10 ways the credit crunch will hit IT

The shadow of the credit crunch has dominated the front pages in 2008 - claiming a number of high profile scalps such as the 158-year-old Lehman Brothers bank.

As job losses mount and with HP announcing it will lay off tens of thousands of workers following its purchase of EDS, silicon.com takes a look at what the crunch means for the IT industry.

Hardware and software vendors will feel the squeeze
Holding off on big projects such as upgrading to dual-core PCs or Windows Vista for another six months is likely to be a rather painless way of postponing spending for the IT department.

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Charles Ward, chief operating officer of IT trade association Intellect, believes that many companies will hold off on hardware and software refreshes for longer, hitting tech vendors and computer equipment leasers in the pocket.

"If you have a hardware refresh scheduled and that has to be delayed for another six months, that's not likely to make a huge amount of difference. Similarly software upgrades or integration projects following mergers can be delayed," he told silicon.com.

"But one thing you have to be careful of is that you are not cutting off your nose to spite your face: you have to weigh up the cost benefits of the upgrade against the savings of holding off."

Hastening the move to software-as-a-service and open source
Budget pressures are expected to drive businesses away from the licensing deals offered by companies such as Microsoft and the need for dedicated in-house IT support teams.

Carla Rapoport, managing editor for technology with analysts the Economist Intelligence Unit, believes companies will prefer the more flexible charging models of hosted software.

"You will see a move towards cloud computing and software coming from the web where there will only be the service cost rather than paying an IT team.

"There will also be more interest in adopting open source software," she said.

Outsourcers are tied to an industry in crisis
Indian outsourcing companies face considerable risk from their reliance on the global banking sector, with the country's top five service suppliers depending on the financial sector for about 45 per cent of their business.

Fears about the industry's over-reliance on an increasingly shaky sector were dramatically illustrated on Monday when shares in Satyam, India's fourth largest services provider, fell to a five-year low.

Rapoport said: "The Indian outsourcers will be hit hard in the short term.

"Quite a lot of the back-office work goes to India, with about 50 per cent of contracts coming out of the US.

"With more closures like the Lehman Brothers and acquisitions like Merrill Lynch [by] Bank of America, there is going to be a lot of consolidation of outsourcing contracts."

Phil Morris, managing director for the EU and Asia for outsourcing advisors EquaTerra, cautioned that outsourcers could take a hit as the business world in general scales back non-essential projects including some research and development work.

He added that there is also a danger in the high value of many outsourcing deals, which routinely run to hundreds of millions of pounds, in that suppliers might not be able to recover all of their money if their clients go under.

In the long term, outsourcing booms
The flip side is that the crunch will spark a flurry of new and renegotiated IT and business process outsourcing deals as companies look to squeeze savings out of new and existing contracts.

Outsourcers can expect to feel the belt-tightening as large banks and multinationals demand better value deals but suppliers are likely to extract longer contracts on the back of such changes.

Morris said: "I can see some pretty aggressive stances being taken by financial institutions to ensure they get a better deal going forward.

"Outsourcing is counter-cyclical, as soon as the economy takes a downturn then outsourcing goes up."

Ward believes outsourcing will grow on the back of the crunch, saying: "The outsourcers are more insulated against the effects and many firms affected by the credit crunch are locked into long-term contracts with suppliers spanning years.

"Outsourcing will continue to offer these struggling companies a way of controlling their costs in the long term."

Every cloud has a silver lining
The wake of the credit crunch is expected to bring greater financial regulation to avoid a repeat of the bad lending that saw banks write off billions in debts.

Those vendors specialising in business intelligence systems could experience a boom similar to the one sparked a few years ago by companies seeking software to help them comply with the tough data management requirements of the Sarbanes-Oxley Act.

Ward said: "The greater regulation in the financial sector will create opportunity for companies specialising in that area and there is going to be massive system changes required.

"Sarbanes-Oxley presented great opportunities for companies specialising in business intelligence and you could see a similar demand for firms to extract and analyse data in a way they have not before."

For more ways the IT industry will be hit by the credit crunch, click here for page two…