Will a US recession demolish global IT budgets in 2008?

The US sub-prime mortgage lending crisis could lead to economic losses totaling between US$150bn and US$400bn, according to The Wall Street Journal. While this dwarfs the effect of previous disasters such as the dot com bust, analysts remain optimistic that its effect on IT budgets will be flat, rather than disastrous.
Written by Cath Everett, Contributor

The US sub-prime mortgage lending crisis could lead to economic losses between US$150bn and US$400bn, according to The Wall Street Journal. While this dwarfs the effect of previous disasters such as the dot com bust, analysts remain optimistic that it will merely flatten rather than demolish IT budgets.

The expected impact of the sub-prime mortgage crisis in the US is expected to trigger losses up to four times that of the $93bn cost to the US economy resulting from the dot-com bust and at least double the $189bn deficit generated by the savings and loan disaster of the early 1980s, which led to several years of recession.

However, because the full impact of the lending crisis and the subsequent credit crunch is still not clear, opinion on both sides of the Atlantic is divided as to whether the situation will simply lead to an economic slowdown or to something much worse.

What is clear, however, is that the uncertainty of the situation is generating an attitude of widespread caution, not least in terms of IT expenditure. Nonetheless, most pundits do not expect IT budgets to be slashed over the year ahead, but rather to remain relatively flat.

Flat budgets for 2008
"Capital expenditure budgets are set in advance and aren't generally affected too much by the weather. It's discretionary, ad-hoc project spend that tends to be trimmed first in the face of adverse conditions," Martin Atherton, a research director at Freeform Dynamics said.

"But, if you're half-way through a project, it doesn't make sense to ditch it if conditions toughen -- instead it's easier to postpone initiatives if they've not already started yet," he said.

The idea that IT budgets will remain flat this year is reflected in a survey of 500 IT managers in Western Europe, the US and Asia-Pacific, published by Datamonitor in September.

The findings of this survey indicate that the 2008 IT budgets of around 50 percent of respondents will remain flat, while the majority of the remaining budgets will rise by between one and five percent. Only those questioned who expected to see investment increase by six percent or more are likely to see a cut, but, again, only by a few percentage points.

Vuk Trifkovic, a Datamonitor analyst, acknowledged that the study was undertaken before knowledge of the sub-prime market situation was common, but he said he believes its findings still hold true.

"I'd be surprised if there was a crash in budgets without the economy crashing, but there's likely to be some retrenching and I think people will be a bit more defensive in their spending. It'll be about doing things better for less, so the general themes will be optimisation and working out how to run things more efficiently," Trifkovic said.

This would have been the case with or without a credit crunch, because of rising energy and real-estate prices, as well as early indications that the economy was slowing, Trifkovic added.

Another factor is that the technology-investment cycle is currently at a "digestion" or "enhancement" phase, rather than a growth one, according to Alex Cullen, a vice president and research director at Forrester Research,

During digestion periods, technology budgets tend to grow at similar levels to the overall economy, while, in growth times, they generally grow between four and five percentage points faster.

"The technology industry is finishing up on a digestion phase and will go into a growth phase over the next couple of years. This is based not on particular technologies emerging but on the fact that there seems to be a predictable cycle around these things," Cullen explained.

As a result, for many IT departments, the year ahead will be about refocusing slightly on where they invest their money. This means that they will concentrate less on maintaining the status quo in order to simply keep the IT infrastructure operational and more on better exploiting existing IT assets in order to boost efficiency and free up budget to do other things.

It also means that any brand new technology trends are unlikely to emerge -- instead, it will...

...simply be more of the same.

"We'll continue with existing trends and people will focus on getting more value from them via optimisation and better integration with business processes. But this makes sense, given the overall growing maturity of the market," said Trifkovic.

Nonetheless, two key, umbrella topics are likely to keep making headlines over the following year: "green" technology; and governance, compliance and risk management (GCR).

Increased interest in green IT
The interest in so-called green technologies is likely to be fuelled by growing concerns about the rising cost of power, lighting, cooling and floor space, rather than environmental concerns per se, although this won't stop vendors bombarding customers with green messaging and rebranding every widget as green.

These concerns will also lead to increasing consolidation whether in relation to servers or the number of data centres, and to the progressive adoption of virtualisation software.

"You can think of it as being part of the digestion process for IT infrastructure. People are finding that the cost of keeping the lights on only goes up, unless they invest in consolidation and virtualisation, so they're trying to keep a lid on costs by focusing on these areas. The enemy of cost efficiency is low utilisation, and virtualisation is a way to fix that," Forrester's Cullen explained.

While adoption of virtualisation, even in the much-hyped x86 server world, is still limited mainly to large enterprises, this will start to change during 2008 as smaller organisations start to take more notice.

The enemy of cost efficiency is low utilisation, and virtualisation is a way to fix that.

