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| The shape of things to come |
January 26, 2009 |
The most difficult and worrisome year the tech industry has had to face since 2002 has just ended. What can we expect as we stumble, blinking and bewildered, into 2009?
By Danny Bradbury
2008 was a turbulent year. Two important elections, roller coaster oil and energy prices, and the biggest financial crisis of the past century have left the IT markets (like many others) bewildered and nervous. This year more than ever, IT professionals will be eager to know what the pundits think is likely to happen over the next 12 months. Backbone questioned a variety of analysts and industry figures to get their perspective on the coming year.
1. IT spending:
expect a buyer’s market in 2009
 2009 will be a year of pronounced winners and losers, said Andy Woyzbun, lead analyst at London, Ont.-based Info-Tech Research. Those organizations that have left themselves vulnerable will be weakened by the financial constraints in the market. Others that are more able to absorb lower pricing requirements and a reduction in credit will be in a position to take customers away from the weaker firms.
“What is interesting from the winners’ perspective is that they’re going to be in a much better position to negotiate better deals with the vendors,” Woyzbun said. “Even without any further innovation and reduction in basic cost, those companies that will be in a position to buy technology will encounter more of a buyer’s market than they will have seen in recent memory.”
 The winners in the economy will be more likely to invest in technology because they’ll find themselves in merger and acquisition situations where they need to rationalize and integrate their systems.
“There is going to be a significant absorption of companies that don’t have solid capitalization,” Woyzbun said. “The pre-IPO companies will be absolutely perfect victims of those companies that have cash in their pockets. They will sell at a discount.”
2. Mobile data:
the introduction of a new carrier will drive favourable strategic data pricing plans for consumers, accelerating the use of data by Canadian wireless users
 For years, Canadians have complained about excessive data rates (culminating in the infamous www.ruinediphone.com anti-Rogers campaign announced last summer). In 2009, carriers will be forced to be more competitive, said Samir Sakpal, industry manager and senior analyst for North America at Frost & Sullivan. Globalive Communications is gearing up for a launch later in the year,  following its successful $442 million bid for a portion of the wireless spectrum auctioned by the federal government this year.
“More Canadians are accessing data on their cellphones and that will be a growing trend in 2009,” Sakpal said. “You will see competitive pricing strategies in place once the new carrier comes in, and this is just being further fueled by the influx of devices that are coming onto the Canadian wireless horizon.”
3. Unified communications:
converged systems are going mainstream
 Financial crisis notwithstanding, companies are set to recognize the value of unified communications this year, according to Jon Arnold, principal of analyst firm J Arnold & Associates.
Companies may baulk at purchasing the expensive single-vendor solutions that typify unified communications solutions today, but other opportunities are emerging, Arnold said. “There are many other flavours of unified communications coming to market now that are Web-based and certainly software-based. They are much easier to deploy and accessible to a broader audience,” he said. Examples include software-only solutions from firms like Canada’s Objectworld.
Open source is likely to become strategically important for many companies looking at unified communications, he said. This will be a challenge for larger vendors who continue to try and own the market in unified communications by offering an integrated stack of their own products, rather than promoting interoperability as a means of making purchases simpler and cheaper.
4. Telepresence:
adoption will lag industry expectations
 You’ve heard for years about telepresence. We’ve even written about it. Deloitte Canada, which employs Duncan Stewart as director of research, even bought such a system. But he doesn’t think the rest of us will be using it for awhile.
“As much sense as it makes, people just don’t do it.” Stewart said that it’s the technological equivalent of flossing. It’s good for corporate health and for the environment, but people don’t invest the time, effort or money in it.
Telepresence and videoconferencing seemed like a no-brainer with oil at US$145 a barrel. At the time of writing, it’s down to US$60, and even though these practices could still save firms thousands of dollars a year, many of them will find transportation costs now less pressing.
Where video communication does happen in Canada it’s unlikely to be in the high-end holodeck-style telepresence systems being used by some larger firms. It’ll centre more on basic desktop and rudimentary room-based videoconferencing systems.
