What the credit crunch means for IT

The credit crunch has dominated the front pages in 2008, and claimed a number of high-profile scalps, such as that of the 158-year-old Lehman Brothers bank.
Written by Nick Heath, Contributor
As job losses mount, and with HP announcing it will lay off tens of thousands of workers following its purchase of EDS, here's a look at what the crunch means for the IT industry.

Hardware and software vendors will feel the squeeze
Holding off on big projects such as upgrading to dual-core PCs or Windows Vista for another six months is likely to be a rather painless way of postponing spending for the IT department. Charles Ward, chief operating officer of IT trade association Intellect, said he believes that many companies will hold off on hardware and software refreshes for longer, hitting technology vendors and computer-equipment leasers in the pocket.

"If you have a hardware refresh scheduled and that has to be delayed for another six months, that's not likely to make a huge amount of difference. Similarly, software upgrades or integration projects following mergers can be delayed," Ward told silicon.com.

"But one thing you have to be careful of is that you are not cutting off your nose to spite your face: you have to weigh up the cost benefits of the upgrade against the savings of holding off," Ward added.

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Hastening the move to SaaS and open source
Budget pressures are expected to drive businesses away from the licensing deals offered by companies such as Microsoft and the need for dedicated in-house IT support teams.

Carla Rapoport, managing editor for technology with analysts the Economist Intelligence Unit, believes companies will prefer the more flexible charging models of hosted software.

"You will see a move towards cloud computing and software coming from the web, where there will only be the service cost, rather than paying an IT team," said Rapoport.

"There will also be more interest in adopting open-source software," she said.

Outsourcers tied to an industry in crisis
Indian outsourcing companies face considerable risk from their reliance on the global banking sector, with the country's top five service suppliers depending on the financial sector for about 45 percent of their business.

Fears about the industry's over-reliance on an increasingly shaky sector were substantiated on Monday when shares in Satyam, India's fourth-largest services provider, fell to a five-year low.

Rapoport said: "The Indian outsourcers will be hit hard in the short term. Quite a lot of the back-office work goes to India, with about 50 percent of contracts coming out of the US."

"With more closures, like Lehman Brothers, and acquisitions, like Merrill Lynch [by] Bank of America, there is going to be a lot of consolidation of outsourcing contracts," Rapoport added.

Phil Morris, managing director for the EU and Asia for outsourcing advisers EquaTerra, cautioned that outsourcers could take a hit as the business world in general scales back non-essential projects, including some research and development work.

He added that there is also a danger in the high value of many outsourcing deals, which routinely run to hundreds of millions of pounds, in that suppliers might not be able to recover all of their money if their clients go under.

In the long term, outsourcing booms
The flip side is that the crunch will spark a flurry of new and renegotiated IT and business-process outsourcing deals as companies look to squeeze savings out of new and existing contracts.

Outsourcers can expect to feel the belt-tightening as large banks and multinationals demand better-value deals, but suppliers are likely to extract longer contracts on the back of such changes.

Morris said: "I can see some pretty aggressive stances being taken by financial institutions to ensure they get a better deal going forward."

"Outsourcing is counter-cyclical; as soon as the economy takes a downturn, then outsourcing goes up," said Morris.

Ward also believes outsourcing will grow on the back of the crunch.

"The outsourcers are more insulated against the effects, and many firms affected by the credit crunch are locked into long-term contracts with suppliers, spanning years," said Ward. "Outsourcing will continue to offer these struggling companies a way of controlling their costs in the long term," Ward added.

Every cloud has a silver lining
Greater financial regulation is expected in the wake of the credit crunch, to avoid a repeat of the bad lending that saw banks write off billions in debts.

Those vendors specializing in business-intelligence systems could experience a boom similar to the one sparked a few years ago when companies sought software to help them comply with the tough data-management requirements of the Sarbanes-Oxley Act.

Ward said: "The greater regulation in the financial sector will create opportunity for companies specializing in that area, and there are going to be massive system changes required."

"Sarbanes-Oxley presented great opportunities for companies specializing in business intelligence and you could see a similar demand for firms to extract and analyze data in a way they have not before," said Ward.

Faster shift of jobs from West to East
Expect the crunch to fuel the erosion of IT jobs from high-cost base areas in the UK and US to low-cost alternatives in the East, as companies seek to rebalance their workforce in favor of countries that promise lower wages and operating costs.

EquaTerra's Morris said: "You will see an increasing number of redundancies in the UK and the US. An example is the HP-EDS deal. Where there are redundancies coming out of integration, they are going to be in the countries where there are highest costs."

Contract workers will suffer
One of the first places the axe is likely to fall is on contract workers, which Intellect's Ward said makes them a good barometer for the credit crunch's overall damage to the industry. He said: "If there is pressure on IT suppliers, then one way they can make immediate savings is by first getting rid of the contract work. That is the one area of IT that is usually most sensitive to these things."

Recent research from contractor services provider Giant Group shows the long-term jobless rate among IT contractors has risen from a two-year low of 4.4 percent, at the end of 2007, to 5.5 percent in March 2008. Fears over job security are also growing, the company added.

Leon Howgill, client relationship manager for IT recruitment company Advanced Resource Managers, said the organization is "not seeing an impact so far", adding he believes the flexible nature of contract work will allow contractors to weather the credit crunch.

Financial services divisions will take a hit
Supplying IT infrastructure and back-office services for financial-services companies is a multi-billion-pound industry. Large suppliers with substantial financial-services arms, such as Fujitsu and IBM, will probably readjust their focus to more resilient areas, such as the public sector.

Ward said: "It is evident that those companies providing telecoms support and software as a service to financial institutions are going to be hit hard if their customers go out of business or tighten their belts."

"There is a big network of companies that supply into the financial-services market," said Ward.

Global IT spend will be resilient to the economic slowdown Despite forecasting a fall in global IT spending, the Economist Intelligence Unit said the drop will be below the general spending decline.

Rapoport said the IT industry is diverse enough worldwide to guarantee areas of growth to compensate for other, weaker technology areas.

She said: "There are lot of strings to the technology industry's bow. For example, look at the emergence of smartphones that allow people to get on the internet in emerging markets."

"I do not think that people will have to worry about large job losses in the IT industry," Rapoport said.

More home workers
As companies shut office buildings and sell off business real estate to raise cash, more businesses can be expected to adopt a remote-working model.

With changes to the flexible-working laws expected soon, companies could find themselves with an additional reason to allow their staff to do their work without tying them to an office.

The growing penetration of broadband and the various secure virtual private network offerings will only make the model more attractive compared to the expense of running an office.

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