The Financial Market’s Impact On Technology
December 8th, 2008 Posted in In The NewsDo Cooling Markets Mean Cooling Technology Spending?
The recent woes throttling the worldwide financial markets have unleashed a tsunami of bad news that has quickly spilled from the confines of Wall Street’s banking industry and into Main Street. Even though most industry watchers expect IT spending to increase, there is little doubt that the current financial turmoil will have a significant impact on the technology sector and enterprise spending.
At this time, no one knows how long this financial malaise will linger, so predicting the magnitude of the impact on the technology sector and enterprise spending is, at best, a wild guess. It may also be difficult to predict and understand the impact on mergers and acquisitions, as well as the impact on the average small or midsized enterprise.
The Impact On Technology & Spending
Jill Fishbein, co-chair of the Corporate Practice Group and a partner at Carr & Ferrell LLP, says that she expects to see a continued general decline in capital expenditures with the anticipated recession, so hardware purchases such as servers, PCs, routers, and so on may be reduced or postponed.
But, she adds, “clean” tech investments not dependent on project (debt) financing, such as energy-saving technologies, will continue to grow.
Matt Dubois, information technology manager at d2 Business Solutions, says even though his company is seeing a downturn in new hardware purchases, it is also seeing a huge increase in outsourced services (backups, hosted spam filtering, etc.) and outsourced personnel. Some of the larger businesses, adds Dubois, are laying off expensive or highly specialized technical personnel and opting to use contractors instead.
But not all is bad news in technology. Christine Crandell, EVP and chief marketing officer at Egenera, says even though the overall economy “has caught a bad case of the flu,” the demands on IT have not changed. Even though spending will be curtailed, a lot of spending necessary to support enterprises will continue.
Says Crandell, “IT spending will focus on increasing service levels while cutting costs and building more agility and reliability into IT, [all] while better aligning with business goals.”
A Tightening Credit Noose
Decreasing access to credit, one of the most pernicious symptoms of the financial crisis, directly affects businesses because it crimps their ability to obtain loans needed to fund operations. Sean Murphy, co-founder and vice president of Canvas Systems, an IT life-cycle management company, says that with big IT financing companies (GE Capital, CIT, and others) caught up in the credit storm, companies are increasingly looking for ways to pay cash for equipment rather than seeking financing.
Murphy says small leasing companies, Canvas included, are in a good spot because they are largely unaffected by the current credit squeeze. “Additionally,” he adds, “leasing is coming back in a huge way because customers get to keep their cash and make monthly payments and don’t have to make huge purchases right now.”
Will Mergers & Acquisitions Cool Down?
According to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, venture capitalists invested $7.1 billion in 907 deals during the third quarter of 2008, a 7% decrease from the second quarter of 2008, in which they spent $7.7 billion on 1,033 deals.
“While overall venture investing hasn’t yet been impacted by the turmoil in the financial markets, as evidenced by the $7 billion-plus invested in Q3, we do expect to see a dip in investing over the next several quarters,” says Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. Also, adds Lefteroff, PwC does not expect venture funding to dry up, as VCs have slogged through difficult times before and tend to be long-term investors who won’t jump ship just because times are tough.
“They may tighten their belts and those of their portfolio companies, but they still have money in their coffers and will continue to make investments,” adds Lefteroff.
So, where did the VC money go as far as technology is concerned? According to data from the MoneyTree Report, Internet-specific companies received $1.1 billion for 194 deals in the third quarter. Semiconductors received $396 million in 50 deals, while telecommunications investments totaled $323 million in 45 deals, the lowest level for that sector since the third quarter of 1997.
Richard Muirhead, CEO and founder of Tideway, a developer of platform systems for data center search, says, “VC fund tightening is already impacting later-stage companies that do not understand the economics of their growth very comprehensively.” VCs, adds Muirhead, will not tolerate high levels of burn without certainty in this environment. And, he says, earlier-stage companies are where the innovation could potentially be impacted, as VCs look for propositions that focus on cost reduction and compliance.
Small & Medium-Sized Enterprises Feel The Pinch
The current financial situation is certain to affect SMEs who need to borrow cash to fund their operations. Carr & Ferrell’s Fishbein says these enterprises need to conserve cash and get creative about growing a business in times of tight cash by making use of corporate partnerships, government grants and loans, or alternative sources of revenue.
Egenera’s Crandell says the economic crisis affects midsized enterprises acutely because they don’t often have the cash reserves of larger companies. So, she adds, “the focus will be on negotiating lower rates from suppliers, standardizing their hardware to reduce complexity and support requirements, locking in longer service agreements with favorable terms, and outsourcing their applications and parts of their edge infrastructure.”
But, says Canvas Systems’ Murphy, small and midsized enterprises don’t have the same challenges as some of the bigger companies, so Murphy sees this as a good time to be an SME because the distractions suffered by large firms such as AIG are not there. That being said, he adds, everyone is tightening their belts. Murphy predicts an uptick in the purchase of refurbished IT equipment during these financially challenging times.
“I also think,” he says, “small to midsized enterprises might need to be a little more aggressive than larger enterprises because the big guys are scaling back like I’ve never seen before.”
Stay The Course
In many ways, the current financial crisis is a challenge that will be difficult for government and the private sector to overcome, even with the Treasury and the Federal Reserve throwing literally everything in their arsenal at the problem. Economies rise and fall with time, however, so it is important for enterprises to avoid over-tightening their belts during challenging times. As Janet Tyler, president of Airfoil Public Relations, points out, if a business doesn’t keep pace with IT developments during the downturn, it could find itself at a considerable disadvantage against competitors who did when things finally improve.
by Sixto Ortiz Jr.