Alex Cullen, Forrester Research

"Roughly about 20 percent of companies at the top end of the market say that x86 server virtualisation is the standard thing for their live systems, and probably two or three times that [number] are evaluating it or preparing to deploy it," Atherton said. "Virtualisation is just starting to move into the mainstream but it's not part of the furniture yet, although, during 2008, it will become more the norm," he added.

But this overarching notion of green IT will, in turn, also feed into and be fed by corporate GCR preoccupations and rising organisational concern about being viewed as a good green citizen -- not least in order to retain and attract increasingly environmentally aware customers and personnel.

Push towards good governance
The general drive towards good governance and boosting efficiency will also manifest itself in other ways, however. IT managers will increasingly see the value of introducing processes and technologies to identify and manage their assets and resources more effectively. This, in turn, will result in a growing rationalisation and streamlining of both products and their associated vendors in a bid to get more value for money.

The trend is also likely to lead to increased automation of currently manual management processes and a wider and deeper adoption of systems and service-management software, in a bid to cut costs and ensure that IT staff are able to focus less on administrative tasks and more on activities that generate value for the business.

Moreover, said Neil Macehiter, a partner at analyst house Macehiter Ward-Dutton: "Business intelligence [BI] and analytics won't be headline-makers, but they will be key initiatives for many organisations. You need to know how well you're performing currently in order to work out where you need to optimise things, and BI provides that insight, especially when aligned with business-process automation to provide a feedback loop."

While, until now, most implementations of this nature have been introduced in a "patchwork style", Macehiter said 2008 will see organisations exploring how they can address their increasing need for operational information more holistically.

Another driver behind rising levels of BI adoption will be a desire to maximise sales from existing customer bases as new clients potentially become more difficult to find.

Tom Kucharvy, a senior vice president at Ovum, explained: "I think there'll be a big change in adding to the level of dollars spent on this type of investment... There'll be much more of a shift to investments that have the potential to increase revenues by facilitating cross- and up-selling."

Organisations are predicted to pursue GCR in a more strategic manner. Until now, most organisations have chosen to tackle...

...both compliance and risk-management issues on a siloed basis, by, for example, putting measures in place to deal with the US's Sarbannes-Oxley financial regulations, before dealing with the Payment Card Industry's Data Security Standard.

This approach has led to islands of automation and the creation of individual initiatives that have proved hard to join up into a coherent whole. As a result, organisations are now beginning to explore GCR on an increasingly enterprise-wide basis, not least as a means of transforming standalone IT assets into more coherent IT services.

"At the top, GCR is starting to drive technology purchasing to some degree and is becoming a real influencer. It's also a nice umbrella term to put round everything else, such as infrastructure optimisation, security, identity management and the like. But what this all boils down to is supporting what you're trying to do as a business and making the most of what you've got," said Atherton.

As most organisations have so far failed to establish a single point of GCR ownership, however, "you can't expect overnight consistency. It's bubbling to the top, but it's not there yet", Atherton added.

Another trend feeding into this notion of creating IT services, reducing IT redundancy and diminishing business fragmentation is that of service-oriented architectures (SOAs) and process automation, standardisation and improvement.

Although the SOA acronym won't be as all-pervasive as it was in 2007, vendors are still likely to push the concept hard, not least in terms of it enabling component reuse, and resource and process optimisation.

"We'll see organisations looking at how they can maximise the return on their initial SOA investments. Many already have the core services infrastructure there, but they'll look at how they can harness it using business process-management technology," said Macehiter.

The rise of Enterprise 2.0
A final area that is likely to generate headlines, if not widespread adoption, is the concept of "Enterprise 2.0", or the application of Web 2.0 technologies, such as mashups and collaborative tools like blogs and wikis, in the business context.

Although the hype will continue to mount, any uptake is likely to be limited to lines of business and could well be driven by departments themselves, rather than the IT organisation, as they start to evaluate potential business uses.

Over the last five years, chief information officers have been reasserting control over front-end technologies by providing users with more tools for collaboration, Cullen explained.

"But what I think will happen now is that the business will see things that it wants to do, and can do, with less involvement from IT. So rather than say 'no, it's too risky', chief information officers will enable the business to do more on its own," he said.

Giving the business more input into IT planning will "stress the current model of chief information officers and IT" and will lead to a more marked division between what he described as "IT general managers, who control and run technology", and "partner players", who play a more strategic role as agents of business change, Cullen said.

"I'm talking about CIO 2.0 and, over the next year, I expect to see this trend increasing," Cullen added.

But no matter where IT chiefs' focus lies, Cullen recommended everyone to prepare for a potential economic downturn -- the idea being that to be forewarned is to be forearmed.

"My advice is to structure budgets so that it's very clear what the cost drivers are and what makes investment go up or down. This means that, if you're asked to contribute to overall company savings, you can give the business an idea of where it's prudent to cut or not. Otherwise, you'll just have to cut in the easiest places, rather than the best, so it's best to start planning for this now," Cullen said.

Editorial standards