BENGALURU: The IT services sector is likely to witness slowdown in discretionary spending in coming quarters, considering the present global uncertainty and demand environment. These firms were hopeful in the December quarter that there would be a revival in discretionary spending as top CEOs said it is picking up in certain sectors including banking and retail.
But things have changed in the last few weeks due to tariffs and shifts in consumer sentiment, according to analysts. Accenture posted $16.66 billion revenues for the second quarter ended February 2025. Its CEO Julie Sweet in an earnings conference said, in recent weeks, they are seeing an elevated level of what was already significant uncertainty in the global economic and geopolitical environment, marking a shift from its first quarter FY 25 earnings report in December.
"At the same time, we believe the fundamentals of our industry remain strong and we are very well-positioned with our clients because all strategies continue to lead to reinvention through new ways of working, tech, data, and AI," she added.
Motilal Oswal Financial Services in its report said Accenture results reinforce the cautious sentiment around discretionary spending in IT services, which remains constrained, particularly for smaller deals.
"The expectation that discretionary spending would revive in areas like US banking, healthcare, and Hi-Tech due to factors such as rate cuts, a business-friendly administration, and pre-GenAI spending has not fully materialised, as the landscape over the past six months has shifted — US rate cuts appear less imminent, and geopolitical/tariff risks have introduced new uncertainties for enterprises in the US and Europe," it said.
Somdutta Singh, serial entrepreneur, founder and CEO Assiduus Global pointed out that while short-term spending is clearly under pressure, this period is also prompting a reset in how companies evaluate ROI on digital transformation.
"Enterprises are doubling down on proven technologies and partners that can deliver faster outcomes with leaner teams. In the long run, this phase of caution may catalyse a shift toward more value driven, outcome-based IT engagement models, especially for Indian firms with global delivery strength and cost advantage," she added.
Peter Bendor-Samuel, CEO of Everest Group, a research firm, told The New Indian Express that the tariff-based uncertainty is clearly affecting the North American market and that we are seeing significant delays and a few cancellations.
"This appears to be also shifting the conversations to cost saving agendas. Going into the year, we were seeing signs that discretionary spending was set for a modest comeback, there are still signs that there is significant pent-up demand after two years of pull back so the uncertainty caused by tariffs could prove to be temporary," he said.
However, at this time the market is holding its breath and we believe that this will affect at least the next quarter and possibly two quarters. Surprisingly, we are seeing Europe bounce back. It appears the willingness by governments to abandon their strict debt covenants and spend on infrastructure and defence is creating a much-needed stimulus, which is lifting the entire economy. Hence, we are seeing promising signs out of Europe, he added.
IT companies are also now focusing on Gen AI. Accenture’s Generative AI new bookings in the second quarter stood at $1.4 billion. Motilal Oswal believes that companies that have already invested in data engineering and security frameworks are in a better position to integrate GenAI at scale — leading to more automation, streamlined operations, and greater efficiency.