Lippis Report Issue 101: Economic Recession? Which IT Projects Will Get Cut? For Networks and Communications, Not Many.
The US recession forecasted by economists and government agencies became real on March 7th when the Labor Department estimated that the nation lost 63,000 jobs in February. Like plotting the coordinates on a hurricane chart as the storm heads toward you, this consumer-led downturn is beginning to concern business and IT leaders. Perhaps the worst fear is that this downturn is similar to Japan's 1990s real estate-led crisis, which resulted in a decade of economic malaise. But the only similarity between the 1990s Japanese and the current US downturn is the source of the disturbance. US banks are quick to write down bad debt; the federal government responded quickly with a stimulus package while the Fed continues to reduce interest rates, none of which Japan did. In IT while there are no hard signs that the US economic slow down has impacted current projects, business and IT leaders have a steady-as-she-goes attitude with a tint of caution. I predict that IT will weather this storm with only a slight percentage of spending growth lost while some projects such as UC, virtualized data centers and application delivery accelerate their adoption and growth.
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According to a recent report from the U.S. Census Bureau released on Thursday, March 6th 2008, "œU.S. businesses spent $250.7 billion on information and communication technology equipment and computer software in 2006, an increase of 6.3 percent from 2005". IT spending will still grow in 2008, but perhaps not as fast as it had between 2005-2006 and 2006-2007. While IT projects currently funded are not impacted by the slowdown, it's the summer and fall quarters which may be impacted and I say may be for the following reasons:
Been Here Before
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The tech bubble burst of 2001 trained this generation of business and IT leaders to be financially responsible. IT spending was scrutinized under a microscope by executive management, in particular the Chief Financial Officer, Chief Operating Officer, Chief Executive Officer and Chief Information Officer. During this period financial ROI and TCO guidelines were put in place for most corporations, which have not been relaxed. IT vendors were also trained to produce products and services that solve business requirements which are justified under these strict lowering TCO and quicker ROI guidelines. These controls and practices eliminated G Wiz tech spending for rational IT business planning and deployment.
Consumer-Led Slow Down
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This slow down is consumer-led, impacting real estate, retailers, hospitality, and other consumer focused businesses the hardest. Other industry segments such as energy, finance and insurance, health care and manufacturing, etc., have yet to significantly slow their IT capital budgets.
In the current economic climate many IT projects that adhere to fundamental corporate justifications such as short ROI times and lower TCO guidelines will not be affected but in fact will be accelerated. In particular data center consolidation and virtualization, unified communications (UC), application delivery and branch office networking, network infrastructure upgrades and network security projects will not be negatively impacted if a mild recession occurs lasting as long as twelve months.
Data Center Consolidation and Virtualization
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Data center consolidation and virtualization projects are by definition designed to reduce cost while increasing efficiency and performance. During challenging economic times these IT projects accelerate due to their favorable ROI and TCO benefits. In addition data centers are the largest consumers of IT energy, thus bringing another important and tangible benefit to these products, reduced energy consumption and cost.
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There are two kinds of UC projects. There are UC engagements where CIOs seek to reduce cost by displacing their TDM-based enterprise voice communication system. The cost savings advantages of UC are well documented and usually fall into the 30-50% range when compared against TDM systems. UC was born out of the tech bubble burst offering corporations a new feature rich with lower cost option to traditional TDM. These projects are very popular now due to their cost/benefit value proposition, but most importantly to some, their economic return is solid. These kinds of IT projects accelerate during weak economic times, thanks to their favorable return on investment cycle which is usually less than twenty four months and is typically eighteen months. The only caveat is that if the US economy enters into a long protracted downturn that significantly slows capital spending then some will delay or defer UC projects and keep to their antiquated and legacy TDM systems until the economy improves.
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But UC is also on a trajectory of software economics, which will radically reduce its acquisition cost to a small fraction of comparable TDM-based voice systems. For example, Siemens Communications made the largest UC announcement of the year by launching its OpenScape UC Server and a suite of UC applications. This is a huge software investment from Siemens taking one of, if not the, largest steps of any in the industry toward a software and services concern. With OpenScape UC server running on industry standard computing hardware IT leaders can deliver Siemens OpenScape Voice Application, UC application and its video collaboration suite of solutions. UC savings are found in acquisition and total cost comparisons including wide area services, operations and capital spend. But there is also the value and reduced cost of doing business that is achieved with UC which is a benefit not calculated during acquisition. For example, according to Forrester Research, Siemens UC Server with video showed "œsignificant benefits by integrating video into its UC strategy yielding quarterly team meetings dropped by 97%, reducing cost from $35,000 to ~$1,000."
