Why this tech recession will be different

Quickly: For tech, this recession will be different than 2001-2003

Content: I'm not an economist. But I've been present for a bunch of recessions and watched how technology markets survived. And I spend a lot of my time talking to management teams at large companies about economic conditions and their businesses. Here's my view of the effects of this recession on technology. If you want Forrester's formal view of the recession, check out Andy Bartels' report, What the Financial Crisis Means to the Tech Market.

Here's my take:

1) Tech will be down, but not out. 2001-2003 was a tech depression. Spending stopped, projects were canceled, excess inventory flooded the market destroying pricing. Cisco lost half a trillion dollars of market cap. Why? Tech had a long way to fall. Tech spending in 2000 in the U.S. was up 12% -- there was fluff and fat everywhere. When the bubble burst, the fall was precipitous. But tech spending was up only 6% from 2006 to 2007. Users of technology are far more disciplined and have cut out the nonsense. So yes, growth will slow, but it won't fall off a cliff.

2) Transformation and innovation will lead recovery. CIOs and CEOs are telling me that they plan to change their way out of this mess. Goldman Sachs is scoping best practices in commercial banking (its new world). JP Morgan has to integrate Bear Stearns. Bank of America will be converting and integrating its systems to fit with Merrill Lynch. Wal-Mart is going to use social computing to increase customer responsiveness. FedEx is replacing its data centers with high-efficiency, green designs. When we come out the other side of this crisis, companies will look quite different -- and technology will have been a catalyst in those changes.

3) Tech is everywhere. It's seven years since the last recession. Technology has become markedly more pervasive in that time -- it's the air we breathe and the water we swim in. Cell phone penetration in the U.S. has tripled in that time; eCommerce has increased by 85%. While it may have been "nice to have" (and therefore eminently cut-able) back in 2002, tech now sits at the center of companies' operations. IT has become Business Technology. If you don't believe me, start unplugging wires at your company and see how long you can develop, manufacture, deliver, sell, and service your products.

4) Customers live on tech. The consumer landscape is very different than it was in 2001. Forrester's consumer surveys show that each succeeding generation takes more tech into their day-to-day life. The delta between the Y generation (18-27) and the X generation (28-41) is extraordinary -- Y spends twice the amount of time on cell phones and half the amount of time reading newspapers. For more on this, check out our report, The Gen Y Design Guide. In a recession, the use of Facebook, Linked In, eCommerce, blogs will increase, not decrease, as people look for jobs, companies stay closer to their customers, and easier-to-ROI Internet advertising accelerates. Companies will have to stay focused on their web sites, social strategies, and eCommerce this time around -- or risk losing their next generation of customers.

5) Tech issues are burning. There were no big tech changes afoot back in 2001-2002. Not true now. Virtualization, social computing, mobile computing, Green IT, SOA, extended Internet (connecting the physical world to the digital world) are front and center on the agendas of large companies. Will many of these projects get cut back? Yes. But many are part of long-term company plans -- they will persist despite economic slowdowns.

Tech suffers when GDP growth stalls -- that is always the case. But the tech environment has transitioned since the 2001-2002 hurricane -- meaning that this time around will not be as severe.

Got another view? Let me know.

Comments

re: Why this tech recession will be different

This points made in this article are right on. The connectedness will go beyond the social networking sites - companies will use business networks to, as said above, keep their customers, partners and employees closer, and to leverage their collective intelligence to achieve continuous business improvement and efficiencies.The structural changes in the world's economy reflect much broader social changes and rising expectations for inclusion on the part of customers, partners, and employees. Technology will actually be a stabilizer rather than a destabilizer - that is what is different.

re: Why this tech recession will be different

I agree with you – the one thing the tech industry has in its favour this time around is experience. Lessons have been certainly learnt from the tech bust at the turn of the century, which will no doubt serve businesses well in riding out this current storm. The first thing to accept is that cut backs will have to be made, so smart companies should look to cut fast and cut deep to avoid further repercussions down the line.Also, don’t rule out the possibility of businesses actually prospering in these conditions. There is a natural tendency to shy away from these conditions, whereas competitive gains are there for the taking for those businesses that decide to take a risk and grasp opportunities. When combined with a good balance sheet, these companies that thrive in the current conditions may also find they have a head start when the market picks back up.

