IT service companies brace for tougher times

NEW YORK, Oct 15 - Technology service providers are expected to suffer a sharp slowdown in demand heading into 2009, forcing them to diversify from financial services and pump more resources into regions outside the United States.

Amid fears of a global recession, companies -- especially banks, worst-hit by the credit crisis -- have already started to cut or delay spending on information technology services such as consulting and software development.

Analysts say the worst is yet to come for the IT services industry, which has cut contractors and frozen hiring as customers postpone short-term projects.

"The December quarter will be the first full quarter after the credit crisis and the results could be quite ugly," said Kaufman Brothers analyst Karl Keirstead, adding that a prolonged recession could lead to more IT job cuts.

"This is the great myth spun by all the outsourcing companies -- that a downturn would help the outsourcing firms because they deliver cost savings to clients. A recession doesn't help anyone."

Market research firm Gartner slashed its forecast for 2009 IT services spending this week. It now expects such spending to fall 0.2 percent next year at $815 billion, down from its August forecast of 7 percent growth over 2008, and said developed markets would be harder hit than emerging economies.

Infosys Technologies Ltd, India's No. 2 IT services exporter, cut its full-year revenue forecast due to the global financial crisis. Even IBM, the world's top tech services provider, gave weaker-than-expected quarterly revenues, though analysts say cost controls helped it beat on profit.

In this climate, analysts said U.S. companies with diverse portfolios such as Accenture Ltd, Computer Sciences Corp, IBM and Hewlett-Packard Co are likely to fare better than Indian outsourcers such as Tata Consultancy Services Ltd, Infosys and Wipro Ltd, which are highly exposed to financial services and the U.S. market.

"The Indian services firms will feel the heat from the meltdown in financial services for sure," Forrester Research analyst John McCarthy said.

Shares of Infosys, Tata Consulting and Wipro have lost more than half their value so far this year. In contrast, Accenture -- a favorite of many IT analysts -- has lost 10 percent while IBM is down 15 percent, both outperforming the S&P technology index's 35 percent fall.

NOT AS BAD AS 2001

Forrester analyst Christine Ferrusi Ross said the industry has to diversify from financials and seek growth opportunities in utilities, manufacturing, telecoms and health care.

"The service providers are going to their existing clients in the other industries to offer better rates and better resources," she said, also seeing expansions in Europe.

The financial industry accounts for close to 20 percent of global IT services revenue, according to IDC. Manufacturing makes up about 22 percent and government about 18 percent.

IDC analyst Rebecca Segal said project-based services -- which account for a third of the market and include areas such as application development and consulting -- were slowing.

However, she was more optimistic on the outsourcing sector than Keirstead, saying, "Outsourcing can run counter-cyclical as you could see it as a way of saving money."

Amid the spending cuts, analysts have made comparisons with the bursting of the dotcom bubble in 2001. Cowen & Co analyst Moshe Katri expects a less dramatic drop this time, saying companies were already running disciplined budgets.

"You'll probably see a slowdown in 2009, but I don't think it's going to be as drastic as it was in 2001 to 2003," Katri said, noting annual IT spending growth slowed to 2 to 3 percent from 2003 to 2007, from 10 to 15 percent from 1998 to 2001.

Sanford C. Bernstein analyst Rod Bourgeois also said things were not as bad as they could be. "The good news is that we are not seeing major blow-ups on existing deals -- substantially limiting the magnitude of downside risk stemming from the poor macro-environment," he said in an e-mail interview.