IT services revenue expected to dip in second quarter

IT services revenue expected to dip in second quarter

Businesses should be ready to quickly adjust to the changing market

Credit: Leyn

As business disruption sets in with the COVID-19 pandemic, customer demand for IT services will take a hit, with revenue in the sector set to decline in the second half of 2020, according to analyst firm Technology Business Research (TBR). 

In the analyst firm's Q4 IT Services Vendor Benchmark report, TBR senior analyst Elitsa Bakalova pointed out that 2020 will be a challenging year for IT services companies that are slow to adjust their business models to address rapidly changing market needs. 

Furthermore, IT services revenue will retain its low single-digit growth trajectory through to the first quarter of 2020, before decelerating due to COVID-19, according to Bakalova.

“As widespread business disruption occurs in Europe, the US and Asia Pacific due to COVID-19, it will affect customer demand for IT services in 2020,” she said. 

Up to this point, IT services year-to-year was trailing at 2.2 per cent growth in US dollar terms, and was up 30 basis points sequentially in the fourth quarter of 2019, but down 400 basis points compared to a year ago, the TBR report said. 

Bakalova said that during the fourth quarter of 2019, benchmarked IT services vendors continued to invest to expand their portfolios and resources to enable enterprise-wide business transformation initiatives across front, middle and back-office functions. 

But this isn’t without experiencing growth challenges in traditional IT service areas and competitive pressures in areas such as digital, cloud and cybersecurity. 

This is also followed by unfavourable market dynamics tied to rising macroeconomic uncertainties and pockets of tight spending, which slowed vendors’ revenue performance in the fourth quarter, Bakalova said.

Average profitability for benchmarked vendors contracted 80 basis points year-to-year to 11.2 per cent in the fourth quarter 2019 as some vendors continued to find it hard to balance addressing revenue pressures with investing in portfolio expansion, talent development, organisational restructuring and service delivery improvement such as through automation, artificial intelligence and platform-delivered services, the report said. 

The report specifically pointed out Accenture’s success within its go-to-market strategy for enterprise-wide transformation initiatives.

“Delivering revenue growth ahead of the IT services market while remaining two to three times the revenue size of most of its peers highlights Accenture’s successful transition from a human capital-focused to a technology-enabled organisation,” Bakalova said. 

Another highlight was Infosys’ momentum with large-scale deals involving investments in off-the-shelf open-source solutions, which Bakalova said bolsters its position to offer low-risk, price-competitive managed services.

“Additionally, co-developed solutions addressing clients’ industry pain points and supporting buyers’ digital transformation initiatives will improve Infosys’ ability to cross-sell and upsell legacy clients and expand share from its Digital business,” she said. 

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