Finding the floor in the tech downturn

It's been a critical couple of weeks for IT market watchers, with a wealth of quarterly results from blue chip companies and analysts trying to interpret events. The question everyone wants an answer to is: where's the floor? From city trading floors to the boardrooms of all information technology companies, finding the floor of the recession is the key question. It tells us when the key psychological moment has been reached when the business mood can start to improve.

Intel's lacklustre results this week suggest that the fourth quarter (normally a growth one, with Xmas and new school terms providing a boost in PC sales) will be at best flat, with Merrill Lynch (last week) predicting a 3 percent fall in PC sales this year. Chip sales are suffering from slow or negative growth in PCs and the continuing malaise in telecoms. If Merrill is correct, you may take the view that a 3 percent dip is not that awful considering the economic background, but any lingering positive interpretation is crushed by Intel chief executive Craig Barrett's comment: "The industry is experiencing one of its worst downturns ever."

Aside from Intel, this week's other company earnings were generally seen as positive -- causing a wider rally on Wall Street and London. Microsoft boosted Nasdaq with a 26% rise in sales and a doubling of net profits in the quarter to September.

IBM's results beat market expectations with its critically important cash generator, the IT services division, registering $9bn of new contracts. The company says the time is right to get back on the acquisitions trail, which characterises a generally positive outlook from Big Blue. In a similarly optimistic move, Microsoft has recently stepped up recruitment. Europe's largest software company, SAP, also achieved better than expected results, increased market share, and saw its share price lift strongly this week. Taken together -- IBM's services division performance and SAP's improvement provides much needed relief for the enterprise IT software and services sectors.

Further clues for floor searchers will come next week when the networking giant Cisco gives its quarterly results. Analysts have been speculating that Cisco would advise the market of slightly lower than expected revenues -- but there has been no guidance from chief executive John Chambers that this is the case. If Cisco can follow IBM in hitting its numbers than the arch optimists will say that we have found a floor.

There is some anecdotal evidence from an unexpected quarter that we may already be standing on the floor -- with some day traders claiming to have made a killing on the bounce in share prices of e-com sites such as Lastminute and Amazon. E-commerce sites appear to be rising, Phoenix-like from the flames of the dot-com collapse with a 42 percent growth in UK sales in the past 12 months according to government figures.

This week's earnings, however, of themselves, do not provide enough evidence to suggest we have hit terra firma. They provide reasons to believe it may be found in 2003, but there is also plenty to sustain the pessimists -- many of whom have already written off next year as another tough one, adding that we shouldn't expect the gloom to lift until 2004. Sun, for example, have confirmed that it will cut a further 11% its work force in a bid to reduce operating costs.

Although, IBM, SAP, and Microsoft's outlook is now sounding more positive Motorola's CEO, Chris Galvin, struck a gloomier note in his view. The firm's shares fell sharply this week following a statement suggesting a more pessimistic outlook for 2003 -- citing slowing demand in its chips and telecoms businesses. The CEO euphemistically described an aggressive cost cutting response this week as concentrating on the "execution". But it amounts to the same thing -- reducing costs, usually by cutting jobs.

The problem with all this earnings and stock market-related clue searching is that it does not address the main cause of the IT downturn; businesses and consumers postponing technology buying decisions or canning them altogether. Until we see some lift in corporate expenditure the picture will continue to look grim for business software and hardware vendors, and more chief executives will, like Chris Galvin, "concentrate on their execution" -- or to use the other favourite euphemism for laying off tech workers: "Bringing the costs in line with the revenue expectations."

The markets are too volatile to tell us much about when the floor will be found. A dramatic reaction to a positive piece of news today is likely to be wiped out by a jump in the opposite direction tomorrow -- again based on a seemingly far from earth-shattering item of news. We must look for longer-term trends and other market data to try to find out why companies aren't buying hardware and software.

Partly the reasons are purely to do with cost control in a recession -- Chris Galvin's 'execution' again, but there is also evidence that the problems go deeper. Sun's chief executive, Scott McNealy, says that the finance officers are in charge now -- and they are the people who call the shots and need to be convinced. But convincing them is difficult, because chief financial officers are deeply suspicious of the revenue gains and profits that have supposedly been generated by previous investments in information technology.

This view is sustained by research from McKinsey and others arguing that the productivity gains attributed to IT investments are at best exaggerated and at worst illusory.

But this is a minority view. The consensus view is that productivity gains are very real with a new study of almost 1,000 European companies conducted by Gartner and commissioned by BT Ignite, revealing what researchers call the "strongest evidence to date of a link between investment in information and communications technology (ICT) and profit." Gartner also stated this week that they believed a recovery in European IT markets would begin next year -- though they do not expect sustained recovery until 2004.

There is no doubt that the case can be made that IT investments boosts productivity and cuts costs -- but again looking to the longer term trend, this may not be positive for tech employment.

There is a suggestion from Gartner in a separate report that the long-term trend in tech employment will be downwards. In a recent article for ZDNet, Dan Farber summarised Gartner's prediction that efficiencies driven by e-business and other IT technologies will result in reduction of operating costs (taking millions of IT jobs with them) "Gartner's strategic planning assumption is that enterprises transformed by the Internet are 70 percent likely to have 10 percent few workers by 2005 and 60 percent likely to have 30 percent fewer workers by 2010."

This could be a bitter irony for IT workers that have survived the shakeout -- to find that the next upgrade to their firm's IT infrastructure results in their own unemployment. They will effectively be coding their own obsolescence.

Not everyone is convinced by Gartner's vision though. It assumes the new mood of financial prudence and cost cutting will continue to be the driver of all IT investment. That may not be the case. Fear and greed drive IT investment -- just as they drive the financial markets. These psychological drivers are constantly shifting. If the business climate improves firms will once again look to gain commercial advantage by upgrading their IT infrastructure -- and look to differentiate themselves by modernising faster.

Do Intel and IBM's results and the new slew of market research published in the past fortnight tell us where the floor is? No, though what Craig Barrett, Chris Galvin, John Chambers and other chief executives have to say about future prospects for growth might. Statements that speak to longer-term trends -- the words about the future as opposed to numbers about the past quarter's performance contain the best guesses. Better still are the spending intentions of businesses and consumers on technology products and services. The floor is found when people believe, think, and feel that they are standing on firm ground. Recessions exist in hearts and minds as much as in markets -- and that's where they end too.

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