IT intensity or IT spending as a % of GDP/corporate profits is a key indicator of
the technology spending intensity of an economy. Plotting IT intensity for the US
since 1995, we see several outcomes at play that have implications for IT services
(IT services is one sub-segment besides hardware, software and telecom services).
IT spending as a % of corporate profits for the US has been moderating
since CY08 and has reached a 6-year low. This raises questions as to whether
the US economy is entering an era of lower technology spending intensity.
We think that there are both cyclical (temporary) & structural factors at
play here. Corporate profits/balance sheets are robust in the US; thus capacity to
spend on IT is not in question. It is a matter of confidence & timing (hence,
cyclical). Today, we think corporations are getting over this cyclical hump.
In addition to cyclical effects, some segments of IT spending are seeing some
adverse structural impact, particularly on the pure hardware side thanks to
technologies such as cloud and supporting virtualization which compresses
hardware/data-centre growth. Gartner points out infra-as-a-service business
models are forcing disruption on the infrastructure/hardware players (e.g.
Dell/HP). Revenue cannibalization resulting from industrialized, cloud-based
services risks muting growth for the IT outsourcing providers that are heavily
focused on asset-heavy traditional infrastructure outsourcing (e.g. CSC).
Also, the ongoing tide towards smartphones/tablets is structurally impacting the
PC industry (hardware). Though this results in smart secular growth for spending
on devices (as per Gartner, devices are among the fastest-growing sub-segments
within IT spending – it is the entrenched PC-dependent players who do not seem
to be able to cope adequately with this trend). Likewise, on the software side, what
we see happening is different players emerging that commercialize newer business
models (e.g. Salesforce) – a phenomenon needing established, players (e.g.
Oracle) to keep up. This does not necessarily dim the outlook on top-down
software spending; it’s the incremental shift that needs watching. In fact, Gartner
sees software as the fastest growing sub-segment.
On the other hand, the picture on asset-light IT services is better, in our
view, despite oft-expressed reservations about the lowered intensity of IT
services spending in the US. One common view of pessimists is that
investments that had to be made in spreading diffusion of technology in the
economy have substantially been done and IT services is already ingrained in
business activities within the US. What tends to get missed is the capacity and
room for business innovation, change and productivity brought about by
technologies which demands increasing IT services consumption.
The consumption of technology is still rapidly rising thanks to new waves
such as SMAC (social mobility, mobility, analytics and cloud) – much faster
than corporate IT budgets can accommodate them. Therefore, as the units of
consumption go up pushing the technology mainstream, price per unit may show
a downward trend. Alternatively, keeping the unit pricing competitive for newer
business models promotes usage and helps cast the net wider attracting newer &
different client segments. It’s the pricing trend that needs watching in the pricevolume
equation – will newer business models impact pricing is the key issue.
The SMAC wave buffeting IT services has the potential to change the
assimilation & growth landscape for IT services. We estimate that SMAC-led
opportunities alone should raise the 3-5 year revenue CAGR profile of offshore
IT services industry by at least 1% (net of cannibalization). Thus, we think a
reversion to mean of IT services to profits ratio in the US is possible.
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the technology spending intensity of an economy. Plotting IT intensity for the US
since 1995, we see several outcomes at play that have implications for IT services
(IT services is one sub-segment besides hardware, software and telecom services).
IT spending as a % of corporate profits for the US has been moderating
since CY08 and has reached a 6-year low. This raises questions as to whether
the US economy is entering an era of lower technology spending intensity.
We think that there are both cyclical (temporary) & structural factors at
play here. Corporate profits/balance sheets are robust in the US; thus capacity to
spend on IT is not in question. It is a matter of confidence & timing (hence,
cyclical). Today, we think corporations are getting over this cyclical hump.
In addition to cyclical effects, some segments of IT spending are seeing some
adverse structural impact, particularly on the pure hardware side thanks to
technologies such as cloud and supporting virtualization which compresses
hardware/data-centre growth. Gartner points out infra-as-a-service business
models are forcing disruption on the infrastructure/hardware players (e.g.
Dell/HP). Revenue cannibalization resulting from industrialized, cloud-based
services risks muting growth for the IT outsourcing providers that are heavily
focused on asset-heavy traditional infrastructure outsourcing (e.g. CSC).
Also, the ongoing tide towards smartphones/tablets is structurally impacting the
PC industry (hardware). Though this results in smart secular growth for spending
on devices (as per Gartner, devices are among the fastest-growing sub-segments
within IT spending – it is the entrenched PC-dependent players who do not seem
to be able to cope adequately with this trend). Likewise, on the software side, what
we see happening is different players emerging that commercialize newer business
models (e.g. Salesforce) – a phenomenon needing established, players (e.g.
Oracle) to keep up. This does not necessarily dim the outlook on top-down
software spending; it’s the incremental shift that needs watching. In fact, Gartner
sees software as the fastest growing sub-segment.
On the other hand, the picture on asset-light IT services is better, in our
view, despite oft-expressed reservations about the lowered intensity of IT
services spending in the US. One common view of pessimists is that
investments that had to be made in spreading diffusion of technology in the
economy have substantially been done and IT services is already ingrained in
business activities within the US. What tends to get missed is the capacity and
room for business innovation, change and productivity brought about by
technologies which demands increasing IT services consumption.
The consumption of technology is still rapidly rising thanks to new waves
such as SMAC (social mobility, mobility, analytics and cloud) – much faster
than corporate IT budgets can accommodate them. Therefore, as the units of
consumption go up pushing the technology mainstream, price per unit may show
a downward trend. Alternatively, keeping the unit pricing competitive for newer
business models promotes usage and helps cast the net wider attracting newer &
different client segments. It’s the pricing trend that needs watching in the pricevolume
equation – will newer business models impact pricing is the key issue.
The SMAC wave buffeting IT services has the potential to change the
assimilation & growth landscape for IT services. We estimate that SMAC-led
opportunities alone should raise the 3-5 year revenue CAGR profile of offshore
IT services industry by at least 1% (net of cannibalization). Thus, we think a
reversion to mean of IT services to profits ratio in the US is possible.
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