You have put out a note, a very positive one, saying that second half of this year, you should witness improvement in IT spends in global IT majors. Now, this is quite in contrast than what the rest of the world believes. So, what is your finding, actually your interactions and your surveys, which you work very closely with global corporations, how come such a stark difference in opinion?
There is no recession in IT world. Now, for 2023, we have projected about 4.3% growth and that moves to 8 plus percentage in 2024. As part of our research, what we felt is IT software and services are going to be the two big underpinning drivers in 2023 and 2024 as well. Yes, we acknowledge that there are macroeconomic headwinds and because of that there is a change in the way big corporates around the world are looking at IT.
So, IT was earlier only a tool to drive engagement and growth with a business and that actually continues, that does not change.
However, the interesting part that we see in the last three to six months, especially given some of the caution that the CIOs and the boards are practicing is number one, look inward, use IT to drive employee productivity, employee engagement, also looking into a lot of internal systems such as ERP, CRM and that is actually a big part of why the software spent, so when I talk about 4.3% growth for 2023, actually software is the only segment which is expected to grow in double digit, about 13 percentage for 2023.
So, a lot of the software vendors out there who are engaging in this, yes, your end customers are looking at specific solutions that help them to be more efficient.
And then finally, the services area where for 2023, we made some adjustments but still we are saying it is about eight plus percentage point growth and moving into 12%, double digit growth for IT services.
Talent remains a big differentiator. It is a big concern that the corporations have. Now, to address that, they are going to engage with services companies and within services, especially the consulting, the business consulting, the technology consulting those are the areas where we expect more spend to happen. So, all in all, I hope this substantiate the fact that there is no IT recession.
No, I do not think anybody is calling out for an IT recession. Everybody understands this is just timely, a time difference, if at all, in terms of the lag of bookings and ramp downs that we are seeing. But I just wanted to bring out two points. Of course, one is the interesting one where you talked about the double digit growth will come back in 2024. So 2023 might be a bit of a blip, but we will see that sharp recovery in 2024. And the other one that you said about the companies looking inwards. Does that mean that they are getting out of the outsourcing mode and maybe looking at building up their own teams because this is one thing that generative AI was also expected to disrupt, that people thought that companies and corporations will start spending inwards and setting up their own teams. And that would raise a big question mark for the entire disruption of IT services in India at least?
I mean, you made a very good point here. So two or three things. Number one, organisations are looking inward which means can I train my people? Can I do things which are high value? Now, does this impact outsourcing in a big way? The answer is no, because a lot of the outsourcing is low value.
So the low value stack of the outsourcing is not getting impacted. And then if you look at that low value and bring the killer app which is the generative AI today, all of that is going to be taken care of with that piece.
But where we see more inward real stuff happening is business layer, high value impact. And I think that is an area where services companies need to invest into building practices, business consulting, technology consulting, advisory, even sustainability consulting.
Given all the awareness that we look at from a sustainability perspective, these are the high impact areas where inward conversations are happening.
Rather than the low value stuff which is more infrastructure, more commodity, more outsourcing that is not necessarily getting too impacted.
Yes, there could be price pressures that is one area because of the inflation, because of the macroeconomic headwinds, there could be price pressure on it but this is not going to radically change the outsourcing business.
I want to understand how, what is the position, are the new contracts being negotiated at much more stricter pricing regime? You made a point of talent. Is talent starting to make an issue? Because if talent comes back as a key issue which means wage hikes will come back and so will pressurise the margins of these large companies?
As far as the sourcing and the contracts are concerned; number one, the contracts are definitely seen with a lot of caution. We see more number of influencers and scrutiny in the deal which clearly means they are going to be questions asked about the business impact so it is not the technology solution.
It is the business impact and that changes the conversation. Sometimes this will translate into tougher pricing contracts as well, because more people are trying to get that.
So, yes the whole margins situation is going to be tight that is number one. Number two, what we are also seeing is customers wanting to do more short term contracts rather than five year-10 year contracts.
They want to look into one year, two year contract because that gives them a better visibility on the ROI. I mentioned business impact so if you are looking at a business solution, are you able to see impact in the next 12 months or so? Because let us face it, a lot of IT services contracts will be five year, seven year, 10 year and in today’s regime, it is difficult for all companies to justify that kind of spend with that long term view. So those are the two underpinning forces that we definitely see impacting the contracts. But yes, contracts are being signed.