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The largest U.S. financial debacle since the weeks and months following the Sept. 11, 2001, terrorist attacks on New York and Washington has left no U.S. business unaffected. The IT industry, meaning all sectors of the software, hardware and associated services businesses, is certainly not immune to what is transpiring.
Indeed, all financial institutions, by their nature, are important consumers of IT. Not only do they do virtually all their business on the Web and on IT systems, but the effects of the current crisis on Wall Street are all being recorded and analyzed using IT tools and services.
All the Wall Street analyses, the uncertainty about what the federal government is going to do to stem the losses and protect taxpayers and businesses, and the money lost by investors point to one overriding factor: The financial sector’s risk-management mechanisms have failed.
“This financial mess is one colossal example of poor risk management,” Art Coviello, president of EMC’s RSA Security division, one of the largest and most respected data security companies in the world, told me.
EMC, which lost about 10 percent of its $23.5 billion market capitalization on Sept. 29, is a conglomerate that includes the world’s largest external data storage company plus other assets that include virtualization kingpin VMware and content-management provider Documentum.
“We [at RSA] certainly play a role in mitigating this sort of thing, but there’s business risk, and it’s as if the regulatory authorities and businesses themselves have not recognized the speed at which business is done today,” Coviello said. “The ability to do these complex financial instruments requires literally a Ph.D. in applied mathematics to understand some of these things that are being treated by 25- and 35-year-olds without the profile of risk behind it.
“So you’ve got speed conspiring with complexity to create more risk, and there’s nobody evaluating the risk!”
There’s nothing wrong with the breakneck speed at which business operates, because it does lead to greater productivity, Coviello said.
“But people need to understand that the risk is higher, and you need to start with business risk. Quickly that will devolve to IT risk, because so much of business today is run on your IT environment,” he said. “If ever there was a time when the kind of work that we’re doing [was important], to raise the profile of risk mitigation and risk-rewarding equation, it’s absolutely right now.”
Crisis Affects IT Companies in Individual Ways
Brian Babineau, a storage analyst with Enterprise Strategy Group, told me that the crisis is affecting the IT industry overall but manifesting differently for each enterprise.
“The first thing to keep in mind is that there is a large portion of IT purchasing that is financed with capital or operating leases or other mechanisms,” Babineau said.
“And obviously, getting access to that capital for companies that want to make purchases is going to be significantly harder than it ever was. We’ve actually seen this happen in the past two weeks, where well-respected end users have not been able to get financed to make IT capital purchases.”
When it comes down to nondiscretionary spending, storage purchases usually flow to the top, because “we are always creating new data and need someplace to keep it and protect it,” Babineau said.
“I think what we may see are some tertiary things happening in the storage industry, like things that can be deferred-potentially backup software, because you may be able to stretch licenses, or set up site licenses in a different way,” he said. “You can be more creative in that sense. But as far as the hardware industry as a whole, you can certainly see companies try to get the most out of their current investments in the short term.”
Was This a Financial Heart Attack?
Wall Street’s meltdown may only be the beginning of a much longer-term problem for the IT industry-and everybody else.
“We have seen the symptoms of a financial heart attack, but it’s only been a warning sign,” David Hill, an IT analyst with Mesabi Group, told me. “We haven’t had the full effect yet. When and if it does happen, there could be irreversible damage, even though something gets done [in Washington] to try and alleviate things.”
Capital in the bank, certainly, is the name of the game right now, Hill said. “If you’re a larger company, with more cash reserves, you can make payroll and not have to rely on credit or sales cash flow to stay above water. But if you’re a smaller company, with less reserves, it may affect you a lot more directly at this time.”
A key fact affecting the IT industry is that financial companies always invest heavily in IT products and services-and in high-tech companies themselves, Hill said.
“This [crisis] poses a very difficult problem for them [if they want] to spend more money. Even those IT companies with good credit are going to have a hard time borrowing money on a short-term basis,” Hill said.
Consumer-Oriented IT companies May Be Hit Hardest
Some IT companies may have seen this coming.
“As this train wreck has been rolling along, we saw some early impacts in companies that had pretty heavy exposure in the financial services and banking industries,” Charles King, principal analyst with Pund-IT, told me.
“Sun [Microsystems] got slammed, not only for the last quarter, but included some cautionary language about the financial sector [in its quarterly report] earlier this year. That’s a company that has a lot of traditional customers in the banking sector,” King said.
The worry that most IT companies have, as credit continues to contract, is that the effects are going to ripple out into other industries because they have customers everywhere, King said.
“As the lack of credit impacts the IT business in general, there’s a general belief that it’s going to sock companies that are heavily invested in the consumer market,” King said. “Apple probably stands as the poster child [of consumer IT success]. People are going to say, ‘Boy, it’d be great to get that new 16GB iPod, but my 4-gig works pretty darn well.'”
Venture-Backed Companies May Be OK?ö?ç?Âfor Now
Joe Davis, president and CEO of Coremetrics, a venture-backed, 300-employee company that provides hosted marketing optimization software to large enterprises, isn’t seeing a direct impact from the Wall Street crisis in his domain. Yet.
“Frankly, the biggest concern I see right now is a personal concern about my own portfolio,” Davis said. “We just closed a $60 million round of financing, we just looked at the markets, and didn’t see an IPO happening for at least a year or more. To fund-raise at that size is almost like a private IPO. We made sure that we had enough money in the bank to make sure we didn’t have to worry about cash for awhile.”
Davis said with a laugh, “It seemed smart at the time, it seems incredibly brilliant now. Especially when I look at how difficult it’s going to be in the short term for people to raise money from a debt or equity position.”
Even with that bankroll, however, Davis said he’s thinking differently about how the company spends its money now than he did a month ago.
“We’re going to see some distasteful times for a little while,” Davis said. “We will continue to be prudent in how we operate our business, no question about that.”
About 50 percent of Coremetrics’ business is online retail, Davis said. “We have most of the big online retailers as customers, and while some of them are flat in in-store sales, their online sales are growing really rapidly,” he said.
One of his biggest customers, Davis said, has seen its in-store sales drop 10 to 15 percent in the last year, while its online sales have improved by 35 percent.
“Our [sales] growth is tied to page views and online sales, so our income is doing okay. Tomorrow [Sept. 30] is the last day of the quarter, and we’re on track to book our biggest bookings quarter ever. At this point in time, we feel good-I’d love to say great-but I’m a fairly cautious person,” Davis said.