How Recession-Proof Is IT?
- By Jabulani Leffall
- September 22, 2008
There are just as many surveys and reports making the case for or debunking the assertion that we are currently in a recession.
Likewise, when it comes to IT spending, the results vary in terms of severity but the fact is that businesses across the country are currently reining in technology budgets because of slowing economic growth across the board.
One need only look to three industry heavyweights in software, hardware software and Internet search and advertising to gauge what chief information officers and their cohorts in the finance department might be thinking when it comes to expenditures on enterprise technology.
For instance, Cisco Systems may predict in its upcoming earnings report that revenue will be little changed or perhaps even in decline from the previous three months according to recent analyst report by Nikos Theodosopoulos of Swiss investment bank UBS..
Moreover, Cisco Chief Executive John Chambers said in May that demand in the U.S., which accounted for about half of annual revenue, has "softened."
Microsoft, meanwhile, is one of the few technology giants not too adversely affected by slowdowns as sales of Windows were strong for the three months ended June 30. However, its near ubiquitous Microsoft Office software suite missed the company's sales goals for a second straight quarter amid flatter demand and high piracy rates in places China.
More telling is the prospects for the area in which Redmond seems to be making a strategic shift, the Internet. Microsoft's Internet advertising also fell short of its targets as it lost business to Google.
Yet Google, Microsoft's fiercest competitor in the space in mid-July released second-quarter results for the three months ending June 30, showing that while net income had risen by more than a third to $1.25 billion, the increase was slightly lower than expected.
A problem area for many businesses these days, according to IT pro Don Leatham, is whether to purchase only "best of breed" solutions or rely on one larger vendor.
"While having only one support and license agreement is convenient, the Swiss Army knife solution will not provide the level of functionality, depth or manageability of the point solutions," said Leatham director of solutions and strategy at Lumension Security in Scottsdale, Ariz.
IT pros, former finance and IT executives as well as third-party vendors all contend that it won't so much be a recession-induced drop-off in IT spending that will be the main issue. Rather, it'll be how companies decide what to buy, what purchases can wait and how shelling out cash of any kind can best be leveraged in an environment such as this.
It's evident that expansion is slowing, which in turn affects the attitudes and perceptions among enterprises doing business with technology firms. Measuring overall sentiment and how it affects IT spending can be tricky depending on who commissioned the report, what the central questions of that study are, who's asking them and, of course, who stands to benefit from the information.
"Most industry surveys are showing that IT budgets will be reduced, or will have smaller increases, than in previous years," said Everrett Johnson, a former finance executive, a CPA and past iinternational president of the Information Systems Audit and Control Association and IT Governance Institute. "First to be hit will be services and projects with poor ROI. Staff at larger companies may also be the first to face reductions."
Johnson adds that enterprises no longer have the luxury of supporting or recovering from underperforming IT investments.
"IT leaders will rely heavily on their bench strength within IT staff and judiciously hire new talent," he said.
In that vein, here's a cursory look at a few of the more prominent reports on IT spending released over the first half of 2008, which may give IT pros a greater insight into what people are saying and what areas will see the most cuts and/or increases:
Fitch Ratings, the corporate credit rating concern, believes that the credit profile of technology providers going forward will be enhanced by greater exposure to non-U.S. markets due to higher growth opportunities in emerging markets. The report also concluded that vendors can benefits from diversification of products and services to hedge risk, which could lead to lower volatility and exposure to the effects of cyclical purchases. For instance, the report said a software company experiencing a slowdown in sales of its products might want to consider beefing up its service and support components for existing customers and clients.
"However, the source (product or vertical) of revenues needs to be examined closely, as well as regional profitability characteristics," the report concluded.
Citi Investment Research's July survey of more than 200 chief information officers arrived at a conclusion that reflects a cautious outlook for technology spending that promises to be flat in the latter half of this year as opposed to the same period in 2007. But the study also pointed out that the estimated contraction in spending would make it a buyer's market for enterprise managers --good news for companies, but bad news for vendors. According to the study, 100 CIOs in Europe and 100 stateside see a flatness in spending, down from the comparable period a year ago.
The report went on to say that new IT projects are being shelved in the second half of the year as respondents indicated that they only expect to shell out 19 percent of their technology budgets on new projects, a decrease from 23 percent in 2007.
Computer Economics' July report, "Computer Economics IT Spending Staffing and Technology Trends," concedes that economic growth has finally begun to "pull down IT spending increases." As a result, the Irvine-Calif. based research outfit found that median IT operational budgets will growing 4 percent this year -- a decline from the 5 percent growth seen in 2007.
The report's executive summary paints a cautiously optimistic picture for IT spending going forward: "To be sure, IT spending and staffing levels are not generally falling, just as the U.S. economy is not yet, technically, in a recession." The report continued. "Nevertheless, it does not take an outright recession for organizations to pull back their IT spending and staffing growth plans."
Forrester Research, a tech industry research giant that usually takes a larger macroeconomic view of the industry, announced earlier in the year it had revised its earlier estimate of a 4.6 percent increase in U.S. purchases of IT goods and services down to a more modest 2.8 percent.
