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Wednesday, 29 April 2009 10:40

Asia Pacific hedge against downturn for IT services firms

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The Asia Pacific region is proving to be an effective hedge for IT services firms against the economic turbulence sweeping the world.

So much so that, in the face of economic turmoil in markets like the US and Europe, an increasing number of IT services vendors are ramping up business development activities and expanding their alliance networks in the region.

According to a new study by Technology Business Research (TBR) the economic turmoil in the US and continental Europe means that IT services vendors have found that the most “fruitful opportunities” are currently emerging markets in the Asia Pacific region, along with the Middle East and other rapidly growing economies.

TBR says the economic turmoil intensified in the fourth quarter of last year leading to an, increase in client demand for services that enhance savings, and “steering IT services vendors to emerging markets and compelling them to trim their own expense structures.”

However, TBR’s director of PSBQ, Eugene Zakharov, says generally, most professional services firms experienced a further deceleration in growth in 4Q 2008, and the growth of the IT services market fell into negative territory, dropping from 1.5% in the third quarter last year to -0.2% in the fourth.

Zakharov predicts a further drop to -1.4% in IT services growth when the figures for the first quarter this year are released 1Q09 and, he anticipates that overall 2009 will be a tough year for IT Services vendors, with market growth being flat at best, compared with 2008.

Not surprisingly, the economic downturn also means there’s also been a shift in client demand, with TBR reporting that clients are now looking to services that deliver a quick return on investment (ROI) and cost savings.
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Zakharov says cost containment and quick ROI value propositions are critical and most attractive for IT services clients in the current environment.

According to Zakharov, as a result of projects initiated prior to the recession, consulting & SI fared better in 2H08 than outsourcing, and he says, this dynamic is changing in 2009, with outsourcing taking the lead in terms of growth.

With the financial crisis biting even deeper, and faced with clients’ cutting costs and demanding cheaper services, IT services firms, themselves, are scrambling to rationalise their expense structures by trimming costs.

TBR reports that many firms have curtailed hiring, reduced recruiting targets and begun eliminating redundancies among general, administrative and sales staffs. And, in addition, firms with offshore operations are shifting more work to low-cost regions and increasing employee utilisation to preserve profitability.

And, in the face of the economic downturn, TBR finds that there’s severe pressure on the major vendors, with “revenue leaders struggling to maintain top-line growth.”

According to Zakharov, while the acquisition of EDS significantly increased HPS’TTM revenue –allowing it to leapfrog from number four in the third quarter last year to number  two, and ahead of major competitor Accenture in 4Q08 – he says, however, that the organisation remains “significantly smaller than IT services behemoth IBM Global Services.”
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Zakharov observes that European-centric companies have large revenue bases, but are negatively affected by foreign exchange fluctuations, internal restructuring and some divestitures.

There’s a warning, too, from Zakharov that the economic chaos is eroding pricing and vendors are increasing utilisation, use of low-cost resources and fixed pricing to sustain profitability.

While TBR believes consulting pricing remained relatively stable during the last quarter of 2008, Zakharov says he believes the focus has shifted to cost-cutting-type engagements with quick ROI since they “offer attractive value propositions and pricing models.”

Zakharov also says that Accenture does not expect the current pricing pressures to negatively impact its overall profitability, and to recoup its recent salary increases (July-August), it plans to drive added labour cost-savings by increasing utilisation and the use of its GDN.
 
He also reports that IGS saw stable pricing during 4Q08, which assisted the profitability of the business unit, and he believes IBM remains less affected in terms of pricing than competitors due to the global economic slowdown.

In Europe, Zakharov says TBR believes consulting pricing is threatened as a result of MNC and Indian players’ expansion into the region.

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