Why it will be very different this time

Zoli summarizes a round of speculations on what tech spend can be "safe" in a recession - it follows a NY Times report on IT "belt tightening"

I wish I was smart enough to pinpoint specific winners and losers - all I know is the market is very different from the one in 2001 and we should be careful not to look for too many clues from past recessions.

Here are some conflicting cross-currents I am seeing:

a) If tech increases 4% next year, that's NOT a recession. Other than spend on compliance and security in the last 5 years, IT spending has been declining in most companies.
b) Capital budgets will take a much bigger hit, as the trend towards buying IT as Opex accelerates. SaaS, Utility Computing, SaCS were not major factors the last time around.
c) Never before has there a confluence of so much technology innovation all showing up at the same time - virtualization, green data centers, mobility, sensory networks, social networking to name just a few. I am tracking over 40 categories on my innovation New Florence blog. Many with very compelling value propositions, but also competing with each other and incumbent vendors for attention and budget
d) Advertiser driven revenues of IT vendors are much bigger than in 2001. These dollars do not show in traditional IT budgets.
e) Customers are revolting a lot more around forced upgrades. They were not popular in 2001 because everyone was sore from Y2K. Now, if companies want it, they want it invisible and in background as with SaaS.
f) Vendor marketing dollars were concentrated on tech media and industry analysts and industry events. Many of those have already died even ahead of any slowdown as dollars move to digital channels.
g) Third party maintenance and Open Source were not on the radar for many companies seven years ago.  A recession will only push them forward this time around.
h) Offshoring (at least for US companies) is a lot more expensive than in 2001 because of  years of wage inflation and the dollar weakness. Developer communities and crowdsourcing are new phenomena we did not have in any robust fashion a few years ago.
i) The consumerization of technology in last few years has made enterprises far more eager to see similar price points in their own budgets

As a buyer of technology, sit down with your budget for the last few years. If the categories and percentages have not changed much and you have not taken advantage of various innovations and price declines and newer vendors, you are doing your organization a huge disservice if you just batten your hatches. In a recession, you should be dramatically transforming your IT budget and sourcing strategy.

As an older vendor of technology, if you expect to continue with what has worked in the last few years, you are in a very vulnerable category. The cross-currents are too strong  for you, big as you might be, to just ride it out.  Transform your revenue and marketing mix in a big way.

What will not change - and something for newer vendors to keep intensely focused on - is good old fashioned value justification. Cost savings are always handy in a recession. But other tangible payback areas also help. But as a CIO recently told me - the pay back numbers better be eye-popping. A 10 or even 20 % improvement just will not cut it.

It should be an interesting ride.

Comments

[Phil Fersht]

Very good points Vin. My cousin is a CIO at one of the major investment banks and he was complaining to me the other day at how he (and his peers) were being instructed to take management accounting courses. Their roles are moving towards cost-containment and away from innovation. Combined with fears of a downturn, surely this is going to drive more firms to look at external services options to drive down Opex further? While you are correct about offshoring being complicated by rising wage inflation and currency appreciation, we are also seeing the emergence of competitive offshore vendors such as Satyam and Patni looking to get their piece of the action. What's more, the offshore firms are a lot better at taking on higher value services, such as ADM and IM, than they were in 2001. I would like to see more domestic IT services firms becoming more competitive this year to take advantage of these rising offshore costs and keep more IT work onshore - and maybe a recession will force this to happen? Might be a blessing in disguise for the US IT industry?

All these fluctuating issues seems to be swirling around in 2008 to create a rather intriguing picture!

[vinnie mirchandani]

Phil, I was just making observation that you have to negotiate harder with offshore vendors...of course, you can still get competitive deals but nothing like 5 years ago. I would add Cognizant and several specialist vendors to the ones you mention..and vendors from Russia, Philippines and other markets you can still do pretty well around.