Domestic Downturn a Boon for IT Services Firms

Cost-cutting will help companies focused on overseas operations.
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Demand for IT services will likely buck an economic slowdown as companies look for ways to cut costs while spreading operations overseas, according to analysts.

Tech trend watchers from Gartner expect services spending to increase nearly 9% to $733 billion this year, vs. 8% growth for the entire IT industry (which includes services, software and hardware).

The primary growth driver will be companies looking for ways to pare costs and sustain profit margins as the U.S. economy slows and profit growth recedes.

The continued need for IT services also stems in part from mergers like

NYSE's

(NYX)

tie-up with

Euronext

that joined companies with operations in various countries. Mergers often fuel demand for systems integration and network service support so employees working under the same corporate banner can share information easily.

The focus on cost-cutting means growth in spending on IT services will likely favor companies like

Accenture

(ACN) - Get Report

,

Infosys

(INFY) - Get Report

and

Cognizant

(CTSH) - Get Report

that have a large portion of their workforce in low-cost areas, namely in India, according to Cowen analyst Moshe Katri.

Cowen makes a market in shares of Cognizant and Infosys, but has not provided investment banking services to them in the past twelve months.

Infosys, one of the largest offshore services companies, will be the first to report quarterly earnings when it announces second-quarter results on Thursday. Analysts expect the company's revenue to jump 33% to $992 million as earnings rise 31%, according to Thomson Financial.

An analyst from Macquarie Securities had

expected Infosys to lift is dollar-denominated revenue guidance thanks to continued growth in the demand for IT support.

In addition to the established offshore players like Infosys, smaller offshore IT support shops have also founds ways to elbow between the so-called legacy providers like

IBM

(IBM) - Get Report

and

Computer Sciences

(CSC)

as clients break down IT projects into smaller chunks.

India-based

Satyam

(SAY)

, for one, recently beat Accenture and Computer Sciences for a $28 million contract to help a large chemicals maker roll out business planning software for a globally scattered polymer operation.

Satyam had previously been working for the chemical company as a subcontractor to Computer Sciences, and had gradually taken responsibility for several smaller-sized projects, says Ken Taromina, who oversees Satyam's manufacturing practice.

There are some clouds on the horizon, however. Katri says internal layoffs and delays of planned projects foreshadow a slowdown in spending on more complex IT consulting projects. While consulting projects carry wider profit margins than outsourcing and support projects, they are often discretionary and find their way to the chopping block amid cost-cutting efforts.

That has rattled the nerves of some Accenture investors who worry that the company is overly exposed to cuts in discretionary spending. About 60% of the company's revenue comes from consulting.

But in a conference call following the release of its

fourth-quarter financial results, Accenture's Chief Executive Bill Green said that the company's consulting work is less susceptible to cost-cutting because it helps clients deal with long-term issues like complying with regulatory mandates.

Green also said that the company expects to continue raising the rates it charges, which suggests that demand for its consulting services remains healthy.

Shares of Accenture closed Monday at $39.74, up 22 cents.