What Goes Down Must Come Up: Preparing for Recovery
June 2, 2009
By Dave Trowbridge
If past experience is any guide, the economy will eventually follow a kind of inverted Newtonian logic: What goes down must come up. In the meantime, canny business leaders and IT executives are keeping three questions uppermost in their minds. When and how will it turn around? What should we be doing right now to survive and even prosper? And how should we prepare for the upturn?
If you're looking for a good source of information on how other companies like yours are dealing with the present economic turmoil, there are many among the 60,000 Cisco partners throughout the world. Their close, often strategic relationship with customers gives them a close-up perspective on the impact of the economy on organizations of every size in a wide range of industries.
"Especially now, we must do exactly as any customer would demand its leading IT supplier do: become a strategic partner to them," says Ettienne Reinecke, CTO and group executive: network integration at Dimension Data, a global IT services and solutions provider based in South Africa. "We work to understand their business, the processes that support it, and that gives us a pretty broad view of how companies are dealing with the recession."
The Three Faces of Business
Reinecke discerns three types of customers these days, distinguished by their reaction to the recession: those focusing almost exclusively on cost cutting, those using the downturn as breathing room for cleaning up projects and those leveraging economic turmoil to drive into new markets.
"The first group, if they're spending at all, is investing for cost savings," says Reinecke. "IT consolidation is a typical driver here."
The second groupschooled by the roller-coaster ride of the last 10 yearsdoes all that and more. "Now IT has many balls in the air, many projects demanding its attention. This group is embracing the downturn as an opportunity to clean house, make important architectural decisions and get ready for the market to come back."
"I believe technology in itself is not a differentiator, it is an enabler."
And finally, the third group is at the leading edge of IT adoption.
"These IT executives have gone through the first two stages and gained the trust of business lead; they're considered a strategic asset and a growth vessel," Reinecke notes. "These companies are investing in solutions that will help them launch into new markets." Some businesses are seeking out emerging markets, for example, in a move to escape the more limited growth potential of a mature market at homea factor contributing to globalization.
A Matter of Style
Some industries fall naturally into one of these categories. Dan Holt is president of HEIT, an integrator and managed services provider headquartered in Fort Collins, CO. The company specializes in IT security and compliance for the financial industry.
"Risk management is the foundation of banking. Last year they were looking to increase revenue, but now they're being cautious and focusing on reducing costs," he says. Of course, financial services have been especially hard hit, and face additional challenges dealing with business impact of the Toxic Assets Recovery Program (TARP). "So they're concentrating on streamlining, holding on to the customers they have and increasing the profit they realize from them."
Government responses to the recession can play a part in other industries, depending on the country involved. "The Australian government is pumping a lot of money into education right now," says Ben Donaldson, sales director at the Kytec Group, an Australian IT solutions provider with particular strengths in hospitality and education. "So there are a lot of infrastructure projects there."
On the other hand, he points out that hospitality has been doubly impacted by the downturn. "They get income streams from both business and leisure travel, and both are down now, as I expect is the case anywhere in the world. In just about every hotel we look after in Australia, occupancy is down anywhere from 20 to 50 percent."
But Reinecke says all three kinds of customers in a variety of industries share a common response to economic travails. "They are far more willing to consider new service models, which is giving managed services a real boost."
Holt agrees. "The shock of the recession has opened their eyes to the value-add a company like ours offers. They know they can't do security as well as we can, and if they could, it would still cost them a lot more." And Donaldson notes that many customers are seeing the benefit in troubled times of the increased agility outsourcing can provide.
All We Have To Fear...
All three partners agree that panic and paralysis are a company's worst enemy in a recession.
"Fortunately, we're seeing panicshort-term thinking, staff and maintenance cutsin very few of our customers," says Donaldson. "I've actually been surprised by the resilience of the market. Ninety percent of our customers are taking a very strategic approach, which in many cases means committing to projects they now realize they should have done sooner."
However, he reports that they all expect a faster payback. "They want a maximum 12-month return on investment, rather than the 24 to 36 months they were comfortable with before the bottom dropped out."
Holt underscores the importance of moving forward. "Companies must start planning for and investing in the recovery now. It takes time to ramp up, and you'll miss the turnaround if you're not positioned to move."
Even more important, he observes, is making sure that cuts you make now don't break the very systems you need to jump onboard when the economy turns around. "We've seen it before. A company overreacts to losses and focuses too much on the declining profitability of its revenue-generating people. It starts letting them go. Then they've got no one to pick up the load when business comes back, and they face the cost of re-hiring and training as well." A better strategy, he insists, is to outsource what's not your core competency, and invest instead in core processes and in holding on to the people that know how to use them.
"The worst mistake an organization can make right now," says Reinecke, "is to tread water. They'll drown. Organizations need to swim for shore by starting the architecture journey so they are ready to move when the turnaround comes." Managed services can play a major part in such a journey, in part because they can offer turnaround readiness with a lower capital investment.
Back to the Future
Although the degree is different, many IT organizations have already experienced economic downturns. "Having experienced the dot-com crash in 2000 can help today. The lessons are similar," says Reinecke. "We learned a lot about making good decisions in a downturn; IT has matured."
This time around, he sees strong investments in collaboration technologies among aggressive companies attempting to more effectively leverage the employee talent and knowledge. "One thing is certain: Just as it did the last time, the recession will produce new leaders when growth comes back."
According to Donaldson, the strategy for success hasn't changed. "Concentrate on what differentiates you from the competition; spend to where your strengths are. Look at solutions that will help you take advantage of the economic turmoil to pick up customers from less-prepared competitors."
And even the most risk-averse companies can find opportunity in the recession, says Holt. "We're seeing a lot of zero-based budgeting, where IT undertakes to justify every expense from the ground up, and nothing gets grandfathered in. That can be a good way to really focus your efforts, to strike the right balance between tactical and strategic investments, and make sure that every dollar counts."
Dave Trowbridge is a freelance writer based in Boulder Creek, CA