Jan 30, 2009

What is happenning? part 4

Early 2008, 24 March, well before the financial meltdown in mid-September, STKI analysts discussed  information technology  2008-9 budgets. It was the first of many presentations intended to address what we saw as a troubling economy in the coming two years, given conditions in the financial markets and general economic indicators.

Not that we had a real crystal ball, but we were concerned about the direction the future would be taking.

Despite that early and clear-eyed start we recommended our clients to continue reviewing their budget  plans quarterly. They should have been revising their spending plans and preparing to be fluid and ready to respond to any number of scenarios.

Basically working from two plans, based on worst- and best-case scenarios. Many if not most of our clients followed our recommendations and basically worked quarterly in 2008 and now in 2009. IT vendors had good quartersin  Q108 and in Q208 and worst than expected for 2h08. Which means that the year was closed at a flat to minus 5% growth in the IT market in Israel. (more info during our STKI Summit … 24 March 2009)


Because, today CIOs lack the ability to forecast next week's business conditions -- much less this year's -- IT's marching orders are shifting to emphasize flexibility, especially as business priorities and resources change.

Here are factors to consider :


1.    Understand the Credit Crunch….. renamed the IT CAPEX crisis



In my presentation I tried to give  some background on what is happening.

What's different about this crisis is it's a capex (capital expenditure) crisis because it involves expenditures used to acquire or upgrade physical assets.

Today's credit crunch directly affects IT because, for many companies, technology is the No. 1 "capex" (capital expenditure) item.

That means IT leaders need to pay more attention to financial metrics such as the weighted average cost of capital, or WACC.

WACC measures the rate that a company is expected to pay to finance its assets (the higher the WACC, the higher the "hurdle rate" in a return-on-investment calculation, or the minimum rate of ROI that must be met to undertake a project).

Many companies will enter usage assessment projects (click here or see below).

2. Compress Payback Periods…. ROI in the next 90 days

Another metric getting scrutiny is payback period,.not just about ROI, but what ROI can I get in the next 60 days.. This will change not just what gets funded but also how you think about sequencing projects and which components you're going to launch first.

Companies will intensify their focus on goals they have pursued in the past few months but now they will break up projects into smaller components with deliverables every 3 months. They will be evaluating and possibly reducing the application portfolio by a certain percentage and eliminating redundant functionality.

Projects that show concrete cost reductions will take precedence over those that provide functional enhancements.

3.    Learn More about CLOUD COMPUTING and other new computing models

Look (click here) at several cloud postings (below) explaining the technology and its problems

The credit crunch practically guarantees that CIOs will be pressured to consider new computing models that promise lower capital costs, such as cloud computing, which refers to a variety of techniques in which technology capabilities are provided as a service. Focus on reducing per-unit costs, such as cost per server, per terabyte of storage, per help desk ticket, per programmer or per line of code.

We should still investigate the economics of the cloud, including migration, transition and security costs, as well as the solvency of the vendors that offer it.

Capex is not just affecting end users but also technology vendors.


No comments: