While the situation for IT services firms is not as dire as in some other sectors, the aftermath of COVID-19 is expected to impact them as their customers grapple with challenges. According to consultancy firm Gartner, there is an anticipated decline of approximately $300 billion in aggregate IT spending by organizations globally in FY21.
Conducting a dipstick survey across senior executive management of India’s top 10 IT companies, CNBC TV18 aimed to assess the impact of COVID-19 on Indian IT’s financials. The findings reveal a substantial impact across five key sectors, with US clients expected to make the most significant cuts in spending.
Most IT executives interviewed emphasized that industries such as retail, travel, transport, and hospitality, which bore the brunt of lockdowns, would experience the most significant spending declines. Surprisingly, even the banking and financial services (BFS) sector, deemed operational and essential during this period, is witnessing substantial cuts in spending.
Large BFS clients in the US are particularly reducing spending, and given Indian IT’s substantial exposure to North America and Europe, the impact is expected to be more profound than in sectors like travel and hospitality. Although there is currently no clarity on when these sectors will rebound, companies express hope that spending will start picking up in September, with expectations for manufacturing to revive from October onwards.
Besides spending cuts, the impact of COVID-19 is leading clients to seek discounts in billing rates, with some clients requesting discounts as high as 40 percent. Executives anticipate that pricing will be adversely affected throughout FY21 and into FY22, stabilizing only by mid-FY22.
Another notable impact is the increased skepticism about the Work From Home (WFH) model, especially among BFS clients. Concerns about security have prompted clients to demand a reduction in the WFH percentage for their projects as certain areas relax lockdown norms.
To navigate these challenges and maintain margins, IT companies are emphasizing the reduction of subcontracting costs. Companies like TCS, Infosys, HCL Tech, and Wipro have mentioned in their earnings calls that cutting down on subcontracting costs is a key strategy. The subcontracting workforce has seen significant reductions, with around 70-80 percent of employees in subcontracting roles across onsite and offsite being let go.
Clients in sectors like nonessential retail, transport, and travel are requesting furloughs (leave without pay) for project staff. While IT companies are making efforts to retain their employees, those in between projects or on the bench may face increased scrutiny and potential job cuts in some companies.