Staying alive: Surviving the economic meltdown

The dot-com bust of 1999 will seem like a sun shower compared to the coming economic tsunami. The telecom sector is already feeling the ripple effects of the Wall Street crash, and the economy continues to deteriorate with no bottom in sight. Landlines, telephony services and big enterprise projects – but not wireless – could be among the causalities. “Companies are like rabbits on the highway, watching the truck bearing at them,” says Duncan Stewart, Toronto-based director of research in technology, media and telecommunications at global consultancy Deloitte Touche Tohmatsu. Although times are tough, it’s important to keep perspective, Stewart adds consolingly. “When the Nikkei crashed in 1991, Japan had the second largest economy by GDP. It’s taken decades for that bubble to unwind – but Japan is still the second largest economy today.” Nobody knows the magnitude of this recession yet, he warns. “Remember, all the information we’re getting is from third quarter reports at the end of September, but most of the really bad news came after in October.” Nevertheless, we’ve assembled the best guesstimates about trends to expect in 2009 and survival tactics to consider from analysts, vendors and end-user organizations. Enterprise crunch During recessionary times, the first thing companies do is cut back on non-essential spending across the board, and IT budgets are being hit. About 16 percent of IT spending was deemed “new discretionary” in a 2006 survey, says Andy Woyzbun, analyst at London, ON-based Info-Tech Research Group. But that figure may grow dramatically. “People would’ve screamed about 5 percent IT budget cuts a year ago, but I’m not sure recent history is a predictor about what companies will consider ‘discretionary’ now,” he says. On the telecom front, landlines and telephony services are prime targets for cuts, but wireless services are largely deemed essential nowadays by both enterprises and consumers, he says. “Wireless will be a stable force in the telecom sector,” says Tamara Casey, CEO of 4DK Technologies Inc., a wireless consultancy based in Herndon, VA. “Frou-frou stuff like wireless content may suffer, but not basic voice and messaging services.” Most big enterprise projects are being put on hold. “We’re deferring upgrades to the phone systems and an integration project around voice mail and dial plan changes, as these necessitate CPU and system software upgrades that are relatively expensive,” says Michel Labelle, telecom manager at TSI Terminal Systems Inc., a container port operator in Vancouver. Few telecom initiatives are really critical, he adds. “Voice system upgrades are very expensive relative to their ROI, and they’re usually done for non-bottom-line reasons.” And there’s a great deal organizations can do without during hard times, he adds. “Most organizations can operate without a service or maintenance contract. Why pay $50,000 for a contract on your switch when you can probably get emergency support from your telecom provider for less? In good years, it's not worth the hassle, but in bad, it can save money.” Enterprises should use risk management principles to figure out where to put their limited funds, says Labelle. “Risk management will be a huge trend next year,” predicts Randy Park, Toronto-based author of The Prediction Trap, a book that delves into the dangers of extrapolating from historic trends to the future. Vendors in flux The credit crunch at the customer end is rippling through to telcos and telecom vendors. Few companies have the cash reserves needed to invest in products and services, says Bill St. Arnaud, director of network projects at Ottawa-based CANARIE Inc. (and also a member of Telemanagement’s advisory board). “We will see a slowdown in the product space.” Most companies can’t raise money to invest in new network infrastructure, which means equipment providers such as Nortel Networks that were already in precarious positions are now in really dire straits, he says. “Cisco Systems has huge cash reserves but all the others are in trouble.” Labelle agrees: Cisco rules. “They are in a position to formally displace Avaya, Nortel and Alcatel-Lucent in the enterprise telecom space. They will also most likely displace Polycom in the video/voice conferencing space as well.” Vendors that seem strongest from a capital market perspective appear to be winning the lion’s share of new business, says Stewart. “The weaker ones are being abandoned by their customers.” Industry observers agree a wave of consolidation is coming. But it probably won’t start until mid-2009, as many acquirers are playing the waiting game, says Stewart. “Companies can be bought cheap today, but maybe if they wait longer, they’ll be even cheaper. And anyways, things are frozen now – buyers can’t get credit from banks.” Troubled companies may simply go bankrupt instead of being bought out, which can create issues for enterprise customers, adds St. Arnaud. “Small suppliers like Marathon Technologies are in deep trouble and will probably go belly up.” On the telecom services front, newer entrants into the telephony market are unlikely to survive, he says. “All those new companies licensed in the last round with Industry Canada can’t raise money to keep going. Companies like Vonage that were already in a debt position before and new entrants in the wireless space are all doomed.” But there’s good news for incumbent carriers, who aren’t in bad shape overall, says St. Arnaud. Most of their customer base is well-established and pays monthly fees. “They’re all saying, oh wow, the threat of competition just went away. So they won’t need to invest in future infrastructure as much now.” Rogers Communications Inc. in particular is in a strong position, he says. “Its profits jumped significantly in the last quarter, largely due to the iPhone. It’s one of the few companies that’s buying enterprise solutions because it needs to make investments to sustain its growth. But Bell Canada reported a 1.8 percent return, so it’s in go-slow mode.” St. Arnaud predicts the return of big phone companies as consolidation proceeds in this space. “Carriers can reduce their capital costs and increase their profits via mergers and acquisitions.” Cost-cutting tactics There are some bright spots for enterprise customers as vendors compete for their limited funds. Technology costs are going down, and many major vendors such as Microsoft Corp are introducing stripped-down, discount versions of existing products, says Stewart. “This will be a super-trend in 2009. We’re already seeing it and it will get bigger. IT vendors tend to put all their bells and whistles into their products, but these will become premium versions.” There’ll also be more aggressive price competition from carriers, says Woyzbun. “We’ve already seen it in long distance, but now we’ll see it on the cellular and data side too.” To