2022 Outlook Global IT Services

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Global IT Services 2022 Outlook

Anurag Rana
Team: Technology
BI Senior Industry Analyst
1. 2022 Outlook: Global IT Services

Contributing Analysts
Maya Neuman
(Bloomberg Intelligence) -- Constrained labor Table of Contents

supply could curtail sales growth for major IT Key Topics
services companies in 2022, overshadowing Performance & Valuation: Comparisons Get Tougher
strong demand as enterprises invest more in Labor Constraints Could Hurt Margins, Growth
emerging technologies such as cloud, security Expect Strong Demand for Public, Hybrid Cloud
NEW
and artificial intelligence. Providers with scale IT Infrastructure Outsourcing to Drop Further
European Spending on Offshore IT May Improve
and higher brand recognition, such as Tata
Consultancy Services and Accenture, are better positioned than rivals to navigate these challenges
and potentially exhibit double-digit sales growth.
Along with greater use of public-cloud services, we also expect broader adoption of hybrid-cloud
products as corporations boost investments to upgrade their internal architectures. Increased
compensation-related pressures and a greater need to spend on sales and marketing compared with
2021 could trim industry margins by 50-150 bps. (12/08/21)
Key Topics
Performance & Valuation: Comparisons Get Tougher
IT Services Performance in 2022 Unlikely to Match a Strong 2021

Maya Neuman
Tougher comparisons and higher interest rates could push the performance and valuations of the
Bloomberg Intelligence global IT services peer group to be less robust in 2022 compared with 2021.
Even companies with strong fundamentals, such as EPAM Systems, Accenture or Tata Consultancy
Services, could see their multiples compress, while those like IBM or DXC Technology may see some
reprieve. (12/07/21)
2. Digital, Offshore Demand Lift Performance

Maya Neuman
The Bloomberg Intelligence global IT services peer group narrowly underperformed the S&P 500
index through Nov. 30 by about 1.7 percentage points, primarily due to some pressure on technology
stocks over the past month. Other than that, the peer group has steadily outperformed the broader
index for most of the year due to demand for digital and offshore delivery. The outperformance was
driven by EPAM Systems and Capgemini, while companies like Atos and Cognizant lagged behind.
EPAM Systems' 69.8% return has been fueled by strong exposure to cloud, analytics and security
services. Atos was the group laggard with a 49.5% decline due to pricing pressure in its legacy
product portfolio, accounting errors and limited U.S. exposure amid a strong rebound in IT spending
in the region over recent months. (12/07/21)
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Bloomberg® 06/02/2022 14:37:37

BI Global IT Services Peer Group Performance
Source: Bloomberg Intelligence
3. Tough Comparisons Could Hurt 2022 Valuations

Maya Neuman
Bloomberg Intelligence's global IT services peer group multiple has declined in recent months,
mirroring the pressure on technology stocks amid fears of rising interest rates. As of Nov. 30, the S&P
index was trading at a price-to-sales multiple of 2.9x vs. 1.2x for the IT services peer group, below the
recent high of 1.4x. We expect pressure on the group to continue as comparisons get tougher in
2022, making it harder for companies to repeat strong sales-growth performance.
The price-to-sales multiples of EPAM Systems (7.1x), Tata Consultancy (6.5x), Infosys (5.6x) and
Accenture (4.1x) have seen a sharp acceleration compared with two years ago, though they have
pulled back in the past month. IBM could improve next year as it returns to some positive sales
growth. (12/07/21)
BI Global IT Services Peers P/S vs. S&P 500
Labor Constraints Could Hurt Margins, Growth
Tata Consultancy Less Vulnerable to Labor Pressure Than Rivals

Andrew Girard
Tata Consultancy Services' brand and scale leave it better equipped to navigate labor pressure than
rivals like Wipro, Infosys, Tech Mahindra, HCL and Cognizant. A steady uptick in offshore IT and digital
demand is intensifying competition for skilled labor, which will likely fuel inflation and curb margins
by 50-150 bps for most providers in 2022. (05/19/22)
4. Wage Inflation Could Hurt Margin by 50-150 Bps

