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The Recession and IT Spending
The deterioration of the economy and the speed with which it has ravaged Wall St. has executives in all corners of the business world reaching for a playbook. When uncertainty prevails, it can help to look to history for guidance. We can make certain guesses: Manias and their aftermaths have shared characteristics dating back to Dutch Tulips. But what good does this information do when analyzing a specific sector, particularly when it's the ever-evolving IT sector? The last recession after the dotcom was more of a business-led slowdown following a period of extraordinarily rapid tech investment.
The recession of the early 90s was a consumer-led slowdown (like this one), but the IT industry, as we now know it, was in a totally different state: The news-makers were adolescents companies hitting their growth spurts. Think Cisco, Sun, Lucent, Oracle.
Even if every recession is different in nature, there are still lessons to be learned from the past: IT spending may have declined by 11 percent, before coming back strong, but IT dollars are now being allocated in different ways. Consider: The dotcom boom was characterized by an extraordinary tech overbuild. Established companies threw massive amounts of cash at the Internet, much of which showed little return. There were too many overcapitalized startups, whose odds of survival were long to begin with. Beyond that, because money was plentiful and knowledge was scarce, there was a general lack of concern over the price of hardware and software. Vendors of premium, proprietary technology thrived.
When the rebound came, companies that embraced cheap, lightweight stacks, whose products could be more easily plugged in with other commodity components performed better than others. Some of the hottest firms during the rebound have been those utilizing and/or specializing in open source technology. The lesson: The rejuvenation of the IT industry, post-bust, was very much about correcting the industry's past failures.
So as a recession looms, it's worth asking where the industry is failing, and what needs to be fixed.
Resource Use
With oil hovering around $120 barrel, gold at $1020 an ounce and a number of other industrial commodities at record highs, resource costs are proving to be a substantial burden. We're past the point where green energy initiatives are considered to be "greenwashing". IT investments will be key here. Companies like IBM are investing heavily in green data center initiatives. With more and more IT heading 'into the cloud' and companies of all sorts building out massive data centers, the energy consumption question becomes key. Energy costs have been identified as a key cost to Google. Even water, used in cooling, is big. Technology investments that allow enterprises to unshackle themselves from these constraints will show strong yields.
Closely related to all this is the trend towards smart buildings -- buildings that are designed, from the ground up, to marshal energy efficiently. Combined with smart metering, there's tremendous potential for efficiency gains, purely by reducing current consumption of everyday items. Providing the backbone will be robust IT systems that seamlessly connect a company's physical infrastructure and the technological one, while also being mindful of issues like security and government regulations. Many customers we speak with today are in the process of gathering knowledge on building data centers. Sun Microsystems offers tours of one of their internal datacenters in order to help customers and potential customers learn from Sun's past mistakes and take advantage of 'up-and-coming' technologies as they are designing and building their datacenters
Business Processes
To some extent, the astounding collapse of the mortgage market, and its impact on Wall St. is a lesson in inertia. At some point, the process of applying for and granting a mortgage became so routine, that the thought of applying a shred of common sense to the situation became impossible. Try to put yourself in the shoes of someone at a retail bank, a Wall St. firm, or a mortgage broker, and imagine you had inkling that something was amiss. What could you have done? Even if you'd been able to persuade your colleagues, there would have been no easy way to change the business processes involved with the granting of a loan, or the repackaging of said loan into a derivative... or the repackaging of said derivative into another derivative. It's not that IT is to blame for the current malaise, but smarter IT spending will be part of the fix.
Hence the enthusiasm over service-oriented architecture (SOA), which promises that down the road, it will be much to easier rework business processes on the fly. So if you manage to persuade everyone that something needs to be changed, a more flexible IT setup might make that possible. Barring that, a change could more easily be made once 'the writing is on the wall.' Because IT inflexibility will have been a contributing factor to economic weakness, technology that enables flexibility will prove to have particularly high strategic value. New IT will never bring an end to manias and crowd mentality but it will create more opportunities for those who refuse to follow the herd.
As-A-Service
Many have argued, convincingly, that it's not in the best interest of many companies to become too wedded to running their own IT. By this point it's almost trite, but a lot more IT will be delivered as a service. That could be software-as-as-service, as offered by Salesforce.com, or even Google, or infrastructure-as-a-service, such as Amazon's S3 platform. Not only does this potentially offer more flexibility (going back to the first point) since it potentially allows companies to ration their IT consumption as needed, but it should also reduce costs. Companies that are good at making physical widgets can do that, leaving the IT innovation to companies that are good at that. In the long run, this type of division of labor will be fruitful.
Bottom Line
If a severe recession hits, there's only so much that can be done other than sit and wait. Even in a severe recession, economic activity goes on albeit slower and more constrained. The important questions will not have to do with "how much" economic activity there will be, but what that economic activity looks like. Anytime a physical process can be replaced with a tech process, that's usually an economic efficiency and therefore a win for the business. But the real value will be in addressing key weak points. Some big ones have been identified above, and no doubt any particular firm will be able to identify ways that their existing IT setup constrains their business and once addressed can be a source of competitive advantage
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