The Hindu Business Line : The scene's brighter

THE threat of an outsourcing backlash from the US has been gnawing at the psyche of the Indian IT industry over the past nine months. It continues to blow hot and cold and is unlikely to cool down in a hurry. Even as the contours of this debate widen across the US, it is also increasingly clear that offshore outsourcing (also called offshoring) to India has already become an irreversible trend. In the worst-case scenario, only the pace of offshoring may come down, it cannot be stemmed altogether. Hence, a study of the trends in corporate IT budgets and their spending patterns in the US remains as relevant now as it has been in the past. As the calendar year draws to a close, the question uppermost in everybody's mind is : How will the IT spending pan out in 2004, especially after three years of slowdown?

Gartner and Forrester, the two research firms, are turning bullish on the prospects of a rise in IT budgets. They expect IT budgets to rise in line with growth in the US economy. However, the Chief Information Officers (CIOs) surveyed by them remain `cautiously' optimistic. The diffidence on the part of the CIOs is understandable, given the fact that they have been battered and bruised in the markets for nearly three long years. Moreover, there is no consensus as yet among economists and policymakers about the sustainable recovery of the US economy.

Having said that, the surveys and studies done by Forrester and Gartner in the US point towards the following significant highlights in 2004:

Verticals showing promise: The slowdown in the US (and to a large extent, the European economy) has sent one clear message: Focus on the consumers and position products and services to meet their needs. In line with this message, according to Forrester, the consumer-facing sectors such as retail, insurance, healthcare and consumer services are expecting a sharp rise in IT spending relative to the average industry growth.

Increase in new investments: After indulging in cost-cutting initiatives through outsourcing of maintenance and migration activities, the industry is finally veering around to new investments again. However, it is expected that infrastructure software such as security and storage-related software will drive new investments. And new application development and deployment may grow at a relatively slower pace. So, this slow pace tends to reflect that pricing pressures (faced by Indian top-tier software companies) will remain for some time to come. Secondly, with slower application development, maintenance and management projects may continue to be a key driver of volumes for Indian companies. This may not be applicable across-the-board, but Indian companies will have to work harder to secure new software development projects.

Risk mitigation, e-commerce to dominate: The top priorities of IT spending in 2004 are expected to be security and disaster-recovery upgrades (as a part of business continuity programme), e-commerce and business intelligence, in that order. The resurgence in demand for e-commerce and business intelligence projects spells good times for the Indian software industry. For both the top-tier companies and medium-sized companies (with a niche strategy), the expanding revenue base from these two initiatives creates scope for higher realisations and an improvement in margins.

Picture by G.R.N. Somashekar

maverick@thehindu.co.in

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