watching, the report said.

Factors such as higher gasoline prices affecting purchase of non-durable goods; end of cheap credit affecting durable goods; housing sector declining further and tighter credit cutting business investment in buildings and equipment.

If the above sectors see sudden reversals, accompanied by either the collapse of the dollar or persistence of core inflation leading to quick interest rate hikes, then the US economy would see no growth or even see recession, the report said.

“IT purchases would then be flat at best, and IT spending … would grow at 2-4 per cent, at best.”

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