“The flipside of that is that 10 years from now, all of a sudden this will explode. My kids love webcams, and they’re happy with the low frame rate and resolution,” he said. Perhaps when Backbone writes its predictions for 2019, then the story will be different.
5. Outsourcing:
organizations will demand a lot more from vendors and business partners in managing third-party outsourcing relationships, and will continue to adopt a very formal and risk-based approach
 Outsourcing may have been gaining credibility in the past few years as a way to reduce cost and drive efficiency into an organization, but according to Kent Kaulfield, Ernst & Young’s national technology risk services leader in Canada, companies are likely to take a more judicious approach to what they outsource in 2009.
This selective approach to outsourcing will be driven by a healthy attitude toward security, he said. “Organizations become aware that any security [breach] can  destroy the brand that they spent years building up. They will move to understand their key assets using well-integrated enterprise risk management systems, and they will keep those things tightly controlled.”
Consequently, outsourcing critical assets and data to third-party companies will decrease, whereas outsourcing lower-risk common processes such as application management will increase as companies continue to chase cost reductions in a financially constrained market.
6. Cloud computing:
2009 will see an acceleration of the adoption rate of cloud computing in the traditional IT business model
 Cloud-based services—the idea of running your applications and storing your data online—is gaining traction in the industry. Amazon continues to garner success with its cloud-based storage and processing offerings, and Microsoft just launched Azure, its own cloud-based infrastructure.
Expect to see IT spending on cloud-based services gather more momentum in 2009, said Vito Mabrucco, managing director of IDC Canada. This spending will represent investment both in cloud computing contracts with third-party providers, and also “enterprise cloud” systems, where IT departments attempt to build the same highly scalable location-agnostic resources in-house.
“This idea of computing as a service to business will get more interest because it’s more effective and more  scalable thanks to the introduction of new technologies. It lets you move your work to anywhere in the world,” Mabrucco said. “It’s also a new way of looking at how traditional IT departments deliver services to their internal stakeholders.”
IDC sees the cloud services market growing at 27 per cent per year. Globally, it represented a US$16-billion market this year, but will achieve US$42 billion in value by 2012. Right now, the Canadian portion of the cloud computing market is worth around US$650 million.
7. Security:
the majority of companies are going to move away from a compliance-centric to a risk-centric view of their security program
 The past few years have proved to be a compliance nightmare for companies. More stringent controls in corporate governance have led companies to go through significant compliance processes.
However, the box-ticking exercises necessary to satisfy the regulators do not necessarily guarantee proper security, said Khalid Kark, a principal analyst at Forrester Research. “Traditionally, we tried to ensure that we were meeting the bare minimum standards,” he said. Given that many regulatory frameworks are intentionally vague when it comes to mandated security measures, the extent that you have to prove your security as an organization is something of a moveable feast.
In 2009, Kark believes that companies worried by a series of high-profile security breaches in the past year will take a more serious view of security to avoid the same fate. “A lot of organizations are realizing that it isn’t just about fulfilling regulatory compliance. It’s also about not being at the front of the newspaper for a security breach, and not losing valuable intellectual property.”
8. IT skills:
the economic crisis will take some of the pressure off finding IT skills, but we still have a big problem
 The IT skills market in Canada has been constrained for some time. Bernard Courtois, president and CEO of the Information Technology Association of Canada (ITAC), points to research conducted by the Information and Communications Technology Council (ICTC).
“Its most recent study showed that we will be short 89,000 people over the next five years, and that the combination of immigration, graduates and retraining or redirecting people from other disciplines will fall short by 50 per cent.”
With the financial crisis set to have a moderate impact on the Canadian market, companies might hope that technically adept employees will be easier to come by. Employers may be able to look forward to a little less pressure, but not much. “We must understand that Canada is being hit much less than other countries by the financial crisis,” Courtois said. “The banking industry has been ranked most solid in the world, and ICT has been hit less than other industries.” Consequently, demand for scarce IT staff is likely to continue to grow, even if not by quite the same amount.
