It is easy to be incorrect when predicting the future. Thomas J. Watson, founder of IBM, anticipated that the world only needed five computers, and in December 2007, Lehman Brothers claimed the global economy would bottom out in the second half of 2008, but it turned out the crisis is not yet over.

It is the most appropriate to comment on the global software and information outsourcing industry’s bottoming-out time at the very end. Although it is hard to make predictions at the beginning or during the process, and the chances of being accurate are relatively small, people are always fascinated with challenging their imaginations.

I. Signs of Economy Hitting the Bottom

1. International Organizations Upgraded Economy forecast from Minus to Above

In June 2009, the Organization for Economic Co-operation and Development (OECD) published its first half-year OECD Economic Outlook No. 85, which said among its 30 member nations, the recession is touching the bottom, predicting a growth of minus 4.1 per cent in 2009, and a fragile recovery is expected in the year of 2010, with an increase of 0.7 per cent. This has been the first time OECD upgraded economic growth forecast since the breakout of the financial crisis in June 2007. The report was the first to foresee an economic recovery among international organizations; however, it chose a very uncertain wording “maybe” in predictions. Nevertheless, OECD has not changed its view on a minus 1.3 per cent growth in global GDP, and the number for 2008 was 3.1 per cent. International Monetary Fond (IMF) released a more positive figure afterwards, upgrading the number from 1.9 per cent in April to 2.4 per cent. The main reason is that the stimulus policies in place have achieved effective results.

2. Many Economic Indexes Show Positive Changes

There have been signs signaling the economic recovery: The sharp slump in real estate prices and sales figures has postponed in many developed countries. The number of people applying for unemployment allowance is declining. Commercial investment index and consumer confidence index are regaining. The sharp plunge in trade and financial market is recovering.

Many important economy indexes of the US, the engine of the global economy with its GDP in 2007 accounting for 25.15 per cent of that of the whole world, have shown signs to hit the bottom. According to the Manufacturing Index published by the Institute for Supply Management (ISM), it rose to 46.5, from 44.8 in June. This has indicated that although the industry is still in recession, the figure is the best since August 2008, suggesting the economy is moving towards recovery. ISM indexes are significant references of economy vitality. A 50-above index signifies an economic expansion. The index dropped to 32.4 in November 2008, demonstrating businesses steeply cut down production or even discontinued production in order to decrease stock levels.

In August, the US Department of Labor announced the reduction of non-agriculture labor by 2470 thousand in July, the one-year low since last August. The unemployment rate showed the first decline in the last 15 months, dropping from 9.5 per cent in June to 9.4 per cent in July, easing people’s fear of the double-digital rate. The US President Obama said that latest commercial indexes and economic growth data for the second quarter have manifested that the worst time had ended. GDP released by The US Department of Commerce indicated the US economy shrank 1.5 per cent, lower than the 5.5 per cent in the first quarter. As a result, some economists believed that the US economy has hit the bottom.

The US Federal Reserve (Fed) has upgraded the economic growth forecast in 2009-2010, predicting a slight decrease in 2009, and a mild upturn in 2010 with a more than 2 per cent growth. The economic growth will speed up in 2011, reaching a 4 per cent growth rate.

3. IT Hardware Demand Starts to Rebound

When the economy bottoms out, the global software and information outsourcing industry will enjoy a resurgence. In June 2009, IDC foresaw a 15.2 per cent upswing in PC sales from the previous year, while the figure in March was 12.8 per cent. The global PC sales will increase 9.6 per cent to USD286 billion. There also will be an annual increase around 5-6 per cent from 2009 to 2012. According to IDC’s anticipation, the annual growth in PC sales will be a double-digital figure from 2009 to 2010, while the number will drop to about 6-9 per cent in the period of 2011-2012. In 2012, the total number of PC sold will be 472 million. Gartner has also upgraded the outlook to 12.5 per cent from 10.9 three months ago.

As important IT products, PCs’ sales volume, and value of sales are serving as indicators for IT hardware market. The revival in PC sales has presented the dawn of IT industry recovery.

Cell phone market, indicator of consumption demand, has also shown uptrend signs. Cell phone sales volume worldwide climbed 4.7 per cent, the first sequential growth since the third quarter 2008, which was definitely encouraging news after a nine-consecutive-months’ fall. The sales volume in the first, third and fourth quarters in 2008 declined 16.4, 0.3, and 2.6 per cent respectively. In the first quarter of 2009, the number of sales volume dropped 5.88 million compared to the same time in 2008. It was predicted that the sales volume in the third quarter of 2009 would increase 6 per cent to 2809 million, and the number in the fourth quarter would increase 8.3 per cent to 3042 million.

