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IT in the recession: Part 1

Lindsay Clark

The dealing of complex financial derivatives, enabled by hi-tech trading infrastructure and high-speed networks, led to a boom in the British financial services industry. Now the financial services industry has led the world economy into a downturn not seen since the second world war.

Although IT has been through recessions before, its relationship with mainstream business has been revolutionised since the most recent downturns of the 1990s, 1980s and 1970s. IT enables practically every business process and almost everyone in work uses a computer in some way. E-mail and commerce were unheard of during the most recent recessions.

"IT is now embedded in every business process," says Ian Campbell, chairman of the corporate IT forum (Tif), a group of FTSE 100 IT leaders. As a result, this recession will be different for IT.

This recession will also be different for IT departments because of the industries most affected. In the 1980s, it was Britain's industrial base which was worst hit by a shrinking economy. But these sectors had low IT investment at the time. Now, the financial services sector is being decimated. Banking, insurance and pensions firms have always invested a greater proportion of their turnover in IT than any other industry.

 

 

How this recession will hit IT departments

In January, Computer Weekly reported investments banks announcing more job cuts. According to analysts, as many as 300,000 people could have lost their jobs in the global financial services sector globally by the end of 2009, with as many as 25% of that total drawn from IT professionals.

Both these factors will alter how IT departments respond to the recession, and how businesses view their IT spend. IT departments have to continually work to ensure business managers understand the value of their investment, Campbell says.

For IT, the reaction to poor trading conditions can go one of two ways. It can be seen as a peripheral cost, an overhead to be slashed. Or IT can be seen as a means of lowering the cost of doing business, and essential to preserving efficiency in the future.

The message so far is not to panic. According to research firm Gartner, this recession will not hit IT budgets in the way the dot.com crash did. At that time, from 1999 through to the end of 2001, IT budgets expanded as shareholders expected mainstream businesses to chase the dot.com model. This arrived on the back of several waves on investment including Y2K, e-mail and client-server.

"If you look at the last couple of decades the last big IT event was Y2K, when there was a vast amount of IT spending for all sorts of reasons," Campbell says. "It dropped after that and ITspending has been tighter since the early 2000."

These tighter conditions for IT spending should make departments more prepared for the stringent conditions to come.

"They have to be sharper. The red line in business projects [involving IT] or IT projects is higher up," Campbell says. "The hurdles are much higher."

Gartner says more recent global economic problems are impacting IT budgets, but the IT industry will not see the dramatic reductions that were seen during the dot.com bust when budgets were slashed from growth of 15% or so, to low single-digit growth.

"In a worst-case scenario, our research indicates [global] IT spending increase of 2.3% in 2009, down from our earlier projection of 5.8%," said Peter Sondergaard, senior vice-president at Gartner and global head of research. Within this overall figure, UK could be hit harder than there rest of the world. "Europe will experience negative growth in 2009, the United States and Japan will be flat."

 

What CEOs want from IT managers

However, businesses have learned that CEOs want their executives and managers to be advisors and counsellors, not just great implementers of directions given to them. Sondergaard says. "What they want now, most of all, is agile leadership. Leadership that can guide us through simultaneous cost control and expansion at the same time."

Those holding the purse strings can choose one of two approaches with IT budgets. IT can either be seen as a cost, not part of the core revenue stream and therefore apt for cutting. Or it can been seen as an investment which lowers the cost of doing business and worth maintaining in a downturn.

Campbell says IT mangers facing budget cuts can still provide the same services, because they can reduce their costs. "The suppliers are going to get squeezed as well."

With suppliers also facing a recession, they are becoming more flexible. Service contracts can be negotiated down by playing the market, Campbell says.

With software it can be harder because suppliers know you have limited options, he says. "There are contracts and it is difficult to change a major platform. In the short term, there's not much you can do, but in the medium term you can look at software as a service or outsourcing."

If software suppliers prove inflexible, they will encourage software as a service, outsourcing, and open source implementations, Campbell says.

Meanwhile any promise to save other departments money will be severely tested. Although the CFO will love it if IT managers can save them money on operations, the danger is they bank the saving by cutting staff before systems are bedded in. If the savings do not come as expected, senior management will be upset, Campbell says.

With our first recession in more than 15 years, there are many quite senior IT mangers who have never experienced a downturn. They could learn from those more experienced in top IT roles, says Campbell, who has had senior IT roles in Energis and British Energy. "I do believe it helps if you have been there and got the T-shirt. You know these things are cyclical, it will be tough this year, but we will come out of it."

This is a sentiment echoed by Gartner, which encourages IT mangers to stop fearing the future and start driving it. CIOs should reflect conspicuous frugality but not be defined by it. They should resolve to occasionally, where it really matters to staff morale, on items such as training courses or software development tools. The research group recommends working on real money-saving, such as flying economy instead of business class, but avoid empty-gesture cost cutting such as taking cookies off the plate at management meetings.

 

Good time to invest in recovery

Despite some IT departments facing redundancies, Gartner says it could also be a time to look for new people. As large numbers of laid-off people flood the market, some salary-level attrition is inevitable and even good people could find themselves without a position for months. This could create something of a buyers market for some high-calibre IT talent in 2009. CIO and IT directors should identify the attributes of their absolute ideal candidates for the few, most important mid to senior IT positions to open and fulfil during 2009. It could be possible to hold just a few senior job slots open during a recruitment freeze, in return for a higher reduction target elsewhere.

The research group recommends researching and experimenting with new business technologies including cloud computing. In 10 years, much of IT will be served this way, so CIOs need to start leading their organisations safely in this inevitable direction, Gartner says.

Over the coming months Computer Weekly will explore IT strategies during a recession in a series of features. Looking at reducing IT budgets, creating efficiencies in the business, and how suppliers will fair, we hope to provide a guide to these difficult times.

 

Where was IT in previous recessions?   
 1974 to 1975  Microprocessors, dynamic random access memory (Dram) and Ethernet are all less than five years old. IBM develops Structured Query Language (Sequel), which today is known as SQL, the standard database language. Xerox Palo Alto Research Center designed the Alto - the first work station with a built-in mouse for input with a graphical user interface (GUI).
 1980 to 1981  IBM introduced its PC, igniting a fast growth of the personal computer market. The first PC ran on a 4.77 MHz Intel 8088 microprocessor and used Microsoft´s MS-DOS operating system. The first optical data storage disk is introduced with 60 times the capacity of a 5 1/4-inch floppy disk.
 1991  Tim Berners-Lee introduces the World Wide Web project to the public on 6 August, 1991. Intel introduces the Intel 486SX chip in efforts to help bring a lower-cost processor to the PC market. The Linux operating system is introduced, designed by Finnish university student Linus Torvalds.

 

PIC: Sipa Press/Rex Features


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