PAC report: The economic meltdown spurs new IT spending challenges
The Software & IT Services market is entering a period of uncertainty following four years of sustained growth. This is being driven by the economic slowdown, a financial crisis that may not yet have reached its peak, and volatility in prices for energy and raw materials. But what lessons can the sector learn from the previous downturn at the start of the decade?
PAC believes suppliers can draw valuable experience from how market conditions changed back in 2001, but they must be aware that this time around, the context is very different.
2001 was an IT crisis, with the implosion of the e-business bubble forcing many organizations to reassess whether IT really mattered to the success of their business. But the current situation seems closer to that of 1992-1993, which was an economic rather than an IT crisis. And at that time, the IT markets recovered quite quickly.
What else changed between 1992 and 2008?
Looking back at 1992, only a few processes were strongly supported by IT. Two trends started in the 90s: better support for all processes and their integration, resulting in new concepts such as ERP and later SCM, CRM, PLM, and e-business. While not all projects in these areas met expectations, these topics are acknowledged as strategic for improving the performance of any company. No business can exist today without a reliable IT operation, and future performance improvements will heavily rely on IT. So as we move into 2009, IT clearly matters!
The main challenges for IT users will not dramatically change with the crisis. The need for more flexibility and agility requires IT support. Another lesson learned in the post-e-business-crisis phase is that cost saving and process efficiency alone won’t guarantee performance improvement. To succeed, a company must innovate. Here again, IT has a key role in the product development process.
So what does change with the current economic crisis? First of all, companies changed from an “Attack” to “Defend” strategy. This means optimizing existing products portfolio and processes, focusing on customer retention and streamlining the deployment of the existing workforce. The crisis means reduced investment capacities and focus on a short-term ROI. Overall, this will result in a slowdown of IT investments, although nothing comparable with what we experienced in 2001.
|The Software & IT Services market is entering a period of uncertainty following four years of sustained growth. Companies are changing over from an “Attack” to a “Defend” strategy. This means optimizing existing products portfolio and processes, focusing on customer retention, and streamlining the deployment of the existing workforce.|
Most projects have been reviewed—or will be reviewed in the coming months—resulting in some postponements, cancellations, and delays. The fastest reaction has come from small companies, while large businesses traditionally take advantage of a crisis to optimize their efficiency. Topics like collaboration and workflow, risk and performance management, and flexibility are the priorities.
So growth will be affected, and in some cases result in a decline. This will put reinforced pressure on prices, in particular by very large accounts. But a dramatic price collapse is not expected. The timid recovery of onshore daily rates was lower than the salary increases in the last four years, and IT users know this well. Most users understand that offshoring requires a time- and cost-intensive learning curve, meaning the pace of offshoring won’t accelerate substantially.
Overall, the software product business will suffer more than the services business, though maintenance fees will generate stable revenues. Project services will be strongly impacted too. Overall, the outsourcing business will see more new deals; however the pressure on existing deals—especially in mature countries and industries—will result in a slight slowdown of growth.
In terms of countries, medium-size Western European economies like Austria, Belgium, Denmark, Finland, Italy, the Netherlands, Norway, and Switzerland are expected to be among the least affected. France and Germany will be in the average, while the U.S. and the U.K. will be severely hit. These two countries combine several negative factors: very liberal and more reactive economies, strong investment banking industry, importance of the housing crisis, and very mature IT services market. Emerging countries like China, India, or Russia will be impacted too, but they will remain in two-digit growth rates.
Overall, the market situation will be much tougher than in the last four years, however, there will be interesting segments to address, selected topics or services in certain industries—even in the most mature countries.