Editorial. IT’s prospects hit by global headwinds

Signals emerging from quarterly numbers declared by global tech giants indicate that there could be a slowdown in tech spending by companies over the next two quarters. Microsoft, for example, has warned of a marked slowdown in its cloud computing business as large customers pause their spending in the face of a slowing economy. Other major tech companies, such as Meta, Twitter, Snap, and Apple, have already enforced job cuts and slowdown in hiring.

This comes even as the domestic IT industry has steadily climbed in global ranks, reporting the highest-ever market share in five years. India-based IT companies outperformed their global counterparts in Q2-FY23, delivering a cumulative 1 per cent quarter-on-quarter increase in revenues; meanwhile, revenues for global IT companies degrew by 2.1 per cent quarter on quarter. This is because domestic IT companies have been making major investments into technologies of the future, including cybersecurity, analytics, cloud, and IoT digital which have fostered resilience in the sector. While most Indian players see the weakness in the global macro environment as transitory and expect the tech upcycle to continue, management commentary has turned cautious, given fears of a macro slowdown.

For instance, the management of HCL Tech has already revised its guidance downward for the current financial year, blaming volatile macros and the impact of higher-than-expected furloughs in the BFSI, hi-tech and telecom verticals. Similarly, Mindtree is seeing European clients being cautious, which is reflected in a slower pace of decision-making and elongated deal-closure cycles. The US and Europe together account for 80-90 per cent of revenues for all companies. While the US is facing its worst inflationary trends in 40 years, the UK is up against a long recession. Macro uncertainties, high inflation and supply disruptions could force deferment or cancellation of projects, which will shrink the deal pipeline for IT companies.

In terms of vertical segments, for most Indian IT services companies BFSI is the largest vertical. With capital markets taking a hit in the West, discretionary IT spending is likely to reduce. The big four IT players have already cut down on hiring, adding around 30,000 employees in the September quarter compared to 52,000 employees in the same quarter of last fiscal. To their credit, Indian IT companies have fixed their business models and moved up the tech value chain to be able to overcome near term challenges. Now, they should use this period of slowdown to fix issues around human resources. Better employee retention schemes should be put in place to avoid the problem of attrition when the next upcycle comes. Massive attrition over the past year has dented profitability. In the past, companies have used down-cycles for downsizing their workforce to protect margins. Instead, they should look to reskill employees and invest for the long term.

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