The Lippis Report

While it looks like the US economy has averted the Great Depression 2.0 scenario, business leaders are preparing for what now seems to be a slow motion downturn to a deep and potentially long recession. All eyes and ears will focus on this quarter’s earnings reports, unemployment numbers, rate of credit market thaw and stock market volatility. Special focus will be on the $1T of consumer credit looking for signs of much larger than normal defaults as the next shoe to drop. But a $10T valuation loss on the Dow, unemployment at 6.1% and 10,000 home foreclosures a month (both of which are climbing fast) leaves little room for optimism unless you’re Warren Buffet who’s buying depressed equities. With 70% of the economy based upon consumer spending it’s easy to see how double digit unemployment levels and consumer credit defaults, which increased 54 percent in Q208 from Q207, according to Federal Reserve, adds doubt to a V-shaped recovery scenario. Consumer credit defaults at 7% will be a drag on economic recovery as it’s estimated to reach $100B in 2009. What an awful macro economic scenario. But there is a bright spot; IT can and for some will lead the economy out of this funk.

Based upon discussions with many business and IT leaders I find that this quarter’s budgets are on track, but visibility becomes cloudy thereafter. A cautious spending attitude has disseminated over business and IT leaders, but caution is not despair or cuts. Morgan Stanley’s June CIO survey estimated that IT budgets were projected to grow between 5 and 7% in 2009. At the October Gartner Symposium conference IT spending was projected to grow at 2% in 2009. The bottom line here is while the macro economy will take some time to improve and may very well contract more before it recovers, IT budgets will not crash like they did during the internet bubble burst of 2000.

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First there has always been a segment of business leaders who value IT as strategic and others who view it as an expense. These two schools of thought will become more entrenched in their thinking during this business cycle. Those who view IT as strategic will gain competitive advantage while those who view IT as an expense will make cuts and suffer the consequences. Now is the time more than ever for CIOs to take a leadership role within their corporations. No one, not even Chairman Greenspan, estimated that corporate productivity would grow between 3 and 5% between 1997-2004. IT was the major contributor to this huge economic expansion. This business cycle will present CEOs and CIOs with an opportunity to increase corporate productivity by 5 to 10% with the strategic use of IT.

How can corporations grow productivity by 5-to-10% with IT during a deep and long recession? The answer is to use IT to enable corporate top initiatives. If CIOs go to executive management with a plan to increase productivity by 1%, then they will be viewed as an expense. But if IT leaders and CIOs go to executive management with a plan to address the corporation’s top five initiatives, be they entering adjacent markets, reducing operational cost, increasing productivity, combining infrastructure between merged entities, increasing efficiency in business process, etc., with a goal of increasing productivity by 5 to 10% then IT and the CIO are strategic. The more IT leaders take this role and responsibility the more that IT will lead the economy out of its current funk.

Clearly IT will not help a family from being foreclosed upon or avoid consumer credit defaults or grease the skids for banks to lend to each other or stop the stock market volatility. The 2008 crash and subsequent economic damage is done; the real question is how to contain it and recover. Productive corporations don’t have massive layoffs and are stability points in an unstable economic environment. The more productive corporations there are, the more stable the economy.

Clearly business priorities have changed since the market crash; from revenue, profit and productivity growth initiatives just a few months ago to a new set of imperatives. These initiatives will vary from board to board but the main thrust of business leaders are:

Increase Organizational Flexibility: During highly volatile and uncertain times, business leaders are looking for ways to increase their organization’s flexibility and responsiveness to market and customer dynamics.

Increased Speed and Scale of Corporate Capabilities: Market dynamics and changes occur much faster than in previous market cycles, forcing business leaders to make decisions and their implementation at speed and in scale. For example, as the economy contracts the pace of mergers and acquisitions will increase significantly requiring business leaders to move at the pace set by Jamie Dimon of JP Morgan or Ken Lewis of Bank of America.

Enable Cost Cutting Throughout The Entire Organization: Business leaders will be looking for intelligent cost cutting strategies throughout their entire organizations as the economy contracts and spending slows.

IT leaders need to listen and understand the attitudes and priorities of their CEOs. As the above initiatives are articulated an obvious result will be that large IT projects that take a year or more to implement will be off the table. IT project focus will shorten up, such as multi-year ERP implementations that consume excessive IT labor and require years to implement. Less important items such as desktop computer refresh rates will slow. We offer the following guidance to IT leaders:

Pick and Choose Big Productivity Wins: IT leaders are encouraged to review which corporate areas will contribute to highest productivity gain and be most cost effective.

Be An Enabler: IT leaders need to embrace the new CEO initiatives and be a partner to increase flexibility, scale and speed and reduce operational cost.

Lead The Cost Cutting Initiative: IT leaders have a large role to play in organizational cost cutting. Work with business leaders to review existing business processes and create new more streamlined ones. IT has always enabled increased productivity while keeping headcount low; this is the time to put that attribute to work most effectively.

The IT industry, that is vendors, know all too well how to contribute and add value to these corporate initiatives. The industry learned during 2001-2004 that to survive it needed to add value that was cost justified. IT vendors have a lot to offer business leaders on the topic of how to survive and thrive in major market downturns. The organizational learning that took place within IT companies during the IT depression of the early 2000s will be put to good use for corporate with the above initiatives.

So what kind of IT projects will address the post-crash corporate initiatives; those that automate and improve business processes. For example, collaboration solutions that allow organizations to be more responsive to market dynamics by enabling speed and scale of executive decisions and implementations will be most useful. Collaboration solutions based upon the network platform which includes video, unified communications and communications-enabled business processes both reduce organizational cost and increase productivity. IP video or telepresence for example, reduces travel cost significantly but more importantly increases decision making and adds value to business process. Unified communications solutions are well understood by the vendor community and can be implemented within months so that organizations can benefit from both reduced cost of communications, but most importantly increased productivity for all aspects of corporate operations, by linking employees, partners, suppliers and customers together, increasing corporate flexibility and hastening decision making.

There are other IT projects that will offer cost cutting and increased productivity such as virtualized data centers, cloud computing, enterprise-based social software and networking, etc. The role of the IT leader is to review these IT opportunities and filter them through the attitudes and initiatives of executive management. As this process of “search for corporate efficiency” takes hold throughout the world economy, many will look back and realize that IT led the economy out of this funk.