As the foundation of IT hardware, the integrated circuit industry has also had promising news. Data from iSuppli indicated that demand has been in monthly growth since January 2009, resulting from the previous production cut-down, but mainly the ongoing demand for new products featured advanced and creative technology. iSuppli thinks the integrated circuit industry will bottom up in 2009 with a minus 23 per cent growth, but it expects an upturn of more than 10 per cent next year.

II. Leading Indexes Show the Worst Moment is Yet to Come

1. Software and Information Outsourcing Industry is Less Affected by the Economy Circle than IT Hardware Industry.

In comparison to the IT hardware industry, the software industry has always been less sensitive to economic turbulence. When the economy is prosperous, IT hardware industry sees rocketing sales, while the software industry only expands a couple of percentage points. When the economy is going downhill, there will not be huge slump in the software industry.

IDC data also revealed that the sales volume of processors dropped 17 per cent in the fourth quarter of 2008. The sale volume of PCs declined 7 per cent in the first quarter of 2009, the most sizable plunge since the 2001 Internet bubble. In 2008, the global software industry expanded 7 per cent compared to the same time of the previous year, with a total value of USD1.58 trillion, only a small fall of 0.4 per cent from the previous year. This has attributed to the characteristics of software industry demand, which requires planning ahead and certain continuality. It is hard to imagine that a company would terminate the plan of equipping SAP system in 2008 due to the financial crisis.

As a vital part of the software industry, software and information outsourcing industry also bear this feature. Despite of a worsening financial crisis in 2008, the whole industry has accomplished record high achievement regardless. Data from Gartner suggested that in 2008 the industry was valued at USD45.05 billion, an increase of 8.1 per cent from the previous year. BPO attained a double-digital growth, rising to 12 per cent from 10 per cent in 2007.

2. Software Sales Revenue Continues to Decline, Indicating the Software and Information Outsourcing Industry is still in the Process of Bottoming out.

Serving as an indicator of the global industry, the Q1 2009 financial report published by renowned software service enterprises suggested an outstanding slump. IBM gained USD21.7 billion in the first quarter this year, a decline of 11 per cent (4 per cent after currency adjustment) from the same time of the previous year. Microsoft earned a USD13.65 billion in the first three months this year, a 6 per cent reduction from USD14.45 billion achieved in the same time of last year, also a 32 per cent plunge in net profit. This has been Microsoft’s first slump since it was listed 23 years ago. The first quarter revenue of SAP was EURO1.74 billion, roughly equal to that of last year, a decline of 16 per cent in net profit. Another important index, software sales revenue, fell 33 per cent.

Some companies revealed their second quarter financial report, which denoted a severe pressure on short-term adjustment. Oracle’s revenue from February to May was USD5.796 billion, an increase of 3 per cent from the same period of last year. Sales revenue in softwares was USD2.74 billion, a decline of 13 per cent from the same period of last year. IBM earned USD23.3 billion in the second quarter, a decrease of 13 per cent (7 per cent after currency adjustment) compared to the same period of last year. Microsoft’s financial report for the fourth quarter ended on 30 June 2009 showed a USD13.099 billion revenue, a 17 per cent drop, and the net profit shrank 29 per cent to USD30.45 billion. SAP’s second quarter revenue was EURO25.8 billion, a decline of 13 per cent from the same period of last year, and its software sales revenue slumped as high as 40 per cent.

The above financial reports have manifested that most enterprises are suffering revenue loss, and net profit slump, which is even as high as 30 per cent in some companies. Almost every single company is experiencing recession, indicating an obviously shrinking budget from software users. The industry’s worst moment is yet to come, as is mentioned by Rajendra Shreemal, who is in charge of investor relations and finance of Wipro, “There is a lag between the time a company buys a software licence and implements it. We will be affected by dwindling new licence revenues in the market, but it will take some time trickle to down to us.”

3. An Ongoing Fall of Contracts Valued at over USD25 Million

TPI has found that in the first quarter of 2009 contracts over USD25 million in value terms suffered a drop compared to both the same period of last year and the previous quarter, which proves the escalation of the industry adjustment. The total number of signed outsourcing contracts was 141 in the first quarter of 2009, a decrease of 11.9 per cent from 160. The total contract value (TCV) in the first quarter was USD14.1 billion, which hit new low since 2001, a decrease of 22 per cent compared to the same period of last year, and a fall of 21 per cent compared to the previous quarter.

The current economic malaise has continued to affect the software and information outsourcing industry. In the second quarter, the TCV suffered a 24 per cent downslide to USD20.5 billion compared to the same period of last year, but that was a 5 per cent rise from the previous quarter. Also, the number of signed outsourcing contracts was 135, down 7.5 per cent from 141 of the first quarter. The annual contract value (ACV) was USD3.6 billion, a decrease of 5 per cent from the first quarter. In the past six months, the number of signed contracts dropped 11 per cent, the TCV fell 22 per cent, and the ACV decreased 28 per cent compared to the same period of last year.

