Executive Summary

The world of IT services is witnessing a move towards cost optimization. In the wake of such a scenario, questions about the extent of a slowdown in IT services spending that might be experienced in 2008 are currently dominating the thinking of IT service industry participants. The impact of a potential economic slowdown is, therefore, the key subject of investigation. This whitepaper aims to look at what could be the likely fallouts in ITO of buyer decisions under certain economic conditions during 2008.

The effect of upcoming cost optimization efforts on IT services spending will vary dramatically, based on a few factors such as the mode of service delivery and cost-cutting lever the supplier utilizes. The IT services, namely IT consulting, Application Development & Maintenance (ADM) outsourcing and Infrastructure Outsourcing (IO) will react differently under the influence of the above factors.

Infrastructure outsourcing is generally a “non-discretionary” service (often under a long-term contract) that is prone to prove resilient, even in an an economic downturn. Most infrastructure services cannot possibly be switched off due to business criticality. Therefore it is less likely to be adversely impacted by an economic downturn.

Cost-cutting in ADM and IT consulting is likely to have a negative effect,  the extent of which will differ depending on the dynamics of the two services.

However, offshoring is the big wild card in understanding the effect of an economic slowdown on ADM and IT consulting and gives rise to conflicting situations. On the one hand, offshore services are relatively easy to cut and do not affect employee morale as much as layoff of internal staff. On the other hand, offshoring is one of the most effective savings levers; thus economic challenges might even speed up the adoption of offshoring. 

A strong voice has been lent to a moderate move towards offshoring by the IT services community. According to a recent survey jointly conducted by Bernstein Research and Everest Research Institute, if the business environment of IT services customers were to substantially weaken, most individuals believe that there will be a slowdown in onshore budgets and the buyers will look to move work offshore.

This paper discusses:

• The service industry taxonomy and the contrasting dynamics of constituent segments
• The behaviour of the different IT service segments under certain economic conditions and the factors that govern such changes