Monday, 12 May 2008

Safe as Houses? – An Analogy

I’ve been walking in my beloved Lake District. I find it the very best way to ‘clear my head’. My wife describes it as ‘filing’. As you walk along, you can put all the files back where they belong and therefore ‘clear the desktop’. A clear desktop enables new ideas to develop. Indeed, most of my ‘themes’ have been developed whilst clambering up some fell.

I was thinking about an interview I have on Tuesday where I have to give my views on how the ‘credit crunch’ is affecting the tech world.

Everyone knows how the credit crunch is affecting the housing market and, as I climbed ever upwards (and the rain dripped down my back), the similarities became clear.

Builders have stopped building new houses. This is directly analogous to the problems currently being faced by the enterprise software vendors like SAP and Oracle. Enterprises are stopping considering installing NEW software – particularly anything that is going to take one or more years to repay the initial investment.

Builders have stopped buying new heavy plant. Last week Sun reported sagging sales to U.S. consumer-oriented companies that are putting off big-ticket spending for better times Cisco has also warned that their consumer-serving customers have cut down on their spending.

However, there is little evidence that consumers are actually spending less on gadgets…yet! I think the reduction in purchases of “heavy plant” is one example of where “fear for the future” is affecting current spend. Some say we are talking our way into recession. This is one example where they may be right!

More for Less. House prices are not the only prices falling right now. From PCs to consumer devices like iPods, prices are crashing meaning that you really do get “More for Less”. There are also reports that this is happening for fee rates too – particularly for vanilla-type IT roles.

Interestingly, house prices at the very top end are apparently holding up well. If you have a rare and in demand IT skill, despite the slowdown, your can still demand top-rate.

Home owners have stopped moving house. But you still need to maintain the existing house. The last time we had a tech slowdown – post and Y2K – we revoked the old wartime adage “Make do and Mend”. Indeed you might actually prefer to do a bit of refurbishment, even an extension, rather than move. This has a direct analogy with the software vendors too. Most make most of their revenues from existing users. Vendors like COA are doing really well right now as maintenance and support revenues are ‘core’. ‘Bolt on’ revenues are also holding up well. Indeed, many companies might be benefiting as existing companies decide against changing supplier and opt to spend more with their existing suppliers.

More social housing? Social housing (we used to call them council houses in my day) has really gone out of fashion in the last few decades. A turndown in the housing market means fewer new house builds for the private sector. The ‘best’ solution would, of course, be for HM Govt to take up the slack and build more social housing.

This has analogies with the IT sector in the UK in the last 8 years. As demand for IT from the private sector reduced post Y2K/ the public sector moved in. In 2000, just 17% of UK SITS spend was from the Public Sector. In 2007 it was 30%.

However there seems little likelihood of Public Sector IT spend increasing – indeed all the forecasts are for some pretty steep declines in the growth rates. The Public sector is looking for ‘More for Less’ too.

Without wishing to be overtly political, HM Govt has little room for maneuver having “failed to fix the roof when the sun was shining” it hasn’t got the funds saved up to do much.

Rent not Buy. The home rental market is holding up well. Indeed rental yields are improving. Much better to rent than to buy in an declining market. The analogy here is with outsourcing – both ITO and BPO. Both are thriving right now. Indeed the area which is doing best is Financial Services outsourcing – a taboo area until recently.

The other “Rent not Buy” analogy is with SaaS. Although I accept that this is not a direct result of the credit crunch, it is just now starting to have an effect on the economics of the marketplace. SAP has admitted problems moving to this model and I personally believe that the greatest threat of all to Microsoft is to its core operating systems and Office revenue stream as more-and-more users move to Cloud Computing.

Pity the Estate Agents. Apparently hundreds of Estate Agents are closing each week. Strangely this revelation provokes little sympathy! The nearest analogy in the tech world to estate agents is the vast array of corporate advisors – brokers, NOMADs, legal and financial advisors, PR etc - who make their living from IPOs. There has been only one tech IPO since the credit crunch hit in Q3 2007 (TeleCity). There is no indication that this situation will improve anytime soon. Although there is still life in the M&A market, it tends to be at the lower levels (as witnessed by the raft of AIM bids recently) rather than in the £500m+ type deals. That’s why many tech intermediaries are really ‘feeling the pain’ right now.

Security. I’m not quite sure if all homeowners are spending more on security – but the Holway household is. Whether its physical security – to our house or ourselves - or warding off cyber attacks, security is of ever increasing concern. . If you want a ‘hot issue’ in tech too, then look no further than security and compliance as evidenced by the likes of Autonomy and Detica or the fact that the UK ID project (in whatever shape) is the only remaining ‘mega’ IT project on the blocks.

Perhaps we should all remember that although property has been a pretty safe ‘long term investment’, returns have varied greatly by region and type of property. I suspect that will be the same in technology. Overall, I doubt that technology will produce wondrous returns. But there will be specific areas which will outperform the market. Unfortunately balanced by those that don’t!

But the need for technology, just like property, is not going to go away. Technology will be a crucial part of the global economy for generations to come.

1 comment:

alan pelz-sharpe said...

Excellent post! I think the analogy works really well. However I would say that US realtors are 100x more effective than UK estate agents. In the UK there is still the 'list' it and they will come, in the US they actually go out and find buyers and work hard to keep everyone involved.

I sometimes think that sort of disconnect exists in UK IT??