Public sector cuts: where in IT will the pain be felt most?

There is no doubt that cuts in public sector spending will have a significant impact on the private sector, but this will probably be uneven, and may change many relationships between suppliers and their partners in the ecosystem. In times of hardship, proximity to the key elements of a value chain – end customer, core technology – starts to rise in importance, and the ‘middlemen’ begin to suffer more from the squeeze.

The value of proximity to the end customer is clear – after all, they pay the bills that keep the lights on and the pay cheques flowing. Sales people may come in for some stick at times, but their success (or otherwise) is easy to measure and therefore their value to the organisation is transparent. Not all roles, especially those in middle management, have this demonstrable value, and like the middlemen of the value chain, they are more vulnerable.

Core technology, in particular its ownership and the ‘hardness’ of the underlying assets, also rises in importance in ecosystems under pressure, in the same way that gold and precious metals rise in value when ‘soft’ or fiat currencies devalue. Companies with tangible assets – hardware, network infrastructure, physical datacentres, software intellectual property – are in a stronger position than those with soft assets such as people, skills and ‘virtual’ relationships such as integrators and consultants.

However, not all core technology providers will fare equally. Some incumbents with the larger market shares have more to lose. They may have economies of scale and extra resources to draw upon, but they may also be seen as part of the overspending problem. They may be shedding staff in a more public way than their smaller competitors and so will appear slightly more fragile than their market position warrants.

For those involved in the supply of telecommunications systems and services to the public sector, many of the cuts will be a mixed blessing. Public sector organisations will be shedding staff but still need their IT and communications infrastructure, perhaps even more as some services become more economically delivered as ‘e-services’. They will need to outsource, consolidate, virtualise and have hosted services as never before, and this will create opportunities for some, but the public purse will be compelled to look for those who can offer the best value, and there are several areas that should be of interest here:

- Communications aggregators – agile providers who can deliver combinational services across voice, data, mobile with sufficient bundled resources to get economies of scale and sufficient transparency at a fine-grained level to allow cost comparisons.

- IP network service champions – nimble carriers who have combined physical networks designed to deliver dedicated IP services at low cost with virtualised, open data centres to offer managed services.

- Expense control services – those that measure and analyse communications usage and traffic, rolling up individual use into a big picture, and then applying policies to control and manage excess.

Simply offering generic services, bespoke systems integration or low value-add ‘box shifting’ resale will not be enough, and companies whose business models have been structured this way who have enjoyed the good times in public sector spending will be in for a nasty shock, unless they can ally themselves far more closely to those with core expertise and technology. Those incumbent suppliers, integrators and carriers once labelled ‘nobody ever got fired for buying…’ also need to up their game otherwise the minnows of the ecosystem will be eating their lunch.

Rob Bamforth, Principal Analyst, Communication, Collaboration and Convergence
Quocirca