cut telecom spending, companies will likely introduce more stringent limits on employee cellular plans, and there will be more intensive attention paid to billing verification, so telecom auditors and TEM providers will get a bit of a boost. “If enterprises can’t cut back, they’ll want to make sure they’re not paying for stuff they’re not using. But billings and plans have gotten somewhat simpler recently, so there isn’t big potential here.”WAN optimization devices will also get a boost, he says. “Historically, IT departments have avoided risk, as they get punished for poor performance more than rewarded for penny-pinching. So many networks are over-configured and designed for peak traffic instead of average traffic. Since they’ll probably have to defer network enhancements, they can use WAN optimization to handle any growth in traffic without degradation of services.” One area organizations tend to overlook is the purchase of second-hand equipment, largely due to cultural rather than rational reasons, he says. “Many companies say, ’We don’t do that.’ They tend to eliminate line items instead of looking at how they can do the same thing cheaper. Companies haven’t been smart about looking at cheaper alternatives to getting the job done.” Cheapo computing rising, maybe Industry observers are giving emerging technologies mixed reviews. Stewart, for example, believes software as a service (SaaS) will grow during this recession. “It’s easier to lease instead of buying software licences, and amortize them over a longer period of time. Although it may actually cost more doing it that way long-term, companies may opt for less cash down when they’re living quarter to quarter.” St. Arnaud agrees SaaS will get a boost, but it will be limited. “It depends – if you have the service inside your company, you’ll have the costs of your existing infrastructure plus you’ll have to adopt the new SaaS model. The transitional costs will deter SaaS for the next year.” Ditto virtualization, which may appear to be a good way to make data centres more efficient as the price of gear plummets. “You still have to buy software and hire people to do it,” says St. Arnaud. “The safest, minimal-cost approach is to run IT areas exactly as they have in the past.” Cloud computing circumvents many of these in-house issues, but it’s gotten a black eye recently, says Casey. “There have been so many catastrophic failures at Google and Amazon this year. Things are failing in these consolidated IT environments, and people are more cautious now.” But Stewart counters that things routinely fail in in-house environments too. “It all depends on a company’s risk appetite. The challenge is not to find technology that will never fail. It’s a choice between something that breaks occasionally but is more or less free versus paying millions.” Telepresence technology has been touted as a way to cut travel costs for many years. “At TSI, we’ll be expanding our video conferencing and telecommuting offerings,” says Labelle. “This will allow us to put off some building expansions and floor space reconfigurations that would have been necessary to accommodate staffing changes.” But the jury is still out on telepresence uptake overall, as there are many cultural barriers, says Stewart. “We see no evidence that it’s reached an inflection point and will explode in popularity. It doesn’t mean it’s not there, we just haven’t seen any evidence. It may happen next quarter.” Doors opening for open source Casey believes open source uptake will be another bright spot in 2009. “During tough times, people will be more motivated to roll up their sleeves and go the DIY route. This won’t be for mission critical stuff, and it’s not for Fortune 500 companies, but SMBs may be more willing to take the risk.” St. Arnaud warns open source must be evaluated on its own merits. “DIY is a false economy. I don’t think we’ll see much increase in demand, as there are a lot of hidden costs. There are good open source projects and good reasons to go that direction. But it’s not because of the recession, it’s for other strategic reasons.” But there are varying degrees of maturity within the open source industry, says Jim Messer, CEO of Transverse, an open source company based in Austin, TX that recently released open source billing technology for carriers. He bristles at the suggestion of hidden costs. “Yes, DIY projects probably require hiring consultants, but our company is structured like Red Hat. We support the code in the future, and do charge implementation and service fees. Our costs are in fact less hidden, as we have to show carriers why we’re making changes to software and they’re not mandatory product upgrades, versus proprietary vendors, who just do it and there’s no way to validate the code.” Messer says companies are proactively contacting him to find out about their open source products, and in September Transverse acquired two new customers – Crossroads Wireless and Spectrum 5 – despite the bad financial climate. “We’re getting calls from small and large operators. Many IT departments are being mandated from above to evaluate other options before they spend on IT. And many companies already have back-office pockets of open source so we’re at a tipping point now that people have to justify their spend.” Green computing will return with a vengeance Although oil prices are dropping, energy efficiency is still a major cost-cutting concern, says Stewart. “Energy prices may go up or down in the short term, but the long-term trend is higher.” The electricity that powers corporations is in any case generated from coal and other sources, not oil, says St. Arnaud. “Electricity hasn’t dropped in price and will likely increase.” Green computing has been a discretionary spend in the past, but this will change, he warns. “In the U.S., Obama pledged to introduce a cap and trade system next year. This probably won’t happen in Canada right away, as Harper ran on a platform mocking green shifts in the last election. But if the US proceeds, there will be a lot of public pressure on Harper to do the same.” If this happens, he believes we’ll see a reprise of major Y2K-type investment that boosted the economy. “It will force companies to make investments in green IT, as they’ll have no choice – costs will be so dramatic that they’ll have to do it despite the financial crunch. Green IT will pull us out of the slump.” Companies should plan a green strategy in anticipation of the coming opportunities in this space, adds St. Arnaud. “Companies should prepare for this. It will be quiet until cap and trade is introduced, but if they’re well-positioned for it, they can quickly capitalize on that market. If staff are inactive and not doing much, companies should get them focusing on green.”

Staying alive: Surviving the economic meltdown

News | 11/21/2008 6:56 pm EST

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