How low will we go?

Software vendors will have been wondering whether they have been naughty or nice, and looking more anxiously than usual to see whether their gifts of year-end software expenditure.

In past times of recession, IT has been one of the first things for the chop. One very large software vendor I know has just banned internal travel except for customer-facing situations: travel is always a favourite target for gimlet-eyed controllers in times of trouble and IT spend is usually a short step behind. So, how bad are things, and will IT spend fare any better this time around?

I spoke to one vendor who had Lehman Brothers as a hot prospect; I am guessing this is one sales forecast that ended in disappointment. But what about the “real economy” outside the world of sharp suits and derivatives? Of course, looking into the future is perilous without a working crystal ball, but the omens are not good. A friend of mine in the shipping industry tells me that in June it cost $234,000 a day to charter a large ‘capesize’ bulk carrier for a day; at the time of writing one can be had for $2,300 a day, a little matter of a 99 per cent drop in price and a fraction of its basic running cost.

On land, Volvo sold 41,970 trucks in Q3 2007, but in Q3 2008 they sold 115. Not 115,000, just 115 – just over one a day and a 99 per cent drop in sales. There is not much more ‘real economy’ than trucks and ships, and if these figures are even marginally representative then this recession is not going to be a pretty one.

Naturally, not all sectors of the economy are similarly vulnerable. People still have to eat and they still get ill, so pharmaceutical firms may be a relatively safe haven. Pharmaceutical companies spend plenty on technology, so IT companies exposed heavily to sectors like this will probably fare better than those selling to banks. Let’s not even dwell on the automotive sector.

However a lot of IT expenditure is fixed: datacentres need to run, operational systems have to be supported and long-term contracts have to be honoured, so cutting IT expenditure takes time and the axe does not fall evenly. A typical large company will have perhaps 60 to 70 per cent of its IT spend as non-discretionary. However, within the remaining 30 to 40 per cent, just about any IT project could be vulnerable. Except in the darkest of circumstances, not all new projects are going to be shelved, however.

Even in financial services, projects to do with risk management and compliance are probably safe. But what about other areas of IT?

My firm tried to get some hard data in the area in which we specialise, the master data management (MDM) and data quality markets. In a survey conducted in November (that is, post-Lehman Brothers), 92 large organisations (57 per cent US, 31 per cent EU) responded to a poll about their spending intentions for this type of project. Of those actively engaged with MDM and/or data quality projects, only eight per cent were scrapping their projects, with nine per cent delaying for a year. Yet against this, 40 per cent plan to accelerate their implementations. Half of those surveyed felt that data quality and MDM should have a higher priority in the light of the financial crisis. Thirty-seven per cent were “undecided” as to the best course of action. Informal conversations with software vendors in this space over the last few weeks tend to support this view, with sales over the last couple of months holding up reasonably well in most cases.

Of course, what people say in a survey and what actually transpires may be two different things, but data such as this is encouraging, suggesting that firms are prioritising certain IT projects over others, and in some cases accelerating certain types of projects in order to be better able to weather the financial storm.

In general, I tend towards the sceptical side of things. My recollection from working in large companies was that IT projects, like falling rocks, had momentum. It takes time for the decisions at the top of the company to trickle down to the people at the coal face, and so for some time it can seem as if nothing much is happening, and you begin to wonder whether your particular company or area is somehow to immune to the gloom.

Just as it takes time to change the course of one of those large bulk carriers that you can now hire so cheaply, it will take time for financial tightening to filter its way down to day-to-day IT projects. No doubt certain IT projects will be deemed ‘strategic’ and spending will hold up in these areas; there seems to be some data to support this. But the sheer magnitude of the storm buffeting the economy right now means that there are likely to be few safe havens.