Lippis Report 116: IT Was The Problem In ’01; Now It’s The Solution

I believe in IT. Even with all the gloom in the economic news, IT will play a major role in the recovery. This economic mess is not a typical business cycle of supply and demand balance or imbalance. It’s rooted in the greed of a few who sold sub-prime mortgages to those who could not afford them, rating agencies that gave AAA rating to BBB sub-prime mortgage-backed bonds, investment banks that solicited investors to short these bonds only so they could use the short to synthesize and multiply the number of bad bonds which eventually clogged the credit market and ignited the stock market crash of 2008. This cycle of greed has and will continue to cost us, our children and our grandchildren dearly as we are forced to bail out financial institutions, the auto industry and fund a stimulus package sized in the $500 to $700 billion range. With this concerning economic backdrop, I believe in IT more now than at any other time in my career. Why? Because after all the cost cutting, reduction in force or layoffs, supply chain rationalization, expense reduction initiatives, etc., IT is the only tool humans have to improve and sustain productivity gains.

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For some this may seems like an odd position as many IT professionals have fresh memories of the 2001 recession that wiped out $5 trillion of IT market value and cost hundreds of thousands of jobs. But this economic cycle is in stark contrast to the role IT played in the 2001 recession. In short, IT was the problem in the 2001 recession; it’s the solution now.

In 2001 IT was at the epicenter of that recession. Overspending on IT, thanks to Y2K and the internet boom was the problem. The IT industry experienced 50% growth rates that reversed course to -45% within weeks. Inventories were bloated and IT firms were overstaffed. Skepticism descended upon IT investment, prompting CFOs to take charge of reviewing and approving IT projects. The 2001 recession, in retrospect, was the best thing to happen to IT. IT firms became more focused on delivering business value that was quantifiable in terms and metrics that executive management could understand. As IT firms worked off inventory and streamlined operations their balance sheets became strong with little debt to service and stayed that way.

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In 2001, IT was the problem; in 2008 IT is the solution.

Well-managed IT firms have very strong balance sheets and their solutions are designed to increase productivity and reduce cost which will serve them very well during this difficult business cycle. Clearly there is reduction in force occurring across the economy with the latest unemployment levels at 6.7%. Many economists expect this number to rise above 8% during 2009. Note that every .3% increase is approximately 500,000 jobs lost meaning that another 2 million jobs are expected to be lost in 2009. But unlike 2001, IT jobs are in demand, especially those with networking skill sets. So why am I bullish on IT? Because IT is fundamental to productive and profitable business operations.

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For example when organizations undergo a RIF, the workload of those remaining is increased to pick up the work performed by those who are no loner employed. While corporations may experience a short-term increase in productivity thanks to RIF, this is seldom sustained without the injection of productivity improvement processes and tools. Along with RIF many astute business and IT leaders are reviewing business processes with a laser focus toward efficiency. Automated and streamlined business processes via IT are the engine of productivity, which enables corporations to sustain productivity gains through RIF and other cost-cutting initiatives.

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Larger IT firms will benefit more during the current economic cycle as they possess the resources to quickly deliver change. From an IT industry perspective there is a flight to safety occurring now which will continue during the next twelve plus months. This means that those IT firms with the largest market share and strongest balance sheets will gain the lion’s share of revenue during this business cycle. It’s highly likely that firms such as Microsoft, IBM, Cisco, HP, EMC, CA, Oracle, et al., will increase their market share during this time. This is not to say that these firms will grow in the current recession, as IT spending is usually two to three hundred basis points above GDP. But they will gain market share over their category competitors. There will be fortune change too between the largest IT players as a shift in IT spending favors the network business platform over legacy IT products and services. The bottom line is that the largest IT firms will be the winners at the other end of this economic cycle.

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The Data Center At The Epicenter Of Large IT Supplier Competition

Never before have large IT vendors had so much overlap between product lines. The data center is the new front in competition between IT titans. Data center consolidation, virtualization, and cloud computing offerings will become more and more similar between large IT suppliers. In fact, Cisco is rumored to be planning a server blade offering, which has IBM’s Chairman and CEO Sam Palmisano and HP’s CEO Mark Hurd alarmed. At stake during the downturn is who will control the data center? Will it be applications, servers, networking, storage companies or those that can envision, design, deploy and manage next generation data centers? Web 2.0-based collaboration that integrates video, social networking techniques and unified communications is the second front where Microsoft, IBM, Cisco and HP will clash. While data centers are more about IT cost reduction, collaboration is about corporate productivity thanks to a new communication model for enterprise operations.

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IT is Strategic

In the current macro-economic climate IT could not be more strategic as it offers the only sustainable approach to productivity improvement. In fact, for those that invest in IT projects targeted at productivity improvements they could be rewarded with performance increases between 5 and 10%. Let’s think about this for a second.