Andrew Girard
Higher wage inflation due to fierce competition for skilled IT labor could dent industry margins by 50-
150 bps the next few quarters, given that employee-related costs account for about 75% of total
expenses. Companies may have to give a one-time bonus, raise wages or do both to counter the
Bloomberg® 06/02/2022 14:37:37

pressure and curtail higher employee attrition, which is spurred by a strong rebound in tech
spending.
In a normal year, annual wage increases put 100-200 bps of strain on margin, which is absorbed
throughout the year via sales growth, productivity improvements, hiring more junior staff and
changing the mix of offshore-onshore delivery. The additional 50-150 bps of pressure on margin is
likely to hurt smaller companies more than large ones. (05/19/22)
TCS Employee Related Costs % of COGS, SG&A
5. Cloud, Security Demand Could Support Strong Pricing

Andrew Girard
The shortage of skilled labor and heightened demand for cloud and security products could support
strong pricing for the next 12 months, which might offset some of the margin pressures due to wage
inflation. Most industries curtailed tech spending in 2020 because of the pandemic, and in 2021
scrambled to invest in emerging technologies to digitize operations. Recent bookings data give us
confidence that sales growth in digital products will likely remain elevated for the rest of 2022.
(05/19/22)
AWS Sales Growth in Constant Currency (%)
6. Tata Least Exposed; BPO Providers at Higher Risk

Andrew Girard
The size and scale of Tata Consultancy Services and Accenture make them less susceptible to margin
shocks than smaller peers such as Cognizant, Infosys, Wipro, Tech Mahindra and HCL Technologies.
All these companies have already seen a spike in employee attrition, and we expect pressure to
intensify throughout 2022. In periods of high demand, companies with lower brand equity normally
lose employees to companies such as Tata, that are perceived as better places to work.
To ensure their work for clients isn't disrupted, lower-tier providers are forced to increase
compensation to retain employees. Business-process outsourcing (BPO) companies such as Genpact,
EXLS and WNS are also vulnerable to this labor shortage and could see expenses rise. (05/19/22)
Bloomberg® 06/02/2022 14:37:37

IT Services Peers' Employee Attrition (%)
7. Attrition to Experience Modest Slowdown

Andrew Girard
Employee attrition could begin to slow in next few quarters, we believe, after reaching record levels
at the end of 2021. Offshore IT-management teams countered the threat proactively by increasing
compensation, which may result in margin compression above consensus estimates. The demand for
new technologies is high, with a majority of the industry's revenue coming from North America,
typically the forefront for new emerging technologies. Attrition is worse for technologies such as
cybersecurity and cloud migration. (05/19/22)
Bloomberg Transcript
"Moving to talent retention. We have a track record of
consistently maintaining the highest talent retention in the
industry, even in the face of high levels of churn across the
industry. Our attrition in IT services continued to rise on an LTM
basis and was at 17.4%. However, the quarterly annualized
attrition is plateauing. Lastly, we have announced a salary
increment with effect from April 1, similar in quantum to prior
years."
Samir Seksaria - Chief Financial Officer, Tata Consultancy Services Ltd.
4Q22 Earnings Call, April 11, 2022
Click to view entire transcript
Expect Strong Demand for Public, Hybrid Cloud
Digital Transformation to Push Higher Cloud, Security Spending

Andrew Girard
The acceleration of IT-services industry growth drivers -- cloud and analytics -- appears sustainable
through the rest of 2022, driven by the need for digital transformation. Some security-product
spending could rise as more people shift to a hybrid work model, while cyberattack threats are rising.
A shift to the cloud is the main contributor as enterprises hasten upgrades of legacy infrastructure.
(06/02/22)
8. Shift to Cloud Applications Is Main Growth Driver

Andrew Girard
Cloud-based applications -- or Software-as-a-Service (SaaS) -- are positioned to remain the main

near-term growth catalyst, driven by corporations' increased need to upgrade systems, particularly in
functional areas such as sales automation, customer service, collaboration, HR and finance. SaaS
makes up over 61% of total cloud spending, which exceeds $405 billion and expands more than 25%
annually, according to IDC data. Implementing these products falls to IT-services companies and may
rise in-line with the low-double-digit industry average.
Strong implementing practices for Salesforce, Workday and other software sets leader Accenture
apart from rivals, especially offshore companies such as Tata Consultancy, Infosys and Cognizant,
though these get their fair share of work. (06/02/22)
Bloomberg® 06/02/2022 14:37:37

