It strategy: recession effects - In times of crisis management

The IT industry loves a good crisis. Almost any upheaval, preferably on a global scale, can be turned into computer sales, it seems. Year 2000 and EMU conversion at least had a direct technical angle – but the Bill Clinton scandal? This might not seem to have much to do with technology – unless you count phone taps and tape recorders – but the speculation in the world’s media about the contents of the Starr Report and the infamous videotaped testimony was almost rivalled for volume and drivel by a different speculation – would the Internet cope? Despite the millions of people with apparently nothing more exciting to do than read the report and watch the video over the Web, the Internet did hold up – but not before most of the IT suppliers had put in a timely plug for the benefits of buying more powerful PCs and faster modems, signing with Internet service providers with the latest kit, and so on.

Rather than using the Clinton affair as a new marketing device, IT suppliers would be better off considering its effect on the world economy. The potential downfall of the president could, of course, be another factor – added to the crises in the Far East and Russia – in pushing the world towards another recession. And that is a possibility that will affect the IT strategy of every major company, and therefore requires the industry and the consultancies to plan carefully the products and services they will sell, and the advice they will give their customers. The IT industry prepared spectacularly badly for the last recession. The turn of the decade saw innumerable formerly great suppliers going out of business or being reduced to a shadow of their former glories. The players were, on the whole, so young and operating in such a charmed market that they seemed not to have considered the impact of large customers cancelling or delaying major contracts on all sides, making do with old technology for a couple more years, axing in-house projects. It is not clear that preparation is any better this time. If we do see a major recession – and it is arguable that, like the Clinton scandal, it is a crisis that is being created by the media as much as by economic and political forces – there is sure to be massive fall-out again. There are already some signs.

In September-October, the US went for its longest period in 18 years – a full two months – without a hi-tech Initial Public Offer, and only five of 70 public offerings scheduled for the period are likely to make it.

So the voguish Internet start-ups are likely to find the venture capital and eager investors thinner on the ground – but what of the established suppliers on whom the corporations base their buying strategies, and the consultancies their advice and alliances? These seem to be firmly ignoring the possibility of a recession.

“Companies will only survive a downturn by becoming more efficient and that means investing in IT,” said a manager at Sun. “With the Year 2000 and EMU projects, plus the absolute necessity to move some trade to the Web, IT spending is not an optional extra to be axed in tough times,” said a senior executive in a major hardware supplier. These views are typical – and the industry has a point. IT is more strategic than it was 10 years ago, and many boards are more convinced that it is a core area of spending, not a luxury.

Recruitment, where recession tends to hit hardest, would need a very bad downturn indeed to die off. With a survey last month claiming that there will be 1.6m IT jobs unfilled in 2002, companies are unlikely to be looking to cut back on their IT departments. Instead, they are still desperate to fill them in order to cope with the dreaded Y2K and EMU issues, if nothing else. But the IT suppliers should not be too complacent.

Recession may not turn customers off technology, but it may well change their buying patterns – and this is where the consultancies will be altering their strategies and advice too. Currently, IT suppliers seem to be taking the view that, if they tell customers they need to buy an ultrapowerful machine to do all the essential new projects, the users will at least buy a superpowerful one. The customers, faced with recession – or even a phantom recession – may still believe they need new technology, but they will be far more careful about the price they pay for it, and with margins crashing, that could be bad news for some sectors. PC makers are obvious candidates for a fall-out, with their already bloody price wars raging.

At the other end, there will be increased pressure on companies to adopt a relatively cheap and cheerful PC/Microsoft platform and move away from specialised computers such as parallel database servers. All this will, as it did last time, propel some equipment makers into the consultancies’ orbit as they seek out higher margin business. This may be especially apparent at the mainframe end of the business – or enterprise servers as they are now called. In the last recession, mainframe makers still made a wonderful business out of maintenance charges and software licences from their old machines, even if the customers were delaying or cancelling major upgrades. There are still many companies with large data centre machines, but the suppliers have been forced over the past few years to reduce the cost of ownership of these beasts and cannot rely on them as their cash cow any longer. Consultancies and directors involved in setting IT strategy may be able to strike some bargains with the IT suppliers if nervousness about the world economy continues to intensify. At the moment, the industry is still blase, but it may not remain so if the downturn starts to bite. Vendors will survive it if they actually do what they always claim they will – address the real needs and concerns of the customers.

Rather than pushing the latest whizzbang technology, or panicking the users about skills shortages, they should look at adapting the solutions they offer to the sites’ straitened circumstances. Unlike the Clinton affair, the IT industry needs to ignore the dramatic headlines and focus on the real issues for once.

Caroline Gabriel is a group editor in VNU’s IT portfolio.