Credit crunch reverberates across IT industry

Chief information officers across the UK are bracing themselves as the credit crunch makes waves across the IT sector.

Chief information officers across the UK are bracing themselves as the credit crunch makes waves across the IT sector.

There are few who believe the industry will be left unscathed, but many CIOs say the economic downturn will provide an opportunity for IT to prove its worth to the business.

The downturn is feeding through into some areas surprisingly quickly. IT budgets for the next year are expected to remain flat, and companies will ask IT departments to produce more return on investment.

"IT will be asked to do quite a lot more in reducing front line costs," said Jos Creese, CIO at Hampshire County Council. "This could actually be a positive impact of the credit crunch."

But at this stage, most are confident that IT jobs will remain secure. "IT staff have weathered lean times in the past and IT is essential to the business," said Michael Tonkiss, IT director at manufacturing company NeoPost.

The nature of projects is likely to change, as companies look to IT to cut unnecessary and obvious costs quickly. They are less likely to embark on non-essential or major change programmes.

The reluctance of banks to lend is contributing to a drop in IT investment for some companies, according to the Federation of Small Businesses.

Some projects are getting deferred for three to six months while businesses assess the economic situation, analyst group Forrester said. Other companies are being hit by clients who go out of business.

But there are other factors at play. The public sector is expecting a frugal year next year following the government's £500bn bank bailout. This will exacerbate the cash flow problems experienced by local authorities who have lost money in collapsed Icelandic banks.

Suppliers are expecting their clients to become more demanding, as they look for innovative IT ideas to get them through the down turn.

Retail

Retail bellweather Marks & Spencer expects much of its 2009/10 investment to be on IT. The high street giant reported an 8% drop in sales last quarter, and CEO Stuart Rose said, "For 2009/10 we now expect to spend around £400m with the focus of spend being on supply chain and IT systems."

Chris Broe, head of information applications and architecture at Unilever, said the credit crunch effects are likely to start rippling out to the retail sector in the next three to six months, with 2009 budgets likely to be tight.

"There are likely to be fewer bigger IT projects that will bring transformational rather than incremental change, and these will include projects aimed at cutting costs," he said.

IT could become increasingly important as the downturn starts to hit, as retailers turn to online sales to boost revenue. Although it is too late for many to change their priorities this year, because the Christmas rush is already upon them, IMRG consultant Andrew McClelland expects a big build-up of online outlets next year.

"For many retailers, their biggest and most profitable outlet is their online stores," he said.

He expected retailers to spend more on making their website "sticky" with user-generated content and to integrate the website into the firm's enterprise management system. Sainsbury's online sales increased 25% last quarter, and CEO Justin King said the company will launch online sales of non-food products in the summer next year.

Property and construction

David Morris, head of IT at property consultants King Sturge, predicts fewer IT projects. Expenditure will be limited to essentials, and will be focussed on cutting costs and increasing savings and competitive advantage.

"Everything but essential expenditure will need a strong business case," he said.

Companies will expect IT projects to bring quick returns, with payback periods being reduced to six months, instead of three or more years, Morris predicted.

Job security in the property sector has taken a knock from falling house prices and the lack of credit available. "IT professionals working in the property sector feel their position is uncertain, but that is true of the whole sector and not just of IT. However, most are staying where they are because few can see more job security anywhere else," said Morris.

Ray Turner, ICT strategy manager at Balfour Beatty, said, "We will undoubtedly be driven by corporate to cut overheads so that will constrain what we are allowed to do.

Public sector

The public sector is usually a safe haven in times of economic gloom, but this time IT chiefs say they expect to be hit hard.

Steve Hopson, CIO at Cheshire County Council, said, "We will not see immediate effects on the IT front, because budgets were agreed at the beginning of the year. But I do not think the government can spend £500bn without the public sector feeling the squeeze."

Councils expect tighter government grants next year, and this will only exacerbate problems caused by the loss of millions of pounds deposited in failed Icelandic banks.

Hopson added, "If government grants are not as good at they have promised, and funding becomes tight, councils have not got very many options for raising capital. There may well be increases in council tax, and many councils will cut budgets across the board."

Jos Creese, CIO at Hampshire County Council, said, "There will have to be cuts and savings all over the place, and IT will not be spared from that."

Denise Plumpton, director of information at the Highways Agency, said the organisation expects the Treasury to require belt-tightening next year.

Suppliers

Suppliers are likely to "find the going tough" next year, industry observers predict.

Leading ERP supplier SAP has lowered its third quarter 2008 forecasts in response to the credit crunch. Co-chief executive Henning Kagermann said concerns about the financial crisis had "triggered a very sudden and unexpected drop in business activity."

There is already a slowdown in the number of new IT projects, said Chris Yapp, executive technical strategy consultant at Capgemini, and many organisations are reviewing planned IT projects to see what they can defer.

Companies in the insurance and financial services sectors are postponing non-essential or new implementation projects, according to Brian Stones, executive president at Indian outsourcing supplier Patni.

"We are not yet seeing this trend so strongly in other sectors, but we are anticipating a knock-on effect from the turmoil in the banking sector," he said. The company's portfolio of services will narrow in some sectors, he said, to focus mainly on the core functions of clients' businesses.

"Our existing suppliers are even more keen than usual to retain and develop business with us. Prospective suppliers are marketing harder to us and offering longer term contracts," one IT director told Computer Weekly.

Recruitment

In the third quarter of this year, IT recruitment in financial services saw its biggest drop since the dot.com bubble burst in 2001. Vacancies for contractors have fallen 40.2% since the start of 2008.

Overall, vacancies for both permanent and contractor jobs fell by 14.9% compared to the previous quarter. The number of jobs in software houses did nothing to inspire confidence either, dropping 9.4%.

George Molyneaux's quarterly analysis of the IT recruitment market showed these problems are starting to affect the rest of the recruitment market. Overall, the number of jobs advertised is down 8.6% in the past six months, jobs have declined by 14%.

Molyneaux, who is research director at Salary Services Limited, said, "This is the largest sustained fall off in IT recruitment since the collapse of IT jobs seen during the years 2000 to 2001."

Jon Butterfield, managing director at Rethink Recruitment, said candidates are increasingly cautious about moving jobs.

"Recruitment has not died, but customers looking to recruit need to really sell the security of their company - more so than they have ever done before. This was not an issue six months ago."

John Whiting, managing director at Harvey Nash, said some IT staff may have to start accepting lower salaries. But he added that the shortage of skilled IT professionals might mean the looming downturn helps to address the current imbalance between supply and demand.

"There is a paradox, because IT skills have been in such high demand over the last four years that they have demanded a premium. But unless people are thinking about taking a drop in salaries, they might now be pricing themselves out of the market."

Reporting team: Warwick Ashford, Ian Grant and Cliff Saran

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