News Analysis: Global Services Q4 Wrap Up Shows Slowing Momentum

May 1, 2023

Temporary Slow Down Ahead

All indications from Constellation's 1000 person executive network show a temporary 3 to 6 month slowdown ahead. This pause in general IT spending impacts mostly the North American markets. The Middle East and Indian markets continue to show strong market conditions. Despite the doom and gloom, clients continue to invest in rojects related to optimization, regulatory compliance, and modernization. Pressure on Europe, South America, and APAC (sans India) continue to hamper growth. The Middle East remains a highlight along with the ANZA and the India market. North America will slow down despite providing the largest market opportunity.

Operational Efficiency and Regulatory Compliance Drive Hot Projects

Despite headwinds, Cloud, Automation, AI, and Regulatory Compliance continue to grow. In the cloud, CXO's focus on spend rationalization. Key projects include contract negotiations, cloud optimization, code refactoring, and in some cases a move back to on-premises workloads. Customers ask service vendors to renegotiate deals with software vendors and consolidate spend. Increasing scrutiny from CFO's drive operational efficiency budgets.

Automation and AI are working hand in hand. Every customer finds new ways to automate and reduce human interaction. Meanwhile, budget continues to grow for exponential opportunities with AI.

On the regulatory compliance, cyber security remains top of mine. Constellation sees a lessening priority on the regulatory burden of ESG reporting and investment. Many CXO's see AI as a means to reduce compliance risk and mitigate future risks.

Services Firms Show Mixed Results

The IT services firms that move nthe quickest will gain market share despite the current slow down. Quarterly results show that decision makers have slowed down decision making. Deals that took months now take quarters to close. Here's a quick summary of the Q4 earnings of Indian majors:

Tech Mahindra is in crisis. Tech Mahindra has had a tough time retaining talent and keeping clients. The company really needs the big deal expertise of the incoming CEO Mohit Joshi. Mohit has a good reputation for designing large deal solutions with clients and inspiring staff.
Wipro increased revenue 11.5% YoY, though the quarter was flat. Thierry Delaporte, Wipro's CEO has engineered a horizontal realignment strategy to service cloud, data and analytics, bio, product engineering, infrastructure sevices, and consulting with more focus. The strategy is beginning to pay off for clients.
Cognizant dropped 9.6% in Q4. With a $59 million "impairment of capitalized costs" related to a large volume-based contract with a life sciences customer and 1% decline in financial services revenue the arrival of new CEO Ravi Kumar S, could not come sooner. Customers have seen attrition slow and a change in morale as Ravi Kumar S sets the stage for an internal transformation of the once venerable services firm.
HCLTech showed some sales finesse in winning 13 large deals. Despite a great showing, Europe and Rest of World continued ot lag. Attrition rates dropped from 21.7% in q3 to 19.5% in Q4, reflecting worsening economic conditions.
Infosys showed a weaker Q4 and spooked the market along with TCS. With 8% net profit growth, the numbers were impressive. However, Q4 revenue and profit numbers were below estimates. Operating margins were down 1.9% YoY. Guidance at 4 to 7% was seen as disappointing. Attrition at 20.9% was within the industry average range.
TCS showed very slow revenue growth. With the slowest in 11 quarters, the market reacted to the industry leader's bellwether forecasts TCS saw a number of projects defer to the next quarter as the current CEO, Rajesh Gopinathan transitions to K Krithivasan on June 1, 2023.

The Bottom Line: Expect A Pickup In Late Q3 and Early Q4

CXO's will most likely take a pause over the late Q2 and early Q3 summer time frame. Savvy CXO's will start their negotiation processes over the slowdown to consolidate spend. Constellation forecasts increasing demand for projects in:

Cloud rationalization
Analytics
Automation
AI
Cyber Security
Contract Negotiations
Vendor consolidation

These projects show the biggest opportunities and must be completed in order to achieve operational efficiency and exponential growth

Your POV

Ready to focus on operational efficiency and regulatory compliance? Where will you find your biggest cost savings?

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