In early spring, Forrester posited that fresh numbers from "newly available economic data" pointed toward a "slight recession in the United States" and will impact IT spending for 2008.
As a whole, Forrester predicted that the global market for IT purchases is estimated to reach $1.7 trillion, but that this year global IT purchases are expected to grow 6 percent versus well over 6 percent in 2007.
"The U.S. share of expenditures in global IT purchases market is anticipated to shrink down to 33 percent, from about 40 percent in 2003. But the United States will continue to dominate the software spending market with 44 percent of the share," the report said.
Forrester also predicts that neighbors to the north and south, Canada and in many Latin American countries, will see spending slow. While U.S. IT purchasing will grow slightly to $552 billion in 2008, spending on IT in Canada and Latin America will reach $126 billion. Forrester calls the growth respectable at an "8 percent increase for the regions," but still a significant drop off from between 13 and 17 percent growth from 2004 through last year.
Michael Cangemi, president of Cangemi Company LLC and a former president of Financial Executives International, has been both a CIO at CFO at one point or another in his career. Wnd while he didn't specifically admit that some of the numbers he's seen in several reports denote a recession, he did agree that overall there is a downturn.
"Bascially yes, in downturns companies look to save cash and reduce expenses. Therefore regarding IT investments they focus on smaller investments that will reduce expense or increase revenue," Cangemi said. "The ROI for all investments goes up in an economic downturn. Companies ride equipment and legacy systems longer."
Should we buy that or that?
If an old television in a living room no longer works but is too big and meddlesome to move out and one doesn't want to buy a cabinet for the new TV, why not improvise and put a curtain over the big TV and put the smaller and more sleek and modern one on top of it? It seems an apt analogy to describe the thinking of IT pros in the current environment.
Even modest slips in economic growth do not often cause marked spending swings in the IT space. Yet IT investment tends to reflect macroeconomic conditions.
With that in mind, it's obvious that almost all globally competitive enterprises and even small shops with just a few PCs, a Microsoft Office application stack, one server and some browser-based, e-commerce software have to, in fact, spend money on something in regards to IT-related products and services.
The question for IT managers -- not to mention rank-and-file pros charged with recommending purchases and upgrades -- becomes not do we spend this year but what should we spend on?
Desktops are a staple of all businesses, but more than half of large businesses, expert say, will likely spend money supporting, repairing or maintaining systems and entry-level servers this year.
Next to desktops, notebooks and low-end, entry level servers, it's actually printers and related support services that will garner a lot of the spending coin as well.
"(The current environment) has certainly IT procurement managers more conservative and more likely to ask themselves questions like 'Do I really need this?' or 'Do I really need this now?'," said Mark Wood, vice president of product strategy and member of the office of the CTO for San Francisco-based security software firm nCircle. "IT companies and their procurement counterparts are taking hard looks at priorities. Once, the top three project priorities would be likely to receive funding; now, it's the top two or maybe only the top one that gets the dollars."
As a former IT auditor and financial manager as well, Michael Cangemi of Cangemi Company, has a premise that's in step with this assertion, but he suggests that a methodical approach to spending should be put in place in good times and bad, so that information resource strategy and planning becomes the reason for spending and not the other way around.
"Since estimates of productivity improvements and increases in revenue from better information are hard to estimate, managers do not put enough effort into working out realistic returns on the investment," he said. "Basically, the devil is in the details and it is up to operating managers and finance to study before they recommend or approve the purchase."
That said, what most of these reports and many of the analysts and prognosticators always fail to mention is the expenditure side of the business that doesn't involve a software package, a piece of hardware or even a new e-commerce solution service. Maximizing a tangible product purchase more often is complemented by going out and getting the right people. In most cases this can help a company save money on goods and services by hiring IT services pros who have the goods.
Recession-proof IT gigs?
In the end, the calculations on what constitutes a recession can only be seen in retrospect, as economists have always maintained that we don't know we're in one until several quarters showing a down cycle have elapsed and the data can be analyzed through hindsight.
However, one report issued in mid-July suggests there is something technologists can measure right now and that's people. Conventional wisdom dictates that if a company bought an ERP system months ago that has been sitting on a shelf and hasn't been installed or has a new network device that still has the plastic on it, then they would need an application implementation specialist and network admin person for those respective duties.
JobFox.com's "Top 20 Most Recession-Proof Professions" report indentified software design and development; networking and systems administration; software implementation analysis; testing and quality assurance; database administration; and general IT management with cutting-edge mobile IT and Web 2.0 skills as areas in high demand.
Overall, the general category of IT had the biggest prospects in the report, which means that there may yet be a ray of hope for vendors shopping their wares to match up with a steady flow of human capital at various businesses.
"As a vendor, I have to be coldly realistic about how buyers make up their minds and all of these are very valid reasons for choosing one solution over another," said Mark Wood, of nCircle. "In the current economic climate, I think technological performance is going to mean even less. Things like existing relationships and familiarity with technology will be the primary driving forces."