Will IT be affected by credit crisis?

Today’s (Thursday’s) interest rate decision from the Bank of England is under an even brighter spotlight than usual after the three-quarter per cent cut in the US last month to shore up plunging stock markets.

Since its first rumblings, the shock waves of the credit crunch have spread wide.

But a glance through recent Computing issues paints a confusing picture:

* As spending on the high street slowed, online Christmas sales boomed.

* At the end of 2007, financial services business volumes fell at their fastest rate since 1991, according to the CBI. But IT investment plans are at their strongest for a decade.

* Technology contractors’ wages in the sector are at an all-time high.

* In November, Cisco chief executive John Chambers sparked a sell-off of technology stocks with a warning that decreasing orders from banks could slow growth. His firm’s shares fell 10 per cent; EMC, Oracle and VMware also shed some value.

* But CA chief executive John Swainson told Computing last month that he has seen no impact. And many of the financial results announced this year show good growth.

* One study shows UK IT mergers down 21 per cent to a five-year low, with the fastest decline in the crunch-stricken final quarter.

* And investment in Europe’s next-generation media sector nosedived by 52 per cent in the same period. But another report shows a drop of just two per cent in the number of M&A deals in Europe, and a rise of four per cent in value.

Computing talked to experts across the IT sector to find out what is really happening:

The CIO view

Deutsche Bank chief operating officer for technology Daniel Marovitz:

Businesses are involved in rigorous prioritisation exercises and are shortening investment horizons for IT expenditure. These changes are less about
the credit crunch and more related to a general economic slowdown, which has affected a wide range of industries. But there is still an overwhelming demand for IT staff, and the financial services industry in particular has large unfilled portfolios with a lot of opportunities.

Corporate IT Forum chief executive David Roberts:

The credit crunch will see CIOs tightening their belts, but fears about the economy are unlikely to affect spending plans already in place. Large projects will already be business-justified and are likely to be as valid in a faltering economy as in a buoyant one. But CIOs will be preparing for an uncertain future: looking at supplier relationships and ensuring commoditised services provide best value, which could mean a boost for less well-known offshore locations.

Tesco head of operations Mike Yorwerth:

Any business must respond to the economic environment, but we have a wide IT project portfolio that will continue to deliver benefits. Negative talk around the economy and likely future trends will be taken into account over plans for the year ahead.

Jeff Roberts, chief information officer, law firm Norton Rose:

Neither myself nor the other CIOs I know have concerns about a change of strategy caused by the crunch. So while keeping an eye on the market, it’s business as usual ­ensuring projects are aligned to the business, but understanding what must be done first so that if market adversity does bite we can pull back.

Investments I wouldn’t put off include disaster recovery, data centres, and critical client-facing systems. Projects such as hardware and software upgrades could be deferred. But getting deferred projects back on track later can be a challenge because of losing contractors and not being able to get the expertise back.

CIO Connect managing director Nick Kirkland:

CIOs remain confident. Some 44 per cent of our members believe IT budgets will stay the same in 2008, with only 24 per cent expecting a drop. There may be pressure to re-adjust investment plans, but CIOs are capable of cutting their cloth to meet changing needs. There appears to be a move towards outsourcing, with 47 per cent saying spend will go up this year, and only 16 per cent believing it will fall.

The investor view

David Carratt, managing director, venture capitalist investor Kennet Partners:

Lack of credit makes it harder for companies to finance themselves. In the IT sector, firms tend to be small and have unpredictable cashflows, so the immediate effect has been low.

In general, investors are trying to avoid buying into sectors that are using debt, so the technology industry has actually become more attractive. Investors are looking for safe assets, so they are buying into technology more than they were before.

However, the credit crunch also reduces demand for IT, because companies are
reining back capital. I would say most banks will cut IT spending by five to 10 per cent. And financial services represent a large percentage of technology investment, particularly in the UK.

Merrill Lynch small cap strategist Steven DeSanctis:

In our view, the technology sector has not been rewarded for the structural changes it has undergone over the past 15 to 20 years ­ such as a more diversified product base, high levels of cash, rising dividend payouts and increasing earnings stability.

Most investors have rushed to judgment and compared the current environment to the sector’s slowdown in 2000-01. But the 2001 recession was enhanced by year 2000 capacity building, while the current slowdown is dominated by consumer and financial fears. We continue to believe stock portfolios should have at least one higher-growth sector; and we believe that sector should be technology.

Peter Rowell, chairman, technology M&A specialist investment bank Regent Associates:

The IT industry is doing pretty well. Sales are reasonably strong and growth is good, though it will be lower this year than last. Suppliers, on the whole, are generating good cash, so as long as IT expenditure by users holds up, the industry will be almost immune. However, nobody knows how deep the crunch will be and it is clear the big US banks are nervous.

The industry view

CBI head of e-business Jeremy Beale:

The response of the UK IT industry to a possible recession will be varied. Some companies will see a recession as an opportunity to invest in systems, pull ahead of the pack and increase their competitive advantage. Others will do the classic thing and stop spending. To an extent it will depend on the size of the company; larger firms may see an opportunity to invest in IT to increase their competitive advantage. Overall the industry is well-equipped to survive a recession because it provides a solution as well as a cost.

Intellect director general John Higgins:

So far, feedback from our members indicates that they have not seen signs of recession or credit crunch, and there have not been any related profit warnings in the sector. Most UK businesses rely on technology to function on a daily basis, and it is widely accepted that the lion’s share of IT budgets is spent on keeping current systems performing well. This budget is unlikely to be cut dramatically, even in a recession.

Some new IT projects could be delayed, but because technology investment often allows greater savings in other parts of the business, we often see companies buying new IT during a recession as part of the overall cost-reduction exercise. At present the credit crisis is affecting companies that want to expand using borrowed funds, which could have a knock-on effect on the resultant IT work. If the credit is not available to expand, then the growth will not take place and neither will the technology work that would have needed to be done around integration. But this is different to the belt-tightening that other sectors might expect to see in a recession.

Additional reporting: Angelica Mari, Neon Kelly, Tom Young