IT spending remains unpredictable

Contrary to most IT service firms’ rhetoric of a probable revival in IT spending by companies in the West, surveys coming out from the US and Europe speak of prolonged unpredictability in IT budgets.

A survey conducted by IT major Hewlett-Packard (HP) found over 90% of firms felt “business buying cycles will be unpredictable over the next few years, meaning all hardware and software vendors… need to find new approaches to selling.”

Another survey, of over 100 firms in the UK with sizes ranging between £5 million to £1 billion, found that 25% had stopped ERP (an software application that integrates all departments of a firm) project spending, while 41% of them were postponing spending on ERP and other enterprise specific software.

V Balakrishnan, chief financial officer of Infosys Technologies, India’s second largest IT firm by headcount, believes uncertainty in IT spending is here to stay. “Complete recovery is certainly unpredictable now. Firms in the West are continuing to spend on existing projects which has greater percentage of offshore play. So even if recovery is delayed, offshoring will continue. That is what makes us hopeful,” Balakrishnan told DNA Money.

Bank of America-Merrill Lynch Global Research analysts Mitali Ghosh, Pratish Krishnan and Kunal Tayal also believe IT spending is unpredictable. “We believe demand outlook for 2010 is yet tepid and there is no clear indication of an inflexion in IT spending,” they wrote in a November 6 note to clients.

Balakrishnan added that long-term IT projects from firms in the West are on hold. “ERP and other enterprise software spending usually fall under long-term spending. Those are certainly on hold. But firms are still looking to spend on short term,” he said.

Most Indian IT firms, however, have expressed hope of demand recovery in another two quarters. Krishnakumar Natarajan, chief executive officer of Bangalore-based Mindtree Ltd, said: “The scenario in which clients stopped spending on projects completely during the downturn has changed for sure. Since they start planning on budgets by the end of the year, we can expect first signs of investment in January 2010.”

Shubham Majumdar and Nitin Mohta of broking firm Macquarie Research second this. In a November 5 note to clients, they said: “We believe there are visible green shoots in the global economy and expect the large corporates, especially in the developed markets, to start posting better results in CY10E and beyond. Our global views on GDP growth and corporate profits point towards a recovery in the next one or two quarters. Accordingly, we expect discretionary IT spending to start ramping up in the next two to three quarters.”