If We're Entering a Recession, Preparedness is Key
- 16 June, 2008 14:16
Soon after the declaration of war in September 1939, London Zoo put down all of its poisonous snakes in case they escaped during an air raid. Some 400 million sandbags were deployed in front of shops and public buildings and 827,000 children were evacuated from town to country. Apart from that, nothing much happened during what the British came to know as the Phoney War. By the time Hitler invaded Scandinavia on 9 April, 1940, people had stopped carrying their gas masks around with them.
Since last year, when Northern Rock became Northern Wreck, we've been living a latter-day version of the Phoney War. The signs of impending trouble are clear enough. The world's banks have lost several trillion dollars on credit-based derivatives. But there are more losses to come. As a result, they're not lending to each other, us, or the companies that employ us.
The Bank of England is reducing interest rates but the real cost of most mortgages is rising. The housing market is falling like a stone. Credit companies are turning away customers. Meanwhile, the wholesale price of gas has risen by 45 per cent since last year. The price of a white sliced loaf has risen by 60 per cent since 2005. In old money, a gallon of petrol will soon cost £5.
Lately, farmers in the American Midwest have taken to feeding their pigs banana chips and yogurt-covered raisins. Apparently, it's cheaper than feeding them corn, the price of which has gone through the roof thanks to George Bush's plan to make the US self-sufficient in energy by subsidising the production of biofuels.
Welcome to the mother of all concatenations: simultaneously, we're dealing with the end of the credit bubble, the first shocks from climate change interventionism and an array of delayed side-effects generated by China's economic expansion. It may all work out fine but the odds feel uncomfortably poor.
Nevertheless, on both sides of the Atlantic, there are voices saying that big IT departments are in decent shape for a fight.
The theme is rehearsed by David Roberts, chief executive of the Corporate IT Forum, who describes IT as a "lifeboat" rather than an "aggressive weapon". The analogy is meant to be flattering. "I can't think of a FTSE company that hasn't shrunk its IT and enhanced its ability to do strategic IT at a high level during the past five years," says Roberts. "IT's capacity to deliver is probably better than the level at which it currently operates. So IT is in a very good position. You can load more and more on to it, and IT will eat it up," he adds.
Perhaps, as Roberts says, such self-confidence is the natural result of five years of "cost-cutting and depleting". In the wake of the dot-com bust, he suggests, IT departments have sorted out their relationships with vendors and manoeuvred themselves into alignment with the business.
But as Roberts acknowledges, there's a dark corollary to all of this. In sectors like transport and financial services, mergers and acquisitions have "left the total amount of IT within enlarged organisations declining to an alarming extent."
He adds, "In some cases, it's minimalist. There's just enough. It's agile, but there isn't really a lot that one can take out."
The same theme is echoed in San Francisco by Barbara Gomolski, research vice president at analyst firm Gartner. "There's a different feel to it this time," says Gomolski. "Many more companies out there have been underinvesting in IT than have been overinvesting."
Lets Talk Figures
At a stretch, both Gomolski and Roberts might argue that this means the opportunities for cost-cutting in IT are limited. In particular, Gomolski suggests that the first calendar quarter data on corporate IT spend is "not as gloomy as it could be, given the economic situation".
She adds, "Some people were expecting five per cent or 10 per cent cuts in IT budgets, like last time. But budgets do seem to be holding up rather well."
The unspoken caveat in Gomolski's statement involves the words "so far".
Since last year, both Forrester and Gartner have cut their forecasts for growth in global IT spend several times. Both organisations still forecast overall growth, but no one believes that we've seen the last of those downward revisions.
The financial results generated by the big technology suppliers suggest a complex picture. Last November, Cisco caused a stir by suggesting that tech expenditure could get "lumpy". Then, in March, HP reported surprisingly good results but Oracle's earnings suggested that business applications licence sales had stalled in North America. In mid-April, IBM disclosed that its Q1 revenues rose by 11 per cent at year-end.