re: Why this tech recession will be different

I also agree, but for a different reason. For many companies--I'll speak mostly about retail as it's the area I cover the most--the economic downturn means having to do with less. It means fewer employees, fewer resources and less time. And yet, there is an increased need for more revenue and certainly for greater efficiency (what they used to call "profit" in happier days).Not so ironically, that all spells IT. Suddenly, line of business managers will need that tech magic that will allow them to run stores with 48 people that a year ago needed 76 people. That means more kiosks, self-checkout and LOTS of software to automate functions.It will likely push more companies to try and divert sales to E-Commerce, where efficiencies are easier. So depending on what part of tech you're looking at, a recession can deliver a short-term boost.

re: Why this tech recession will be different

GeorgeYou make compelling arguments, but having been through several recessions myself, I tend not to buy the "this time its different" arguments. Yes, it is different, this recessionary environment will probably be deeper, longer and more painful than others, so technology as a % of corporate spend may not decrease in absolute terms, but relatively it has to come down. As I talk to CFO's I hear more arguments for the "IT is not that differentiating" argument.

re: Why this tech recession will be different

GeorgeYou make compelling arguments, but having been through several recessions myself, I tend not to buy the "this time its different" arguments. Yes, it is different, this recessionary environment will probably be deeper, longer and more painful than others, so technology as a % of corporate spend may not decrease in absolute terms, but relatively it has to come down. As I talk to CFO's I hear more arguments for the "IT is not that differentiating" argument.

re: Why this tech recession will be different

This is the common mistake done by many analysts including this writer. This recession is much much more severe than previous recessions and will have severe effects on all business segments including IT over prolonged time. I will agree with your views on innovation. How much IT business is running on innovation? May be around 30%. Remaining are copycats or outsourcers. Innovation will thrive in any business but how many people are innovators?

re: Why this tech recession will be different

Yes George, this recession is different. We still have to see how deep the financial crisis is. America's economy still runs on debt, because you can buy a car or furniture and start to pay in 2010. How much debt can this economy carry for how long? I am not an economist either and if you speak to an honest one they will tell you that their job is to say the economy is good or will get better or the problem is not that bad, because that is the only job they have. No economist can tell you where the economy is going. They can look at the past and extrapolate a little. Finito.IT will not suffer worse than the rest of the economy because as you say it is an integral part of what businesses do. I am however amazed how quickly governments were ready to jump in and snap up government control and even ownership of banks everywhere. The free markets don't work because we should not have so many businesses that are TOO BIG TO FAIL. What happened to small is beautiful?Without wanting to be a conspiracy theorist I see a lot of potential IT business so that governments can monitor banks and while they are at it their customers. Germany already does monitor bank accounts without the knowledge of their owners. Sarkozy in France calls for an end of fincance-capitalism and wants to become the head of an EU control commission. You might say that this will not happen in the US. Actually, the IRS data-mined in 2007 all PayPal customer records for tax evasion. So you may right, IT might do a lot better than the rest as a willing helper for more government control.

re: Why this tech recession will be different

Hello George, these are great points. I am a recruiter in the Tech business, and we are seeing the social networks really starting to grow. Is there anyway we can post a link to this blog on our Facebook page?

re: Why this tech recession will be different

Operational excellence has matured since the tech bubble burst (ESBs arrived in 2002 and ITIL became the ITSM standard) and is a well known problem, as is scalability though the need to scale is much less important now than the need to maintain what you've already won thus there won't be much action there other than trying to further cut costs and trim the fat.Where tech can and will continue to see growth and revenue flow is in improving competitiveness because with fewer customers there is bound to be more competition for each customer. Business intelligence is still a weak area for many non-tech companies, few have mature competitive intelligence strategies, tools or teams that are able to react quickly to changes in the market such as detecting new entrants, observing and responding to customer behaviours, improving the added-value of their partner ecosystem (see www.alliantist.com) or just being able to actually train their staff to use CRM collaboratively and integrate with other tools in the enterprise (i.e. event-driven patterns) to drive responsiveness across the ecosystem.Transparency will be the new challenge of these times as regulators swarm across business communities ever fearful 'this' could happen again. Using technology to improve transparency and corroborate 'trust' will be a significant practice to emerge and I believe this will become an integral part of corporate operations in the next decade.

re: Why this tech recession will be different

You have no credibility. You were the same guy who decried Google's IPO valuation and said:"What the world needs now is a calm, ordered, rational, smart equities market in technology--not overpriced froth. Google at a $6 billion valuation would be great. Google with a market cap north of $15 billion blows in the stench of Bubble II."This for a company that was doing $1B in revenue, growing at 4x YoY with 65% operating margins.

re: Why this tech recession will be different

Mike:I'll admit I don't always get it right -- check out my re-take on Google:http://blogs.forrester.com/colony/the-google-future.htmlBut what's your take on the tech economy? If you think I'm wrong, how bad do you think it's going to get?

