Goldman Sachs Predicts Downturn in U.S. IT Spending

 
 
By Renee Boucher Ferguson  |  Posted 2008-02-26 Email Print this article Print
 
 
 
 
 
 
 

While Goldman Sachs presents a gloomy outlook, IT vendors say a business downturn in the United States won't necessarily impact their businesses.

LAS VEGAS - Goldman Sachs is putting a decidedly bleak spin on its U.S. IT spending outlook for the remainder of 2008.

At the company's Technology Investment Symposium here in Las Vegas, analysts said tech spending in the U.S. market will likely decrease by two percentage points, from 7 percent in 2007 to 5 percent this year.

Software company executives who presented at the meeting, on the other hand, said the downtrodden U.S. economy won't harm their business.

Executives from as far afield as Microsoft and HP to Tata and Accenture-as well as smaller companies-said that while they've seen some small impacts from the U.S. economy with respect to IT spending, there is little to fear in the bigger picture.

"The positive side of the recession is it kind of shakes out the weaker companies. It's all good for the company if you have a good balance sheet," said Global Payments Chairman and CEO Paul Garcia. "There's nothing better for good companies than a good downturn."

Goldman Sachs analysts said the reason a deceleration in IT spending seems inevitable boils down to a number of factors: slower gross domestic product growth; constrained end-market spending; and cautious CIO sentiments.

"We're definitely a little gloomy on IT spending," said Sarah Friar, deputy business unit leader of the Technology Research Group at Goldman Sachs and the lead analyst for the software sector.

"Really a lot of that is due to a drop in GDP that is so closely associated with IT. On the flip side, what makes us not completely throw ourselves out the window in IT is two things: global spending and on top of that, we're also seeing quite strong mergers and acquisitions tailwinds ..., which you can't ignore in software."

GDP is generally defined as the total market value of all final goods and services produced within a country in a given period of time-usually a calendar year.

In its Technology State of the Union report released at the Tech Symposium, Goldman said that while a decline in tech spending looks inevitable, it's unlikely to swing to the negative. The report said that of the two downturns that provide a recent historical perspective for forecasting current impacts-the dot-com meltdown in 2000-2001 and the recession in 1990-1991-only the latter example can potentially serve as a proxy for what 2008 might hold.

"Because IT spending has been outpacing GDP only very modestly over the past few years, and we have experienced minimal overbuilding in that same time period-indeed, post-bubble IT spenders have been generally quite cost-conscious-it would be surprising for spending to swing to growth significantly lower than that of GDP, which our economists forecast will grow nominally at about 3.5 percent for 2008," reads the Goldman report. "Goldman Sachs Research expects real GDP to shrink from 2.2 percent in 2007 to 0.9 in 2008.

HP CEO Mark Hurd gave a nod to Goldman's gloomy forecast but said the impacts of downward spending in the U.S. economy will not be felt too hard at HP. Mainly, according to Hurd, that's because HP is already on its own cost-cutting path-and it's a global company.

"We will cut every penny of not valuable costs regardless of the macro environment," said Hurd in his keynote address Feb. 26. "I don't care about the macro environment as it relates to getting our company as efficient as it can be. It's not the way we think. We're going after everything [to cut costs] regardless.

Hurd said he has seen some reticence among U.S. consumers in its most recent fiscal quarter, but not enough to impact the company's global business. "It wasn't like we saw a huge change," said Hurd. "It was enough, though, that we noticed it."

Sander Van't Noordende, senior executive at Accenture, likewise said his company is prospering in a down economy. Van't Noordende's segment focuses on clients in the energy, gas, utilities, chemicals, natural resources and paper and pulp industries. He said a number of factors are driving IT spending in those industries-the No. 1 driver being globalization. "Companies like Shell and BP, they're organizing by vertical," he said. "They're implementing an operating model that is the same wherever they are operating."

Secondly, according to Van't Noordende, globalization is not just occurring in U.S. and European companies, it's happening in Latin America, Australia, Russia and the Middle East as well. At the same time, Accenture's clients are undergoing changes based on their vertical industry.  "Our clients either produce energy or are large consumers in energy," he said. "That's the bigger scheme of things in resources these days."

Van't Noordende said that many of his clients are looking for ways to optimize the billions of dollars they are spending on new investments, including (but in no way limited to) building out their SAP investments. "They're looking for help managing those investments," he said.

"We program manage and provide IT infrastructure to manage those projects. It's not like building out a new plant; it's almost like building a new organization. If you have a joint business with an oil company in Uzbekistan, it's a new organization. Then once the place is there you want to optimize. They're looking for help there."

Tata Consulting Services is also profiting in a down economy-and perhaps because of it, according to S. Sambamurthy, client partner in Banking Financial Services at Tata. One of the key drivers for business for Tata is a consolidation wave in the financial services industry where Tata's clients want to reduce the number of vendors in their IT environment.

For example there were some large financial institution customers last year whose IT spending decreased, but their business with Tata increased. "They had fragmented suppliers and were looking to consolidate [spending]," said Sambamurthy. "Second, their option was previously offshore. With that customer we expanded their development footprint in South America significantly. When you're certifying new locations ... it's a much longer cycle."

 
 
 
 
 
 
 
 
 
 
 

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