9. Green IT:
we’re seeing small improvements in energy efficiency, but won’t yet see the real benefits in extended lifetime of assets
 For a couple of years now, vendors have emphasized the green characteristics of their technology products, but these have centred largely around power consumption and physical footprint. What about the tendency toward built-in obsolescence? We are unlikely to see that disappear anytime soon, said Jonathan Hirst, director of IT advisory services at PricewaterhouseCoopers in Canada.
“Built in obsolescence works in the vendors’ favour. We have some shared expectations between buyers  and vendors around technology life cycles and they’re not good from a sustainability standpoint,” he said. “We are not yet seeing this level of extended view of IT assets which lets people exploit and upgrade over a period of years.”
Other analysts have advanced the need for a green PC that could be modular and easily upgraded to last 10 years or more. Right now, the only easy way to upgrade many important PC components at the chipset level is to rip and replace the motherboard, and with equipment value depreciating so quickly, most companies simply buy another machine.
“People will try to eke out the lifetime of their equipment, but it’s a cost driver and not a sustainability one,” Hirst said. In 2009, then, expect lots of discussion around power consumption, but not much around longevity.
SIDEBAR
Financial fallout
The financial meltdown has thrown everything into turmoil and all industry predictions this year have to be made with an eye on the markets. Things are looking bad, but perhaps not as bad as you’d think.
Everything was looking relatively upbeat until around September, said IDC’s managing director Vito Mabrucco. “In the last two months we saw a dramatic impact for the economic environment, and we have been tracking that with regard to buyers of IT. That literally fell off the map,” he said. Market indicators used in IDC’s Futurescan service dropped from a peak of 1060 in January to around 930 in October (1000 means zero growth, so Futurescan was predicting shrinkage).
However, the most optimistic view from IDC sees IT spending growth dropping from five per cent to around three per cent next year. The most pessimistic view allows for a one per cent decline in sales, Mabrucco said.
“We see the biggest impact out of the gate on the hardware market and anything with capital intensity,” he said.
Info-Tech’s Andy Woyzbun said that the downstream effects of the financial crisis on IT are difficult to predict, because many companies will respond to the crisis with kneejerk reactions that may not be well thought out. Consequently, IT departments should be thinking about how they will react to budget cuts at three pain levels: less than a five per cent drop, a five to 10 per cent cut and a reduction of more than that.
A drop of up to five per cent could mean as little as deferring capital investments and buying lower-spec equipment. At the mid-level you might have to think about turning down certain maintenance agreements, and being careful about the use of outside contractors.
“If it’s more than 10 per cent you’re in big trouble,” he said. “Unless an organization has a great degree of labour flexibility because it’s outsourced, it will have to start chopping internal labour. That becomes painful, not only in terms of deciding what you’ll cut, but also because the management of the people who are left becomes very difficult thanks to low morale.”
Duncan Stewart, director of research at Deloitte Canada, has a more pessimistic view. “Some companies are seeing a shrinkage of 25 per cent in the fourth quarter,” he said, worrying that such losses will take the tech industry into shrinkage. “If we get a turnaround in the back half of 2009 we’ll be positive. But otherwise, we’ll have a down year.”
Companies in technology sectors with longer-term contracts, such as outsourcing, will suffer less, he said. With contracts often stretching over five years, they’ll be able to regulate their income a little more. And software vendors are in a more solid position. “Historically, software tends to fare better than hardware because of the lower sticker price. And software as a service (SaaS) represents another way of [acquiring] software, on a lease versus buy basis.”
Stewart also said the Canadian tech industry is small enough that we should worry about a loss of critical mass in the event of a contraction. “It’s a time when we need to ensure that we support this industry, so that there’s still an industry left when we emerge from this.” With a tax “chasm” in Canada that rewards very small and very large companies for R&D, the mid-level firms that are chasing project funding are the most likely to be acquired, which could rip the guts out of the technology sector here.
Definitions
Telepresence: a teleconferencing system that uses technology (displays, sound, etc.) to virtually bring together physically separate attendees.
Unified communications: a system that unifies telephony, instant messaging, presence and Web conferencing.
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