re: Why this tech recession will be different

IT business worldwide can be divided in 2 types. First is Innovation/Development and Second is Servicing / Maintenance. This is definitely a more worse and more deep recession. I think the first type will be definitely hit badly by this as there won't be any funds available and second might go down by at least 30%.

re: Why this tech recession will be different

Completely agree with Ed Daniel. While we do not have the level of tech investment we had during the bubble where any idea that could garner eyeballs was funded, we are certainly going to see an overall downturn that will lower all boats.Many businesses were beginning to turn to social media because that is what the buzz was telling them to do. While many of us in this space agree that is a wise place for attention, there is not much ROI data to support it yet. Thus, it is a likely victim of cost cutting.Business Intelligence will reign supreme during this period. Transparency is key. Businesses need to learn more about how the levers they have at their disposal and pulling which ones does what. Much of those decisions are gut oriented today.

re: Why this tech recession will be different

Your points are on target as usual King Friday, however, two oberservations.1) I can't help but feel that the big money, easy money will be harder to come by. Perhaps I've spent too much time in the social media space where revenue channels and media channels are smaller and therefore you need many revenue streams to reach critical mass.2) Gen Y and millennial generation spent time connected, even old foggies 49 like me see the dynamic change that can occur with greater speech, access, and people participating. The question for me over the last year and a half is whether corporate cultures will adapt to transparency, control, and free flow of information, much of which was once paid for. I've referenced this post and picked up the conversation http://culld.us/l2838015One more thing about the US economy, we are addicts, credit addicts, it's that simple. We have to spend to maintain, not even grow, to maintain. Are credit card companies and banks in a position to call in their debit? Do they want to own 75% the homes in America because of a few late payments?There is only one thing more pathetic than a junkie. It's a pusher without one.

re: Why this tech recession will be different

Hi George,I have a start-up in Boston to create 3000 new jobs building a cable tv network, www.HollywoodINBoston.comthe only way to get out of a recession is to pull together, not hunker down and ride out the storm, the thinking that the recession will not hit tech hard, is a mistake. The mistake would be to blame this on housing or Detroit just as the last recession was blamed on tech ( .com), the way out is to invest in new ideas, we need growth in comming together as a community, and having business leaders reach out for new ideas, and start-ups, that will create the new jobs, and pull us all out of this mess.If any leaders in Boston, want to come together, email me vipBoston@yahoo.com it is better to swim together than drown alone.

re: Why this tech recession will be different

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.Sarahhttp://www.thetreadmillguide.com

re: Why this tech recession will be different

Great post and the analysis you had is excellent. Despite the recession dragging on and hitting tech espically hard, it is good to see another optimistic viewpoint (relatively speaking). I think the recession will be over as fast as it started, though the structural changes will last for much longer. Now is the time to make the best of the opportunities available.

re: Why this tech recession will be different

I think the recession is going to last far longer than anyone thinks. We dont know the affect the stimulus package will have on other economies we trade with yet - will they have one also? Are we hoping to outspend them? Will imports become cheaper or more expensive? If they become cheaper than how will that affect their buying power when they want to purchase USA made goods in return?I for one have think commercial offset trading is the way to go (as opposed to barter exchanges which i dont like). I read something about Ormita - www.ormita.com - when I was sent an email from them out of the blue the other day. I first thought it was a mass market email but then I also got a phone call from someone wanting me to post information on my blog about barter in general so it seems like they were just keeping me informed? I dont know why I was on their radar though.During a recession we all need to watch our pennies. As a business owner I have a fixed outgoing every month which I MUST spend-Rent, electricity, wages,Advertising, telecommunicationsOffice supplies, stationery etcI dont have product cost because I am in the radio sector media but my fixed costs every month are around $5000 just to run my small business. I figure if I can swap someone for those services I already pay cash for then I will be better off.Say I swap $1,000 of that (25%) for an equivalent value of my advertising - I just saved $1000 cash and I am prepared for a drop in revenue of up to 25% because I have already taken it into account.At least thats what I gather from their literature. The idea seems a good one to me and I am going to investigate further. Unfortunately they say they are just preparing for launch and haven't done so yet which is unfortunate. I sent them my details though so as soon as they do I could gt someone to talk to me more about joining. I dont know if there is a cap on members but I want to get in because I NEED to save cash now and I cant cut back and more - I already did - so now I need to find a way to offset my remaining cash outlay some way and Ormita Commerce Network seems like a good suggestion.

re: Why this tech recession will be different

It's true. Technology maybe affected by the recession but not in a way that it can wipe this one out. Technology is everywhere and it can easily adapt to it's environment.