NelsonHall is predicting 2% growth (in local currency) in IT services spending in 2016. This mild growth will be driven by project services (up 3%) while IT outsourcing will be up 1% and maintenance down 1%. Digital transformation services (see note & below) will drive growth (up 18%) along with software testing (still growing in low double-digit figures).

2016 Enterprise Spending in Other Services Will Be at Best at Modest Growth

As a result of clients shifting their investments towards digital transformation projects, revenues from other types of IT services will be down or flat at best:

• C&SI (excluding on-premise ERP services and digital transformation project services) will up 1%
• ERP services will be up 3%, thanks to transition to in-memory-based applications
• IT outsourcing (excluding IaaS in private and public forms) will be down 1%. Within this segment, datacenter services will be down 7%, impacted by accelerating adoption of IaaS.

U.S. Steady, Europe Back to Growth, Uncertainty in Growth Markets Apart from India

Mature economies will continue to drive growth globally. The U.S. will continue to lead those mature economies, in spite of a traditionally challenging year in public sector due to the November Presidential Elections and a secular deterioration in spending in federal government services (now moving to flat growth in 2016). NelsonHall is taking the view that higher fees around H-1B-L-1 visas will have a negligible impact on spending in the commercial sector and expects it to grow its spending by ~+4%.

In Europe, U.K. is past the election year and spending from central government will resume. Commercial sector activity in the U.K. will remain competitive but in spending growth mode. IT services spending on Germany will be up 3%, with manufacturing industry activity potentially impacted by the slowdown in exports to China. France will be back to +2% growth and Italy flat. For the second year in a row, spending in the Netherlands will at last bottom out after over five years of negative growth in the financial services and public sectors. After a slight recovery last year, Spain is back to solid growth, of 4%. There remains some uncertainly around Norway, impacted by falling oil prices; and Sweden, the most cyclical country in the Nordics. Spending in Finland will be at best flat, as the country remains in a poor economic cycle.

Outside of Europe, Japan remains a question mark. We are taking the view that spending will be flat in 2016.

Spending in high-growth economies will be under pressure and decline in Russia and Brazil. India will see growth  of ~7%. China is another question mark but will remain in positive growth territory.

Exchange Rates Will Have Limited Impact on IT Services Spending Growth

This growth forecasts are computed in local currency. In USD terms, the impact is difficult to predict given fluctuations of other currencies against the dollar. Yet, the strengthening of the U.S. dollar and other currencies vs. the Indian Rupee during 2015 will have only a marginal impact on IT services spending.

In Summary: Mild Growth for 2016. Impact of Current Stock Exchange Turmoil Caused by Oil Prices and GDP Growth Slowdown in China a Concern

NelsonHall is therefore expecting mild growth in IT services spending in 2016 and has taken the view that the declining oil prices and the GDP growth slowdown in China will not drive a sharp decline in the U.S. indexes in NYSE and NASDAQ stock exchanges.

However, if this were to happen and indexes remain at low levels for several quarters, NelsonHall would revise its spending growth forecast with an impact occurring by September 2016, at time when client organizations reconsider IT budgets. As always, such IT budget reconsiderations would be abrupt, leading to decline in spending.

Note (1): digital transformation services include spending on e-commerce/web sites, mobile apps, IaaS both private and public, analytics and big data, migration to SaaS productivity applications and services around main ERP/HR/CRM SaaS applications.