SA's IT services market faces growth challenges

IDC predicts IT services spend in SA will slow down to a single-digit percentage in 2017.

IDC predicts IT services spend in SA will slow down to a single-digit percentage in 2017.

The South African IT services market, while flat in US dollar terms, grew 15.13% in local currency in 2016.

This is according to the recently published South Africa IT Services Market 2017–2021 Forecast by the International Data Corporation (IDC).

The ongoing macro-economic difficulties in the market are expected to continue, and this will, in turn, continue to inhibit growth in dollar terms, says Jon Tullett, research manager of IT services for IDC Africa.

"2016 was another challenging year for IT services and IT in general in South Africa," says Tullett.

"The economic climate and several years of austere spend are starting to come to a head, with confidence in future growth at a very low level. Opportunities remain in key areas such as outsourcing and cloud, but more strategic and longer-term engagements are under pressure and may remain on the backburner until the economy improves."

In previous years, there has been a notable trend by enterprises to rely on services to facilitate cost-cutting and to restructure infrastructure spend, improve efficiency and position themselves for digital transformation, says Tullett.

"This trend is starting to decline because of continued economic pressure, with many organisations now operating in a fully defensive model, with longer-term strategic investment on hold."

IDC predicts IT services spend in SA will slow down to a single-digit percentage in 2017. These forecasts do, however, remain subject to ongoing exchange rate fluctuations, with questions remaining over economic and political stability, it notes.

Meanwhile, BMI Research notes the South African IT services market will grow from R32.9 billion in 2017 to R45.6 billion in 2021, with a compound annual growth rate of 8%. IT services will be the outperforming IT market segment, with the development of the business process outsourcing market and public sector modernisation spending key drivers, it says.

However, Gartner says currency fluctuations against the US dollar can have a damaging effect on IT spending in SA. The cost of most IT products is based in dollars, which means local prices in rand must increase enough to cover costs and margins in dollars, it adds. The higher the dollar cost of a product or service, the more volatile the local price is to currency movements, explains Gartner.

Similarly, BMI points out potent risks of increased political instability and the credit rating downgrade could send the rand on a steeper depreciatory trajectory, weighing risks for the positive growth of IT services forecasts firmly to the downside.

Tullett says continued market pressures mean vendors will have to align themselves more closely with their customers' positions in their respective markets. "They will have to restructure contracts and relationships where necessary and focus on delivering immediate value while positioning capabilities in advanced or emerging technologies cautiously.

"Vendors will also have to evaluate local resources and right-size these to reflect the realistic expectations of local business opportunities. Vendors using SA as a base for other African operations will most likely also find themselves undergoing similar evaluations in other territories on the continent," he concludes.