Software-as-a-Service Spending Forecast
Source: IDC, Bloomberg Intelligence
9. Upgrading IT Infrastructure in Untapped Market

Andrew Girard
IT-infrastructure modernization is one of the biggest growth opportunities as clients shift workloads to
the public cloud, embrace a hybrid-cloud environment or upgrade older systems. Most legacy
companies invested billions in their client-server IT infrastructure over several decades. But the large
capital investments, regulatory restrictions and low desire to cede full control have prevented
customers from moving their entire IT infrastructure to the public cloud, favoring a hybrid approach.
(06/02/22)
Cloud Penetration by Functional Market
10. Security Services Fueled by More Cyberattacks

Andrew Girard
Managed-security services is one area that could see greater demand in the near and long term, as
the number of malware and ransomware attacks rises. Since most IT-services companies are
software-agnostic and work broadly with all the leading security-software providers, we believe
they're better positioned to capitalize on more spending by companies than product suppliers.
Managed-security services were 20% of the $152 billion security market in 2021 and are expected to
rise about 10.5% a year through 2025, IDC data show. The shortage of skilled security professionals is
another key driver, an issue that may worsen. (06/02/22)
Bloomberg® 06/02/2022 14:37:37

Security Spending, High-Growth Segments
11. Need for Insights Drives Analytics Spending

Andrew Girard
The need for greater insights is another key driver for digital products, as large corporations spend
more to unlock the value of data hidden within their systems. Data-related projects undertaken by IT-
services companies include integrating information from various sources, both within and outside of
an organization, to create a common platform that anyone can use. Once the information is
normalized, IT-services companies help clients create analytics dashboards to gain better insights
into their operations and customers.
The big data and analytics industry is poised to expand 14% a year in 2021-25 to about $164 billion,
according to IDC. Cloud applications could fuel this, growing at a 23% rate vs. 5% on average for
legacy systems. (06/02/22)
Big Data and Analytics Spending Forecast
12. IoT Investments to Fuel Long-Term Growth

Andrew Girard
Emerging technologies such as Internet of Things (IoT), blockchain and metaverse could be the IT-
services industry's next large growth drivers, like cloud and security. We expect a steady rise in the
number of new projects associated with these technologies over the next few years. Unlike IoT, which
has a fair degree of hardware and associated software spending, blockchain-related work depends
mostly on services. A potential recession could stall the growth rates of these technologies, as they
aren't critical to an enterprise, compared to cloud and security. (06/02/22)
Bloomberg® 06/02/2022 14:37:37

Internet of Things Spending Forecast
IT Infrastructure Outsourcing to Drop Further
DXC Technology, Kyndryl’s IT Infrastructure Declines to Continue

Maya Neuman
IT infrastructure outsourcing (ITO) could face more problems in 2022, and we expect traditional data-
center outsourcing to decline 6-8% a year, while cloud-related sales increase about 15%. This cloud
shift could put pressure on ITO units of DXC Technology and Kyndryl next year, partially offset by their
cloud-services businesses. (12/07/21)
13. Pace of Traditional ITO Decline Could Quicken in 2022

Maya Neuman
The continued movement of enterprises to shut down their own data centers and shift more
workloads to either the public cloud or colocation facilities could accelerate next year, increasing
pressure on the traditional outsourcing work of large IT services providers such as Kyndryl (previously
IBM's infrastructure outsourcing unit), DXC Technology and Atos. While the overall industry declined
at the rate of 5% in 2021, based on IDC data, we expect the rate of decline to worsen slightly, to
about 6-8% in 2022. (12/07/21)
Legacy Outsourcing Market
14. Cloud-Related Revenue May Expand 15%

Maya Neuman
The traditional ITO market is poised to decline in 2022, but we continue to expect strong double-digit
growth for the cloud portion of this segment. About two-thirds of the total IT outsourcing market is
tied up with traditional data-center work and the rest associated with cloud services. We see the shift
to cloud from traditional continuing in 2022, albeit at a slower pace than this year's 21%. Tougher
comparisons and the acceleration in demand for cloud services due to the pandemic are two key
reasons why the growth rate could slow in 2022. (12/07/21)
Bloomberg® 06/02/2022 14:37:37

Cloud IT Outsourcing Market
15. Expect Managed Cloud Services Rivalry to Intensify

