Stormy Weather's Ahead For The IT Services Industry?

Infosys recently published strong fiscal Q3 results as revenue growth and operating margins were boosted by a falling rupee (down a sharp 11% sequentially). For the full year, however, the company revised its forecasts in dollars from 19% to 16% for FY2012 (April 2011 to March 2012) on account of a slowing business in Europe.

Forrester expects marginally slowing growth in the global IT services market, dropping from about 7% growth in 2011 to 6% growth in 2012 (read Andy Bartels’ tech market outlook for 2012 here). Most of the slowdown effect will come from the debt crisis in Europe. Growth in emerging markets like AP should remain strong in 2012 (read my report with Andy Bartels here), although this growth will not be large enough to offset a slowdown in mature markets.

I look forward to having updates from Wipro, TCS, and HCL this week to see if we can “generalize” Infosys’ guidance to the overall IT services industry. Until now, Indian IT companies’ growth and margins have been protected thanks to a weakening rupee. I believe that this situation combined with slower growth in the US and Europe will lead to a price war between vendors as they try to build volume.

What does this mean? As economic uncertainty looms in 2012, I believe IT services companies will have to accelerate their transformation toward software capital intensive models. In my upcoming report (“Solutions Accelerators — A Reality Check” to be published in April 2012), I will look at how far they have gone in this transformation and what the key success factors are going forward. Stay tuned.