Gartner's Gomolski remarks, "CIOs aren't saying: 'Chile's GDP just went down, we must adjust our budget'. The overall health of the firm tends to dominate decision-making."
By the time the earnings season ends in early May, you can expect sentiment about the US economy - and therefore sentiment about IT expenditure to be a good deal worse than it is now. In the UK, Gartner's view is that IT budget growth rates are actually increasing in Europe. In the fourth quarter of 2007, European IT budgets were pegged at 3.2 per cent. During the first quarter of 2008, Gartner's forecast increased to 3.9 per cent.
Europe's current expansionary phase is presumably heavily reliant on Eastern European growth and the relative resilience, so far, of the Eurozone. That said, researchers from Citigroup have separately suggested the time lag between deterioration in credit terms and a slowdown in industrial activity stands at around nine months. On this basis, after months of bad headlines, the UK's very own downturn is probably starting in earnest right about now.
So if the worst comes to the worst, what should be done? We asked Barbara Gomolski of Gartner; Richard Sykes, former IT vice president of ICI; David Roberts of The Corporate IT Forum; and Brinley Platts of CIO Development for their views on recessionary best practice.
Our panel recommended eight basic strategies. In terms of broad themes, the degree of overlap between their recommendations was striking.
1. Get your numbers in order Consider what's important during a downturn and line your KPIs up behind that. "The fact that you have met your service levels and kept the network up and running isn't enough," says Gartner's Gomolski.
Gomolski suggests that overall IT budgets split into three main areas: what's required to keep the lights on; what's required to grow your business; and what's needed to transform it, with the average ratio something like: 66 per cent; 20 per cent; and 14 per cent.
"I see lots of IT budgets divided up in standard fashion, apportioned between hardware, software, maintenance and so on," she adds. "And people say to me: 'Where should we cut?' And I say: 'I don't know.' The traditional way of presenting IT budgets just doesn't give you information that's deep enough to say with certainty."
Operating in the dark, too many CIOs will acquiesce to the recessionary logic of cut-and-come-again. "CEOs who lump in lights-on expenditure with discretionary spend can end up inhibiting the growth of a company," says Gomolski.
2. Go from partner to service provider It's worth trying to avoid the scenario in which a CEO orders 10 per cent cuts across all budget lines.
"I think a CIO can get chewed to bits in an argument like that," says Brinley Platts of CIO Development. "No-one's interested in the truth. They're just interested in everyone sharing the pain." Cuts in the 60-70 per cent of expenditure routinely spent on running the business can be difficult to implement. "Out of a total budget of, say, £100 million, perhaps £25 million is discretionary. And £10 million out of £25 million is massive," he says.
Changing the way you work with business units may help. Platts suggests that you should stop acting like a "partner" and start acting like a "service provider". If the £10 million you're being asked to cut is nearly all project money, he suggests asking the line-of-business sponsors of those projects about what they need to achieve. "Go around the table asking about priorities," says Platts. "That's quite a good tactic, and I've seen it work several times."
3. Rigorously evaluate your software estate and cut accordingly As IT leader at ICI between 1993 and 1999, Richard Sykes had the good fortune to experience six years of uninterrupted GDP growth. But he also oversaw preparations for the demerger of what became Astra Zeneca, the pharmaceuticals business, from ICI's core chemicals operation.
The demerger was a forcing house for economies. One of Sykes' first initiatives was an end-to-end evaluation of every piece of software under ICI's roof. "After the audit, one-third of all software code, a staggering amount, bit the dust," he says.
Today, Sykes would recommend the same exercise to anyone. "There tends to be a tremendous accumulation of systems," says Sykes. "Even if you're not paying licence fees on them, they're taking up computing capacity and they have a cost in terms of maintenance."
4. Cut back on upgrades and overpriced packages This prescription has become so standard that it's almost become a cliche. But it's no less useful for that. "If your IT department rules the roost and tends to be tech-driven, you've probably fallen into the trap of upgrading your software too often," says Sykes. "You need a balanced view of what upgrades are required for those systems that survive the cull."