Maya Neuman
Renewed efforts by DXC and Kyndryl to push sales positive could spur heightened competition in
managed cloud services, creating bigger rivalries with the likes of Accenture, Deloitte, Wipro,
Cognizant and Capgemini. In managed-cloud services, a large public-cloud provider such as
Amazon.com, Microsoft or Google provides the IT infrastructure, while a services company offers
consulting expertise and support via its large labor pool. The consulting-focused firms have been
more aggressive in the past few years to expand their services, but we expect tougher competition
ahead. (12/07/21)
Managed Cloud Services Magic Quadrant
Source: Gartner, Bloomberg Intelligence
16. Public Cloud, Co-Location Provider Taking Share

Lindsay Dutch
(REITs, Consumer Hardlines)
Besides IT-service providers that offer managed services, public cloud and co-location companies
could also benefit from enterprises shuttering data centers. Public-cloud companies such as Amazon,
Microsoft and Google are net beneficiaries as enterprises move more workloads to the public cloud.
Initially, clients simply "lift and shift" their applications without any changes, then refactor them over
time.
Co-location companies such as Digital Realty Trust and Equinix, which rent out facilities to companies
and provide power and connectivity, could also see greater rental income. (12/07/21)
Bloomberg® 06/02/2022 14:37:37

Hosting Infrastructure Services Revenue Forecast
European Spending on Offshore IT May Improve
European Spending on Offshore IT Services May Power Sales Growth

Tamlin Bason
(Litigation)
European enterprise spending on offshore IT services may accelerate in 2022 as the region slowly
bridges the gap to the more saturated U.S. and U.K. markets. That presents sales-growth
opportunities to Asia-based companies with large European footprints -- such as Tata Consultancy --
and Capgemini, particularly if Atos' struggles linger. (11/24/21)
17. European Offshore Spending More Resilient to Covid

Tamlin Bason
(Litigation)
Enterprise companies in continental Europe maintained higher offshore IT-services spending than
those in regions with greater offshore saturation in 2020 -- an indication that European businesses
were seeking to manage cost pressure while increasing operational resilience via digital-
transformation projects. Most offshore companies witnessed steadier sales in Europe than in the U.S.
in fiscal 2021 (ended March 31). Digital-services spending looks set to be the main driver of the
global IT services rebound in fiscal 2022. Consequently, momentum is strongest in the U.S., where
digital adoption is higher.
Yet offshore companies are recording solid growth in Europe, and we believe the accelerating
adoption of digital services could be a medium-term sales advantage for those in the region.
(11/24/21)
Offshore Spending Forecasts by Region
18. Europe’s Digital Deficit May Spark Offshore Spending

Tamlin Bason
(Litigation)
European companies lag behind U.S. counterparts in terms of exporting workloads to the cloud,
potentially creating an opportunity for offshore businesses to land contracts that retain some legacy
services while also leveraging digital-transformation expertise. Annual offshore-spending growth in
EMEA will outpace the U.S. in every relevant category through 2025, according to an International
Bloomberg® 06/02/2022 14:37:37

Data Corporation forecast, with the largest difference coming in infrastructure outsourcing (4.4% in
EMEA vs. 0.9% in the U.S.).
Globally, traditional IT outsourcing spending faces pricing pressure as budgets shift to cloud projects,
but the added headroom for expansion in Europe presents opportunities for companies to couple
legacy management with next-generation services. (11/24/21)
Five-Year CAGR Forecasts for Offshore Services
Source: IDC
19. Offshore Companies Steadily Expanding European Exposure

Tamlin Bason
(Litigation)
Offshore IT-services companies may continue to see European sales increase as a share of total
revenue in the medium term, as the region's adoption of offshore services outpaces other mature
markets. Tata Consultancy could be best positioned to gain share in Europe, which comprises 32% of
all sales. Tata's reporting -- which separates continental European revenue from that of the U.K. --
illustrates how European sales growth (14% on average on a constant-currency basis since 2017) has
far surpassed the U.K.'s 8.6%.
European sales as a proportion of total revenue has also improved for Infosys, HCL Technologies and
Wipro, though at a slower pace than Tata. We expect those companies to expand their footprints in
the region, as Wipro did with its Capco acquisition in 2021. (11/24/21)
European Sales' Share of Total Revenue
Source: Bloomberg Intelligence, Company Filings
20. Capgemini Could Take Share If Atos Struggles Persist

