IT budget shock: Global IT services firms continue to struggle

Companies have already made several changes in their approach, offering variable costs with a pay-as-you-go model, said Faisal Kawoosa, chief analyst and founder at Techarc.  “For instance, many of them use solutions from Microsoft, AWS, Google, and the like. All of them offer scalable tech solutions that are cut to size as per the operations. If there is a need, they will continue to add capacity or else scale down and optimize the cost.” 

Interestingly, George pointed out that in the case of Gen AI, only Accenture has openly shared details regarding revenue growth and initiatives. It’s essential to recognize that generative AI technology is still in its infancy when it comes to its application in enterprise-level scenarios, and realizing its potential in most use cases will require significant time.

“Consequently, we anticipate that IT services companies may not experience substantial incremental revenue from generative AI in the immediate term,” George added. “Nonetheless, there will be continued investment in enterprise security and cloud computing. This is driven by persistent cybersecurity threats, breaches, and incidents, as well as the overarching goal of fostering digital transformation and building intelligent enterprises.”  

Expectations in the near term

Looking ahead to 2025, the growth trajectory for the sector hinges on several pivotal factors that need more clarity, including the recovery of discretionary spending and the influx of revenue from new large-scale contracts. Forecasts from CMR indicate an expected growth rate of 6-7% for the segment in FY2025, marking an improvement from the 4-5% observed in FY2024.

“It is anticipated that select companies will surpass the industry average, predominantly fueled by the acceleration of significant contract executions,” George said. “Nevertheless, the outlook for FY2025 remains uncertain, primarily influenced by variables such as the Federal Reserve’s rate cut trajectory. While the full impact of these adjustments on the economy may take time to manifest, they have the potential to stimulate increased discretionary spending among enterprises.”

Nevertheless, Kawoosa highlighted the unique position of the IT sector, noting its relevance in both economic upturns and downturns.

“From that point of view, I expect the momentum to continue, where businesses across sectors would want to see IT implementations not from the point of view of elating experiences but optimizing costs,” Kawoosa said. “However, when this is the requirement, you can’t expect premium pricing from the clients.  This means the IT implementations will see thinner margins and profitability.  But there will be enough business opportunities for consulting-led IT services and solutions providers who can help their clients achieve business and financial goals.”