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While half of UC projects are cost reduction in nature, the other half are strategic offering corporations competitive advantages when they need it the most, during difficult economic times. For example, 24% of retail customers leave a store without the item they entered to purchase, costing retailers some $98 billion annually. Some of the reasons for this lost sale are that the item has not been shelved yet but is still in the back of the store in storage, or the item can be shipped to them if out of stock, etc. Intelligent branch and retail stores equipped with UC link retail store employees with inventory systems, contact center agents and corporate knowledge experts so that retail clerks can address a customer's need and close the sale. Other UC deployments increase the number of products and services offered by retailers or branch offices through "œdigital signage", increasing customer choice, service and revenue per store. For certain these kinds of IT projects take real business and IT leadership during downward cycles but their returns are usually huge as competitive advantage is gained while competitors defer investments and fall behind. This is the time to win market share.
Network Infrastructure Upgrades
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While there is no evidence of this yet, the $20 + billion Y2K Infrastructure upgrade and refresh cycles currently underway could be deferred or delayed if capital spending is significantly reduced. This is unlikely as network infrastructure is linked tightly to application delivery thanks to new network services. Services such as application intelligence, network security, network virtualization, power distribution thanks to PoE, unified communications, etc., is required by communication and corporate applications. Network infrastructure does not simply provide a connectivity service but has become a business platform integral to application performance and delivery, which equates to improved business processes and workflow. New network infrastructure projects especially in wide area networks where aggregation of links deliver economic efficiency and increased bandwidth will accelerate during a slowdown. Of significant note is Cisco's new ASR 1000 series of routers where unified WAN services are enabled. Unified WAN services trades off high cost WAN expense for low cost capital expenditure resulting in overall lower TCO with increased performance. These types of network infrastructure upgrades will occur independent of economic conduction.
Application Delivery and Branch Office Empowerment
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While application delivery and branch office empowerment can be argued as a network infrastructure upgrade, I separate it out here as it solves a unique business requirement. Thanks to the last economic downturn headquarter facilities have increasingly been hollowed out as business leaders shift human and corporate assets to data centers and branch offices in an effort to be closer to customers. The resulting application delivery and branch office empowerment markets have boomed and I see slow down now in its trajectory. The branch office empowerment market is dominated by Cisco with their over 3 million ISRs installed. Cisco is increasingly adding application delivery features such as its WAAS, PfR, ACE et al to its branch office and application delivery solution.
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For branch office networks there are three distinct WAN optimization technologies: 1) TCP optimization for non real-time applications such as Microsoft Exchange which is led by Riverbed; 2) QoS for UDP optimization for real-time applications such as Voice over IP which is led by Packeteer; and 3) Content Delivery Networks (CDN) for web and static application accelerate which is led by Bluecoat. There are many other firms in the application delivery market such as F5, Foundry, Certeon, Exinda, Silverpeak, Juniper et al, providing choice to IT leaders. These IT projects enable branch office employees to have the same set of business tools and resources at the same performance levels as if they were in a fully equipped headquarter facility. Application delivery and branch office empowerment enables the re-allocation of corporate and human resource deployment into branch offices to be successful. Without application delivery and branch office empowerment this corporate strategy would not succeed. That is why these IT projects will continue to be funded during weak economic times.
Network security spending seems independent of economic climate. Securing data and communications is a cost of doing business and its budget is increasingly being allocated out of corporate compliance allocations. Network security IT projects will not be cut.
Economic downturns bring many things, not all of which are bad. IT suppliers will invariably repackage offerings to address short term economic uncertainty, reducing barrier of entry. Economic downturns are often accompanied by introspection of business strategy, initiatives and processes, which drive new innovations. These innovations then drive new requirements which open up new markets; the branch office market was created out of the tech bubble burst. The advantage of acquisition pricing negotiation swings toward buyers, yielding leverage. Large IT companies get larger during these times too, as IT leaders grow more cautionary with smaller players. The fact that networks and communications solutions are entrenched in justification through economic prudence will serve this industry well during what may be an unenviable economic recession. Let's just hope that if we are in recession it's a short one.