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| e-Xpertise in Industry Issue 11 December 2001 |
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Feature Article Planning in the aftermath Even the oldest and most experienced IT sales and marketing hands, as they sit down to draft sales targets and marketing plans for calendar year 2002, will struggle to recall a planning season more mired in uncertainty.
Markets were hard to call even before the war on terrorism and the atrocities that led to it. Now the task looks impossible. But nobody serves the victims of September 11 and its aftermathby pleading that the task is too difficult. The rougher the water, the more necessary - and the more difficult - it becomes to set a course.
In stable times, with steady growth rates, a prophet is a fool with a ruler. This article offers ideas more suited to the needs of the times. It sets out tried and trusted steps for normal forecasting, and then examines the adjustments needed for current circumstances.
In one respect, this year is no different - all forecasts begin with last year’s figures. The difficulty is to know what growth figures to apply. Fortunately there are rules of thumb which link industry sector sales growth and investment, including investment in IT.
To make best use of these, acquire sources of economic and sector data. Note that typical projections include a main scenario, which is thought to be the most likely outcome, together with high and low growth scenarios. You should have contingency plans for the two subsidiary scenarios and a monitoring activity that triggers the contingency plan when it becomes clear that the main scenario is not going to happen.
The first rule of thumb, established in recent research by Computer Weekly and Kew Associates, is that growth in overall IT spending in a quarter generally equates to 3.7 times the growth in GDP in the previous quarter.
The second rule of thumb is that, when an IT application becomes mature, the growth in the application’s market in any industry sector is proportional to the growth in investment in fixed plant and machinery in that sector. Cambashi carried out research with Cambridge University some years ago and found similar results. The corollary is that IT investment is fighting all other kinds of investment for the same budget. If IT sales representatives can’t show that investment in their project gives a faster payback with less risk then the investment will go elsewhere.
So in mature markets – ERP (enterprise applications) or CAD/CAM (product lifecycle management) - sales growth depends on which industry sectors are being sold to and how much they will invest.
This means that, for an industrial sector, you can use the sector’s planned investment data to predict, from historical sales and sector data, what you may expect that sector to buy.
As a check, work out the sector’s overall growth in IT expenditure and, from it, your share of that IT expenditure. The two figures should be about the same.
Take into account where you are in the product cycle. Companies selling new products in rising markets can afford to be more optimistic than those with mature products - more on this below.
The steps suggested so far assume market continuity. Now let’s deal with the disconnects:
For the IT industry, as for everyone else, September 11 was first and foremost a ghastly, needless human tragedy. But from a purely business perspective, it was also the industry’s third serious discontinuity in as many years, following Y2K and the dot.com bubble. What happened must give pause to anyone considering investment. And it certainly increases the risk premium by which any potential return on investment is discounted.
But there are stars to steer by. The general effect has been to accelerate already-evident ‘continuous’ trends. So the information you use to build a forecast from the ‘continuous’ picture provides guidance even after a discontinuity.
Secondly, however seismic or unforeseen an event, the way humans - and markets - react to it can still be judged by past experience. When times are hard, and outcomes uncertain, the first thing managers always do is reduce fixed costs in order to increase flexibility. So they will favour any pay-as-you-go strategy, and the classic example is outsourcing. By this we do not simply mean outsourcing IT but also mean that more business processes will be outsourced or sub-contracted.
We expect IT vendors to be more affected by shifts in the way the IT budget is allocated than by an overall freeze on spending. In difficult times, companies will still invest in tools, techniques and systems that will help them meet their goals.
Cambashi believes that hardware revenues will fall because managers will be downsizing and holding off new spending. The three year replacement cycle will be extended to four years. Similarly, the market for software applications will be flat overall. Industry will think tactically rather than strategically. It will put big initiatives on hold and software prices will come under great pressure. Software application purchases will be driven by downsizing and rationalisation of legacy systems.
Conversely, Cambashi is confident, despite some contrary opinions, that there will be a lot more outsourcing, (Computer Weekly and Kew Associates predict a grim outlook for IT services next year. They say outsourcing will be affected more than other services, dropping from a current user-spend growth rate of 20.7 per cent to 2.4 per cent next year). The CSSA supports this view. However, we agree with Richard Holway that outsourcing is the place to be.
Cambashi also believes industry will spend money on training. Appropriate training classically raises productivity from the same resources by improving performance and, above all, making the workforce more flexible and more empowered. These features in turn improve profitability. So service revenues could actually grow, partly because of IT outsourcing and training, and partly because, the longer the interval between system replacements, the more maintenance spending rises.
Cambashi expects new applications which will do well are those which connect businesses together and create real value for a whole industry supply chain. There are a small number of “hot spots” that we think will still have fast growth rates, albeit from a low starting point:
1. Making shop floor production activities visible to management, suppliers and customers and vice versa; making adjacent steps visible to shop floor staff.
2. Co-design and management of product data over a geographically dispersed industry chain.
3. Companies’ in-house electronic procurement and payment systems.
4. Customer Relationship Management systems, where the customer interaction is automatically recorded such as call centres to despatch field service operatives.
5. Optimisation of the supply chain by exchanging more information more often to cope with rapid changes in demand with minimum inventory and few short deliveries.
Space does not permit justifying all these assertions. If you would like some notes on the justification for the second of these “hot spots”, or references for sources of econometric data, please contact Kathy.strachan@cambashi.com
Cambashi regards these hot spots as part of a theme where inter-enterprise computing will grow in importance. We’d be interested in receiving your comments on this, both privately and for publication - and good luck with the forecasting.
Also in this issue . . . .
Reverse
IT recruitment survival kit
Book Review
Cambashi’s
2002 seminar Cambashi researches best practice and assists IT suppliers in best practice implementation. For more information on Cambashi services please email info@cambashi.com e-Xpertise in Industry operates as an opt-in email. The opt-in policy means we never intentionally send any email to anyone who does not wish to receive it. To subscribe: send an email with the word "subscribe" in the subject line to : expertise@cambashi.com © Copyright 2001 Cambashi Ltd |
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