You may be forgiven for feeling fatigued by the wealth of
depressing stories surrounding the collapse of the sub-prime
mortgage market and the emergence of the so called
"credit crunch". Those in the IT industry may in particular
feel apprehensive as to how it could pan out for them. There is
much talk of slashed budgets and
downturn trends.
The effects of the credit crunch initially impacted upon the US
financial services sector, and although many say that the UK is not
as badly affected, the volatility brought about by
Northern
Rock and rumours of other UK financial organisations in trouble
means that the crunch will soon filter down to UK industry as a
whole.
Mervyn King of the Bank of England has on two recent occasions
demanded that UK banks do more to strengthen their balance sheets
so that they can maintain their capital ratios and support lending.
But even they are finding it hard to obtain cash from one another
to support their liquidity ratios, and soon many sectors of
business will find it harder to get their hands on money for
investment, capital expenditure and growth.
From now on, the strength of the balance sheet and cash reserves
for the financial sector and the wider business sector will be
king. Banks are already restricting their lending criteria, and
only those companies with healthy balance sheets and capital
reserves are likely to be viewed as safe bets by the banks.
However, along with clear threats to the IT sector, there are
also potential opportunities. In a recent report the UK's National
Outsourcing Association predicted that businesses will look to
outsource "high-value-add functions" such as business
processing, application development and IT operations, adding that
the industry will be boosted by "organisations looking to become
more efficient and minimise their risk exposures" by
outsourcing.
Offshoring is the obvious answer for many banks and businesses.
Reduced costs mean that transactional processing and IT development
will be cheaper, giving businesses more bang for their buck.
Although many cautious businesses may consolidate their
processes and be wary of spending on IT and outsourcing, there is
an argument that suggests that those who spend now could reap
benefits when the market turns. They can use IT and business
processing outsourcing as transformational catalysts to address
operational issues, cut costs and utilise their retained resources
to concentrate on core business areas.
Outsourcing, of course, also helps businesses improve balance
sheets by raising cash from the sale of existing assets and
operations to suppliers and by taking many operational costs off
the balance sheet.
All of this is fine, and clearly when cost-savings need to be
made, offshoring to cheaper countries makes sense, but what of
those IT businesses and professionals left in the UK who see their
jobs and contracts move abroad?
The UK IT sector can seek to improve its position by moving up
the value chain, identifying areas that are not as cost or downturn
sensitive. For instance, supporting and developing systems needed
by the outsourcing suppliers, particularly those providing high-end
business process outsourcing services, especially in the emerging
knowledge process outsourcing sector. Early adopters of knowledge
process outsourcing systems and suppliers of bespoke applications
might find themselves well placed to weather the current economic
storm.
But there are other trends that will appear as costs savings
become the watchword of organisations, from which the IT sector
could benefit. For instance:
- "Governance outsourcing", in which suppliers offer companies
that have already outsourced IT and business processes a contract
management and governance service, reducing the cost of managing
outsourced contracts by effectively reducing the retained
organisation and servicing management information systems, contract
payments, service level agreement monitoring and change control
services.
- A move towards a requirement for project-specific, one-off
outsourcing rather than lengthy contracts. This will see the rise
of
agile suppliers able to offer short-term, business-specific
solutions.
- Fees for outsourced services are likely to become much more
volume-price sensitive as businesses move towards requiring
flexible volume based pricing from their suppliers. This way they
can increasingly control costs rather than have volume guarantees
or high fixed-fees irrespective of volume.
- The decline of multi-sourcing owing to the expense involved in
monitoring a multitude of suppliers.
- UK IT suppliers may increasingly offshore their own software
development requirements so that they can concentrate on innovation
and delivering solutions as well as creating powerful sales
capabilities.
The challenge for the IT sector will be to respond quickly to
changing demands and an increasingly global marketplace. For agile
businesses the rewards could be great.
Andrew Rigby is a partner at Brodies LLP