Consulting organizations like IDC downgraded this year’s global IT expenditure growth from 5-6 per cent to 3 per cent, further predicting a minus growth in the global software and information outsourcing market. After many years’ rapid development, now the industry is facing a rough path.

III. The Industry is Expected to Arrive at its Bottom in Q1 2010

The previous economic turbulence appeared around the year of 2000, when the Internet bubble burst. The global economy bottomed out in 2001, leaving the world with a GDP of 2.6 per cent, down 2.2 per cent from 4.8 per cent in 2000. Then the economy was gradually reviving until reaching its peak in 2007, when the financial crisis broke out.

In August 2000, Standard & Poor‘s 500 Index reached its peak at 1516.68, then down sliding along the way. When it was October 2002, the index dropped to 885.76, a 42 per cent loss. After that, another round of surging emerged when it climbed to 1503.25 in June 2007. The financial crisis has severely damaged the stock market. In March 2009, the index fell under 797.87, and now is still bouncing.

India has done outstandingly in the software and information outsourcing industry, accounting for more than half of the world’s offshore services. Therefore, its IT-BPO export growth trend will be used here to replace that of the entire industry in order to analyze the relationship between its changing circle and the growth circle of global GDP as well as the fluctuation circle of the stock market. In 1995 India’s export in IT-BPO exceeded USD10 billion, and the number reached USD40.5, USD24.2, and USD46.3 billion in 1999, 2005, and 2008 respectively, an annual growth rate of more than 36 per cent during the past 20 years. Due to the Internet bubble, the growth pace sharply slowed down to around 25 per cent from 55 per cent in 2001. It picked up fast again since then, with a growth rate of 37.6 per cent in 2005, almost equal to the average of the past 20 years. The financial crisis has resulted in a 16.3 per cent growth rate in 2008, only half that of in 2007. In July, a NASSCOM report analyzed that although there are signs of economy going to bottom out, the malaise will be remaining in the global IT industry. It is predicted that India’s export growth in IT-BPO will be 4-7 per cent this year. The Internet bubble burst has resulted in a year-long adjustment in India’s IT-BPO export. Since the current financial crisis is more severe, adjustment is going to take longer a time.

After analysing the last economic circle, it is anticipated that the software and information outsourcing industry will bottom out one year later than GDP does. Growth rate of India’s IT-BPO reached a periodical low in 2002. The fluctuation circle of software and information outsourcing industry correlates highly with that of stock market.

America’s real GDP downgraded 6.4 per cent in the first quarter of 2009, the largest plunge since 30 years ago, and the figure dropped 6.3 per cent in the previous quarter. The ISM non-manufacturing index went down to its record low at 37.3 in December 2008. Monthly retail figure dropped to lowest point of minus 2.8 per cent in November 2008. Also the Consumer Confidence Index slumped to its lowest level at 25 in February 2009. When combing these data, it is safe to say that the economy will bottom out in the fourth quarter of 2008 or the first quarter of 2009.

Drawn from the above analysis, software and information outsourcing industry will hit the bottom in the first quarter of 2010 the earliest or in the second quarter 2010 the latest.

In accordance with the fluctuation rules of the software and information outsourcing industry and the stock market, the industry is going to bottom out in 2010 if the stock market shows a double-bottom curve similar to that in 2002-2003, while the industry is likely to bottom out in the fourth quarter of 2009 if the stock market shows a V-shaped curve bottom in March 2009. Nevertheless, the growth rate of 2009 will still be the slowest for the past couple of years, but a gradual and moderate recovery is expected in the year of 2010.

IV. Be Mentally Prepared For a Lengthy and Fragile Economic Recovery

Even if the year of 2009 is the bottom of the latest economic wave, the recovery is going to take longer this time, and the rebounding force will be weaker than expected based on the previous economic recovery rules.

An IMF report published in April 2009 claimed that some rules could be developed after a study of the several crises since 1960: shorter recession period, stronger force in rebounding; longer recession period and larger scale, weaker recovery. A typical recession lasts about one year, but the fallout usually continues for more than five years.

National Bureau of Economic Research of the US, a non-profit organization, believes that the current recession started in December 2007, and it has been 19 months for now. The length of this time has already exceeded the recessions that happend in 1973 and 1981, which were both 16 months long.

According to the rules above, this recession is more severe. Financial crisis along with the synchronous global economic downslide could cause an unexceptionally serious and prolonged recession.

(Note: The article is an excerpt from Retrospect and Prospect of 2008/2009 Global Software and Information Outsourcing Industry, and the author is a senior analyst from the Software & Information Services Research Department of the Electronic Technology Information Research Institute—an affiliate of the Ministry of Industry and Information Technology)

(Reproduced from "ChinaSourcing" magazine)