Tamlin Bason
(Litigation)
Capgemini is well-positioned to take market share from Atos if the latter is unable to exit the tailspin
that pressured sales, profit and valuation through 2021. Atos' struggles were partly due to its outsized
exposure to IT outsourcing and slow leveraging of offshore delivery, though the latter has been
accelerating in recent years. Still, with a 3% market share of European IT services, Atos is No. 4 in the
region behind IBM, Accenture and Capgemini.
Bloomberg® 06/02/2022 14:37:37

We see an opportunity for Capgemini to expand beyond its 3.5% market share in Europe if Atos' new
CEO can't resolve its legacy overhang and accelerate the pivot to digital services. (11/24/21)
European IT Spending, Market Share in 2020
Source: Company Filings, Bloomberg Intelligence
To contact the analyst for this research:

Anurag Rana at arana4@bloomberg.net
Bloomberg® 06/02/2022 14:37:37

2022 Outlook Global IT Services

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Global IT Services 2022 Outlook

1. 2022 Outlook: Global IT Services

(Bloomberg Intelligence) -- Constrained labor Table of Contents

Performance & Valuation: Comparisons Get Tougher

IT Services Performance in 2022 Unlikely to Match a Strong 2021

2. Digital, Offshore Demand Lift Performance

Bloomberg® 06/02/2022 14:37:37

BI Global IT Services Peer Group Performance

Source: Bloomberg Intelligence

3. Tough Comparisons Could Hurt 2022 Valuations

BI Global IT Services Peers P/S vs. S&P 500

Source: Bloomberg Intelligence

Labor Constraints Could Hurt Margins, Growth

Tata Consultancy Less Vulnerable to Labor Pressure Than Rivals

4. Wage Inflation Could Hurt Margin by 50-150 Bps

Bloomberg® 06/02/2022 14:37:37

TCS Employee Related Costs % of COGS, SG&A

Source: Bloomberg Intelligence

5. Cloud, Security Demand Could Support Strong Pricing

AWS Sales Growth in Constant Currency (%)

Source: Bloomberg Intelligence

6. Tata Least Exposed; BPO Providers at Higher Risk

Bloomberg® 06/02/2022 14:37:37

IT Services Peers' Employee Attrition (%)

Source: Bloomberg Intelligence

7. Attrition to Experience Modest Slowdown

Expect Strong Demand for Public, Hybrid Cloud

Digital Transformation to Push Higher Cloud, Security Spending

8. Shift to Cloud Applications Is Main Growth Driver

Cloud-based applications -- or Software-as-a-Service (SaaS) -- are positioned to remain the main

Bloomberg® 06/02/2022 14:37:37

Software-as-a-Service Spending Forecast

Source: IDC, Bloomberg Intelligence

9. Upgrading IT Infrastructure in Untapped Market

Cloud Penetration by Functional Market

Source: IDC, Bloomberg Intelligence

10. Security Services Fueled by More Cyberattacks

Bloomberg® 06/02/2022 14:37:37

Security Spending, High-Growth Segments

Source: IDC, Bloomberg Intelligence

11. Need for Insights Drives Analytics Spending

Big Data and Analytics Spending Forecast

Source: IDC, Bloomberg Intelligence

12. IoT Investments to Fuel Long-Term Growth

Bloomberg® 06/02/2022 14:37:37

Internet of Things Spending Forecast

Source: IDC, Bloomberg Intelligence

IT Infrastructure Outsourcing to Drop Further

DXC Technology, Kyndryl’s IT Infrastructure Declines to Continue

13. Pace of Traditional ITO Decline Could Quicken in 2022

Legacy Outsourcing Market

Source: IDC, Bloomberg Intelligence

14. Cloud-Related Revenue May Expand 15%

Bloomberg® 06/02/2022 14:37:37

Cloud IT Outsourcing Market

Source: IDC, Bloomberg Intelligence

15. Expect Managed Cloud Services Rivalry to Intensify

Managed Cloud Services Magic Quadrant

Source: Gartner, Bloomberg Intelligence

16. Public Cloud, Co-Location Provider Taking Share

Bloomberg® 06/02/2022 14:37:37

Hosting Infrastructure Services Revenue Forecast

Source: IDC, Bloomberg Intelligence