How Will IT Services Fare in the Coming US Recession

Most commentators put a high probability on the US going into a recession. What began with a problem of imprudent housing loans in the US has snow balled into a crisis for the Financial Services industry and an almost certain slowdown in consumer spending. How this impacts the Indian IT Services industry requires some analysis.

The last US recession in 2001-02 was triggered by the Tech meltdown. Most IT Services companies went into the recession with a couple of slow quarters. Budget cuts at large accounts ate into the fundamental growth in the industry for a couple of quarters. But very soon, the recession started working in favour of the industry as more companies, facing weak earnings, chose to jump on the offshore outsourcing bandwagon. Soon it was back to double digit quarter on quarter growth.

Is this time going to be the same? I think there are some differences between this recession and the last one which bear examination.

First, the industry in the eye of the storm this time is the Financial Services industry. Most Indian services companies get 30 to 40% of their revenue from the Financial Services industry. The Financials also went through a slowdown in 2001, but the current recession could be a lot worse as far as this industry is concerned.

Second, the numbers are much larger now. The size of the industry at around $20B is now four to five times as large as it was in the last recession. There is a distinct possibility that the contraction due to budget cuts in large accounts may eat away all the growth from new accounts and more. There is also the matter that growth from new accounts, at least in the US, may not be as strong since there are very few companies with large IT budgets who don’t already have offshore programs.

Third, the decline of the dollar makes offshore outsourcing a little less attractive. Sure, the labour arbitrage is still high enough, and this is probably going to hurt margins more than growth, but every bit counts when you are facing a slow down.

The only silver lining, I feel, is Europe. From whatever I hear, Europe is showing strong growth for everyone in the business. The inclination to outsource is higher than ever before. It is possible that Europe may escape a full-blown recession although it will see some impact to GDP growth on account of the US recession. And lastly, the Euro is strong and the arbitrage is very attractive.

How these effects balance out, I do not know. But there will be strong headwinds ahead, for sure.

[Update: Kris Gopalakrishnan, CEO of Infosys, speaking at a conference said that so far the impact of the US slowdown is muted. The story is here . That is good news, however, we should not assume that this is how it will pan out over the duration of the recession for other companies.]

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11 Responses to How Will IT Services Fare in the Coming US Recession

  1. shashi says:

    About the second point. Though the size of the industry is $20 bn and 5x of 2001, it, still, is just a tiny fraction of the global services industry, which is pegged at $600 bn.

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  2. Basab says:

    Shashi, your point is well taken. 3% of the global services market should not present any growth issues, in the long-term. But in the short-term you have a much larger base in existing revenue that will see downward pressure and a somewhat smaller available market to grow into to compensate for that. All I’m saying is it might be different this time around.

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  3. Krishna says:

    I go unless there is a competing market with the consumption levels close to that of US, world economies can’t put up with a moribund US markets for long. Every one feeds off it and it tastes nice. It’s impossible to conceive another market like that, not the least in IT services. Some day, others may achieve its size on the supply side(?), but demand side metrics will be hard to replicate. That sustains the imperative – Help U.S get its act together, fast. If US doesn’t survive, others won’t fare much better either.

    Do anything. Drive economies, value add, scale up, squeeze margins, innovate, sell cheap, offer free – help U.S.clients hold their heads above water. Relying on untested European market is like letting go the proverbial bird in hand seeing two in the bush. Europe is full of (not just linguistic) prejudices and isn’t as origin agnostic as the U.S is, and in between the time taken to schmooze and adapt, the fixed maintenance costs of your large scale build-outs will kill you.

    That would be a catastrophe. In comparison, fixing US recession before it fully arrives seems a song. It is for global economies to be mature enough to rally around the US and get it out of trouble, if they have to stay in shape themselves. My hope is built around that (self-centered) altruism that fits very well with a flat world.

    Some day one of us can ask Kris Gopalakrishnan’s cardiologist about how many heart beats he may have missed while putting a brave face like that up. I am sure he too hears about many fresh billion $$ write downs and CEO ejections as much as I do. All of these were kept off balance sheets (and investors) and the traffic is only getting busier. Bravo, Kris….

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  4. Uhm, but isn’t the problem in the FS industry so wide and deep that it can be a serious inflexion point? We’re talking hits of way beyond the $100 billion mark, which obviously will hit practically every other function of the industry.

    And Kris has to maintain that Infy won’t be hit. There will be a run on anyone that admits to a problem = see what happened to WNS stock after their August 15 conference call.

    The issue unfortunately isn’t short term, in my opinion. This is the return to innocence, the biggest nightmare of the financial bazaar.

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  5. Umang.D. Rathod says:

    wel, to be frank enough a person shouldn’t be dogmatic. as far as i am concerned u.s is not going into recession,majority of the venture capitalist funds and institutional investors are hugely invested in india and china. with a high gdp growth of 8-9% ,the likely chances of poor performance of those funds are negligible,due to the p/e expansion of emerging markets the major beneficaries are in u.s.according to me the jobless reports data which showed signs of recession in early july were solely due to severe outsourcing.higher.although the gdp growth of us will slow down to 1.4% from estimated 1.8% .. its still exceptable with sub-prime issues around it..? isnt it?
    its just that the standard of living in u.s has reached its peak, and due to less per capita income an individual might not be able to fulfill his luxurious desires, can this be termed recession..?
    the higher commodity prices will certainly effect the livelihood but still, it will be coped.some more rate cuts and u.s will be ready to bounce back ,which was even witnessed in data realeased after the previous rate cut.
    i m just 22, and the views are as of my understanding ,i someone wants to correct my views, he’s welcomed
    i have participated in capital markets from last 3 years and i have learnt a golden rule-” the best bull market commences when the last bull turns into a bear”.

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  6. Ram says:

    Folks,
    Although slightly off track, I feel, this time, the slowdown will have a difference due to the following factors:

    1. I always felt, Top 10 service providers (IBM, ACN, TCS, Infy, Cap etc) will start “looking” (services, model, target customers..) the same by 2010 irrespective of branding. The slowdown will probably push that date ahead..i.e, it could happen within next 18 months
    2. Once the “industrialisation” happens, innovation becomes key. Thus, the folks who will emerge out leaders out of the current slowdown will be those who have huge “innovation/R&D” budgets and ability to monetize IP or build these capabilities in next 18 months
    3. The threat for Indian IT leaders is not as much about growth ( The share is only 3% and hence lot of money is out there..) rather it is on:
    – Margins – Without an innovation agenda and solutions forming a key component of revenue, indian IT leaders are particularly vulnerable. The 3 year window they had is reduced to 18 months due to this slowdown
    – Relevance: Once the Top 10 start “looking similar” quality of revenue and positioning for future becomes significant. Indian IT leaders are vulnerable here. They may continue to grow but they would have given away the leadership (for example, neither TCS nor Infosys are leaders in their own backyard !!. The transformation agenda in India is being driven by IBM, Accenture if you have been following media). Thus, there is a real risk of Indian IT leaders becoming irrelevant outside or at home.

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  7. Pingback: Another Post on the Dollar-Rupee Race « Time and Again

  8. Pingback:   Another Post on the Dollar-Rupee Race — Time and Again

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  10. Basab says:

    Scott, No plans to advertise on this blog. btw, there is a Contact form on the blog. thanks

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  11. Pingback: 6 AM Pacific » Blog Archive » The IP imperative for IT Services or How to Beat the Recession

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