At Gartner, Gomolski refers to "a lot of people" who are turning away from richly-specified project management tools. She says, "They are looking at substituting lower-cost alternatives without disastrous consequences."
5. Vendor management When it comes to managing vendor relationships, Gomolski suggests that many IT departments are still doing a "bad job" of managing vendor relationships.
"There's a lot of low-hanging fruit to be picked. Getting more process-related with vendor contracts and putting in some more automation is going to be one solution," she says.
Richard Sykes suggests going to vendors and saying, 'We're both in this situation. What is it that we can do between us that's in both our interests?' This may not be about getting rid of people, it may simply be about adjusting behaviour."
6. Assess alternatives Investigating outsourcing and software-as-a-service (SaaS) is recommended.
At Gartner, Gomolski seems slightly cautious. "Is Pepsi going to migrate off SAP anytime soon?" she asks. "I don't think so. But for a far-flung part of their enterprise that can't support the costs of a full implementation, perhaps a SaaS solution does make sense," she adds.
At the Corporate IT Forum, Roberts seems more bullish. This month, Roberts is organising a seminar that features representatives from "five household-name corporates" who have been running pilot schemes involving Google Apps.
Google Apps' current situation reminds Roberts of open source three or four years ago. The company's online productivity suite, it seems, is beginning to colonise IT departments.
But there are differences. Many IT departments have learned the hard way that open-source software isn't necessarily a low-cost panacea.
8. Keep staff motivated "You don't want to end up with a team that is totally pissed off," warns Richard Sykes bluntly.
Sykes believes that, back in the mid-1990s, he only kept his staff motivated to seek and destroy redundant software by pressing ahead with "a limited number of new projects that were essential for the long-term good of the business".
Most likely, you and your company have already laid plans for a downturn. For the large minority of UK companies that run their financial year from April, the prospect of a downturn has already been factored into official budgets.
During research for this article, I happened to meet the business development executive of a large London advertising agency. "There's a huge amount of new business around at the moment," he said. A few minutes later, the executive mentioned that his company had just finalised its budgets for the financial year starting in April. "We're locking everything down," he said. "We're spending no money next year."
Why do that, I asked, when his agency was on the receiving end of so many new business opportunities? He shrugged. "There are just too many warning signs out there," he said. "Too many negative signals."
There may indeed be many warning signals but, to put it politely, forecasts of IT spending growth are variable. Some researchers rely on surveys; others on multi-part calculations. A few of the latter are relatively sophisticated. Others remind us to be grateful that Heath Robinson didn't study economics.
Researchers can't even agree on a valuation for the industry, much less a forecast for its growth. IDC claims that annual global sales of business IT are worth $1.4 trillion. Forrester says $1.7 trillion. You need growth data for a specific country outside the US? Good luck. By the time a 1,000-strong global sample of "decision-makers" is divvied up across multiple "territories" worldwide, any view of local conditions will be based upon the opinions of perhaps several dozen individuals.
It's hard to avoid the thought that they'd better be the right ones. But after all of those caveats, what do the numbers tell us?
Gartner expects worldwide IT spend to grow by between 2.5 per cent and 3.3 per cent during 2008. Something odd appears to be happening in Europe, however.
In the UK, Gartner was forecasting 3.2 per cent annualised budget growth late last year. In February, that increased to 3.9 per cent. It seems likely that the latter rise is due to the dollar's increasing weakness against the euro. But Gartner isn't saying so publicly.
So when will the Phoney War end? When will the negative signals become negative realities? The classic - if extremely loose - definition of recession involves two successive quarters of negative GDP growth.
But rising unemployment is much closer to being a real-time indicator. In the US, unemployment has been rising since January. In the UK, statisticians who specialise in examining output of the Office for National Statistics noted tentative signs of an increase in UK unemployment in mid-April.
For most of us, that's as close to a starting gun as we're going to get. Fasten your seatbelt: we're in for a very bumpy ride.