John Katsaros

Selling Our Way Out of this Recession

So what's the big picture? How, and when, does this recession end for technology infrastructure companies? Back in 2002 when we were asking this same question about that recession, our answer was relatively straightforward -- we pointed at the financial services sector as being the tipping point for tech companies to come out of the recession -- that's because financial services sector: 1) could gain a lot of competitive advantage from technology deployments, 2) was one of the largest spenders on Information Technology (as much as 10% of revenue in some years), 3) was quick to make changes in their budgets (some companies could change their budgeting in just 30 days) and 4) was relatively healthy. And in fact, that is pretty much what happened as financial companies not only led the way out of that recession by spending on new tech infrastructure, they also helped opened up important new value propositions -- compliance and service management -- which previously had been niche markets. Many infrastructure companies were able to build up the financial services market as the "anchor tenant" of their verticals. Our advice to our clients was "the subway token salesman" -- hire a salesperson in lower Manhattan and be ready when the financial services companies started spending again. So how does the recession end for infrastructure companies this time around? There are a lot of worrisome market sectors -- the financial services market is compressing (while generally negative, this may open up some opportunities for infrastructure spending in support of M&A activities). Automotive is in trouble. Manufacturing is flat on its back. Higher Education may have to cut back technology spending as they figure out how to straighten out their endowments. Retailers are worried about making it through the holidays. Wholesale distribution and transportation/package delivery are going sideways. So are Consumer Products companies. Media and Telecommunications companies are faced with difficult decisions. The travel and hospitality industries are under stress. On the positive side - Healthcare looks promising (during the presidential campaign Obama cited technology as an opportunity to significantly reduce healthcare spending) although spending may take time to ramp up. Life Sciences (pharmaceutical, biotech, medical devices) is relatively strong. Engineering and Construction might get a boost as part of the recovery package (although, once again, real spending on technology infrastructure might take time to come online). Aerospace is holding its own. Defense and Home Land Security possibly will help. The High Tech sector has a proclivity for infrastructure spending. That leaves markets like utilities which, while interesting, are relatively small contributors.

So what's the way out? Once again, a recession is something that infrastructure companies will have to sell their way out of. As odd as it may sound, the subway token salesperson for financial services markets is probably not such a bad idea, although this time around a broader strategy is needed. The financial services sector has to settle down pretty soon (if it doesn't then the recession won't end) and when it settles technology spending budgets will begin strengthening. And with more regulations on the way, compliance and service management will be an even bigger driver for changes to financial technology infrastructure. But with fewer financial services companies and a smaller workforce, this time a broader base of vertical sectors is needed. Clearly Healthcare and Life Sciences are markets worth investing in. The same goes for the Federal market. Our suggestions are to "go vertical" by marketing specifically to industry segments. - Reach deep into several verticals, find meaningful value propositions, develop vertical partnerships to establish high value use that will drive technology decision making. Next Issue: Part #2.

Anchor Tenant Health?

The financial services market has long been the base of the infrastructure business. With its technology spending (often as high as 9% of revenue range), its ability to fund new technology investments and the degree to which technology provided valuable competitive advantage, the financial services industry has often been the starting point for new infrastructure products from the very largest of technology companies to the earliest of startups. When we're being briefed on new products it's quite common to hear that the financial services companies are among the early beta companies. Some value propositions -- like compliance --depend heavily on financial services customers to justify the investment. So you have to wonder (and worry) about the impact the financial turmoil on Wall Street will have on infrastructure companies. It's a question that we often ask and so far only a few companies have admitted that they're seeing a slowdown in spending and/or delays in rollouts of new projects. But you have to wonder at what point does the financial services restructuring impact infrastructure companies many of whom have their largest vertical market at risk. Several years ago during the recession that occurred after the Internet bubble burst, it was the financial services companies that helped infrastructure companies get back on track when they started investing in new technologies. That probably won't be the case this time around. The "sixty-four dollar questions" are...What (and when) will change with financial services technology spending, which high-tech companies will be impacted and by how much?