Seeing the upside of a downturn

The IT world has been riding a veritable roller coaster for the last 24 months.

First there was the fight (and victory) with Y2K, a self-inflicted wound if there ever was one. Then, with the potential disaster safely behind us, 2000 became the year of the dot-com. Investors went haywire buying into IPOs with little thought as to whether a company had a solid business plan. There seemed to be little rhyme or reason as stock prices soared when the average Jane and Joe decided high-tech was the place to be. Then came reality. A slowing economy and the death of thousands of dot-coms combined to hammer NASDAQ and take the lustre off the IT shine.

Does any of this make sense? Will calmer heads prevail? What about NASDAQ?

At a recent Information Technology Association of Canada gathering in Toronto, a couple of high-tech analysts looked for the bigger picture, made some predictions and offered insight into the future of IT investment.

Michael O’Neil, country manager of IDC Canada put it as straight forward as you can get. “The stock market around information technology will not rebound in 2001,” he predicted.

But not all was gloom and doom. “Although we do not forecast a rebound in IT stock prices this year we also do not believe that that lack of resiliency in dot-com stock prices will have a long-term negative impact on overall spending for infrastructure for the Internet.”

O’Neil explained that historically there has been a tendency to ignore recessions in the IT industry because IT, in itself, was a means of increasing efficiencies in a tough economy. In a sense, in a slow economy IT was needed more than ever. So, as the past slowdowns came and went, IT remained more or less unscathed.

But as the portion of the economy made up of the IT industry increased, so too did the potential effects of an economic downturn.

“The greater the portion of total GDP [comprised by] IT, the more any economic down turn is going to impact spending on IT.”

O’Neil divides spending into two categories: utilities and differentiators. Utilities represent those IT items that a company has to have just to survive, much like water, electricity and gas utilities. Regardless of how slow the economy is growing (or not as the case may be), a company cannot function without the basics. In this category, O’Neil included such commodities as PCs, reliable Internet connections and a corporate Web site.

This portion of IT spending is not going to shrink dramatically in an economic slowdown, though he admitted that margins would be squeezed dramatically.

It is investment in the differentiators that will be hit hardest during a down turn, he explained. Here new investment is going to be discretionary. CRM solutions, e-procurement and e-commerce all fit into this category. Suppliers are going to have to show senior management a real return on investment before any deals are signed, he explained.

“The pressure is going to be intense.”

The explanation as to why companies do not appreciably slow down utility spending during a recession rests in the simple fact corporate executive generally don’t expect a return on utility investment. Of the 171 executives surveyed by IDC Canada, fully 49 per cent said they had no ROI expectations for basic IT utilities. On the other hand, 49 per cent of the same executives expected a ROI, within a year, for IT differentiators.

setting goals too high

According to David Ticoll, chairman of Digital 4Sight in Toronto, it is almost as if we spoiled ourselves with recent economic growth.

“Over the past five years, in the U.S., labour productivity growth was about 4.5 per cent,” he explained.

“In the previous 20 years labour productivity growth was around 2.2 per cent…so this investment in IT in general and this explosion of the Internet in particular has really had an impact on the growth of labour productivity.”

So we look at our current growth rate as slow when in reality it was deemed acceptable for almost two decades.

He also reiterated what has become the mantra of the post “dotcomicide” world.

“You can’t make money from stupid ideas or bad execution,” he said.

Ticoll went on to explain the necessity for companies to have sound business plans, good business intelligence and corporate adaptability.

“Those companies that have combined their collaboration with suppliers and their customers…with the technology infrastructure that provides transparency of information are the ones that have the greatest ability to adapt,” he said.

“They have enough intelligence now in their market sensing systems, and also their supply chain systems, that they can identify quickly downturns in the marketplace.”