During the late ’90s in the run-up to the dotcom boom and telecom crash, corporate productivity soared. The reason was IT and in particular the internet and web 1.0. The internet was and still is an efficiency engine. It sought out inefficiency in business models and processes only to transform them and improve efficiency by eliminating human and system delay in business processes.

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Clearly today’s corporate initiatives have changed dramatically since August. Business leaders have embarked on systemic operational cost reduction initiatives as well as increasing organizational flexibility, meaning delivering speed and scale of corporate capabilities to address market dynamics. Business leaders don’t have the luxury of patience to gain the benefits of IT projects, which means that their focus and scope is shorter. There is no time for year-long design cycles. So business and IT leaders are picking and choosing big productivity wins. For some firms this may be a streamlining of how it does business with customers, or perhaps reducing the number of product SKUs that make up a sale or making a corporation more responsive to customers and events through collaboration.

In today’s market, IT and the internet with web 2.0 deliver the tools business and IT leaders need to make their employees more productive as they pick up additional workload and business processes are streamlined. During 2009 industrial strength facebook like social networking, which integrates UC, video, telepresence, etc., could become the collaboration interface organizing employees, projects, information and processes via self-selecting groups. For example, all financial professionals may join the corporate finance group as well as various projects they support by posting videos, questions, project updates, schedules, problems, solutions, etc., in short populating and sharing information with the group. This new approach, borrowed from consumer social networking sites, promises to deliver productivity gains by moving workflow faster between employees within groups to speed up projects. In addition to enterprise-based social networking collaboration, we expect acceleration in IT projects that deliver strong business value as long as suppliers can deliver at speed.

All IT Vendors Are Becoming Networking Vendors

At the same time that the global economy is entering a great recession the IT industry is offering a new IT delivery platform – the networked platform. First a word on “platform”. A platform is an infrastructure in which business value is created and maintained. The word platform in the IT industry used to mean a software development environment, which was tied to a specific computing system.

In the 1960s and 1970s the IBM mainframe was the platform. Then in the late 1970s and into the 1980s the mini computer by Digital, HP, Data General, et al., took the platform ring. Then in the late 1980s and early 1990s the PC took the platform title. But during this time frame, a new technology emerged called local area networking (LANs), which connected PCs and expensive peripherals such as printers and file storage together into a PC LAN. This was the birth of the network-based business platform.

It took a few years, but in the early part of the 1990s LANs starting connecting all IT assets including terminals, mainframes, minicomputers, PCs, storage, servers and other LANs over wide area networks via IP. As each of these separate IT segments became connected a multi-billion dollar market arose. The network platform delivered value in two main areas: 1) it increased access to expensive IT equipment for all enterprise employees; and 2) for the first time it provided programmers with access to all computing resources so that data and applications could be shared between mainframe, mini and PC computing. Then in the mid 1990s the internet and email took off and the network platform was solidified.

Today the network has evolved well beyond a connectivity service as it touches every IT device within an enterprise, that being computing, storage, video surveillance cameras and soon facility environmental systems such as HVAC and lighting. With this sprawl networking’s value has increased by integrating security services, power distribution services, mobility, teleworking, unified communications, video services, virtualization services and application delivery services. In fact, the boundary between computing, networking and storage has been blurring with traditional demarcations soon to be redefined. All major IT industry initiatives are now based upon the network platform such as web 2.0, social networking, SaaS and cloud computing. Gone are the days when innovation such as new features to an operating system took the industry by storm. Today’s IT market is rooted in the networked world.

The unique characteristic of the network platform is flexibility, that is the ability for it to deliver business value unique to every corporation. The key aspect of the network platform is that many of the new web 2.0-based applications can be deployed from the bottom up versus top down. Business and departmental managers can easily deploy enterprise-based social network tools to keep employees updated as to project status, for example. IP video including desktop video, video on-demand and telepresence has become an important new IT tool to most organizations, which is now easy to use as it’s linked into UC solutions. These new attributes of the network platform (web 2.0, social networking, SaaS, cloud computing, etc.) will be rapidly deployed during this business cycle as they deliver results and a new IT delivery model.

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 social networking, video and unified communications 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.

The role of the IT leader is to review 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 based upon the networked business platform led the economy out of this funk.

And that’s why I believe in IT.

2 Debates over Lippis Report 116: IT Was The Problem In ’01; Now It’s The Solution

  1. Stefan said:

    Lippis Report: “I believe in IT” – I especially like the part about networking (could you tell I am biased ? :)) http://bit.ly/iuDm

  2. Stefan Mititelu said:

    Lippis Report: “I believe in IT” – I especially like the part about networking (could you tell I am biased ? :)) http://bit.ly/iuDm