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2017 a Year of Political Uncertainty; IT Services Spending Shift to Digital and Cyber Will Increase

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Here I take a quick look at IT services markets in 2017 against the backdrop of widespread political uncertainty, with predictions for how IT services spending will be impacted.

Political Uncertainties in U.S., U.K., Germany, France

2017 is starting out as a year of political uncertainty, with lack of visibility in the U.S. on the Trump administration’s plans, in the U.K. on Brexit plans, and in Europe with forthcoming elections in the two largest economies. Out of five of the world’s largest mature economies, three will have new administrations. In summary:

  • In the U.S., the Trump administration brings a lack of visibility on federal IT service spending; it intends to re-negotiate civilian and military contracts. We are taking the view that in 2017 federal spending will return to a slight decline. There will be pockets of high growth, with cyber-security explicitly being a priority. For commercial sectors, the Trump administration is considered pro-business. This, and the likely increase in oil prices this year, will drive an improvement in the oil & gas industry in the U.S. Financial services remain a question mark. Overall, we expect a somewhat better IT services spending level in U.S. commercial
  • Japan will continue to suffer from modest economic growth (below 1%) for the fourth year in a row. IT service spending in the public, telecom, and financial services sectors will be down to flat; retail and manufacturing will be up
  • U.K.: uncertainty remains high on the exact dynamics and impact of Brexit, and on the relationship between Scotland and the rest of the Union. IT services spending will be moderately impacted across the country (flat to low-single digit); the public sector will continue to be challenging, financial services and retail will be spotty, utilities more resilient
  • Continental Europe: with elections in Germany and France, 2017 will be a year of delayed spending in the public sector. With its large export industry, Germany is exposed to political uncertainties in the world economy and there could be a slowdown in some manufacturing sectors.

Outside of the mature economies, we are expecting:

  • Continued momentum in India
  • An acceleration in China
  • A mild recovery in Brazil
  • Better market conditions in the Middle East and Russia, thanks to increasing oil prices.

IT Services Spending Continues its Shift Towards Digital Spending

  • Cyber and digital will remain areas of spending growth: in digital in particular in SaaS /cloud migration, big data and analytics, and digital marketing
  • Political uncertainties are likely to delay decision making on large SI contracts
  • IT and business consulting (outside of digital-related consulting services) will be soft
  • ERP services will continue to be soft; demand for large scale projects has gone, and the transition to SaaS applications continues. Pockets of growth (in the context of digital, e.g. SAP HANA) will still exist
  • Pricing pressure in activities like application maintenance will probably worsen as vendors increasingly deploy automation technologies and ML to drive further productivity gains
  • IT outsourcing spending will remain under pressure. IT infrastructure management is a low growth business for two main reasons: transitioning to private and public cloud, and offshoring. This trend will accelerate with increasing adoption of public cloud
  • Software testing will continue its momentum, largely driven by digital testing and better economic environments in BFSI.

Bottom line: we are expecting 1.5% to 2.0% growth in 2017. That’s lower than our estimated 2.5% growth in 2016 – but in a world of political uncertainty, that’s still growth.

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