72% of IT departments are static, 80% of budgets will stay the same in 2013 and CEO decision making is almost evenly split between initiatives that make money, and initiatives that save money. Kathryn Cave, Editor at IDG Connect discusses whether this current stagnation reflects a ‘skinflint’ approach to business.
At 3am on 10th July 1973 a 16 year old American boy living alone in Rome was kidnapped from Piazza Farnese. He was blindfolded, imprisoned in a mountain hideout and a ransom note for $17 million dollars was sent to his mother along with a note which began, “Dear Mummy - since Monday I have fallen into the hands of kidnappers. Don’t let me be killed.”
His grandfather was Jean Paul Getty, founder of the Getty Oil company and officially the richest living American, according to Fortune magazine. Yet Getty point blank refused to pay, stating, “one penny now [and], I’ll have 14 kidnapped grandchildren.” Three months later, the captors chopped Getty junior’s ear off and sent it to a local newspaper. Images of this hit the press, but with no cash forthcoming, the bandits were forced to reduce their demands by $14 million.
Incredibly Jean Paul Getty still would not cough up the full amount. Instead he agreed to pay $2.2 million, the maximum that his accountants said would be tax-deductible and loan the boy’s father (his son) the rest, at a rate of 4% interest. Three years later Jean Paul Getty died - he was worth more than $2billion. This is probably the most extreme example of ‘skinflint’ cash hoarding, but could reflect global economics at present.
Today, despite massive problems resulting from reduced spending, many companies are hoarding cash. As of the end of March, the Federal Reserve calculated that non-financial corporations had an estimated $1.74 trillion in liquid assets on their balance sheets. This is $12.6 billion more than at the end of last year, and up more than a billion fold on a decade ago. US Consultants Treasury Strategies believe 77% of liquidity across Europe and UK is in overnight cash.
This trend is spreading across the globe. HSBC sees the once unassailable Indian economy as a “gasping elephant”. In the Q1 2012 it grew at just 5.2%, one of its worst performances since the crisis of 2008. As one Forbes journalist explained “It has taken a cue from US peers and is saving breath, as in money. Indian companies, like US companies, are hoarders. Cash hoarding has hit India now, too.”
This is already is causing fierce political debate in the US in run-up to the elections. The estimated $2,000 billion spare cash not being invested back into the economy is having a knock-on effect on employment and the implications for the tech industry seem especially severe. Ordinarily any spare money is put back into areas such as technology and M&A. Now this is simply not happening, a fact which seemed especially apparent over three consecutive days this July. On the 17th Intel announced that revenue for this quarter would fall below Wall Street forecasts. On the 18th IBM reported an increase in quarterly earnings, but 3% drop in revenue; whilst on the 19th Microsoft revealed its first quarterly loss in 26 years.
But what does all this mean for IT companies on the operation level? Recent research we conducted to senior IT and business decision makers across Europe appeared to show departments in a position of stasis. When we asked 752 senior professionals across the Nordics, Germany, France and Italy what the priorities of their CEOs were, 37% said IT initiatives that make money; 34% IT initiatives that save money; 29% gave equal weight to each. I wasn’t quite sure what to make of this. On the one hand you could argue that the fact that the slightly higher percentage seek to make rather than save money suggests some attempt at positive growth; on the other you could deduce that the virtually even split suggests some recessionary stagnation? The latter theory appears to be backed up by the 72% who said their IT department was not expanding, and 80% who said their budget would stay the same as 2013 (3% said it would go down and 17% said it would be up).
Jared Bernstein, a former economic adviser to President Barack Obama confirmed that many companies "[have] been making money, and they haven't been spending it,” a fact, which is bound to trickle down throughout the organization. The majority of economists appear to believe this is the result of a “lethargic economy” with little room for profit. However, the other option is plain fear. Verticals where there is space for profit – like technology – take a bit of a gamble. Things can move very rapidly - in either direction. This can be seen in the biggest, most prestigious companies. On 6th July for example Samsung (a company founded in 1938) announced a 79% jump in operating profits (driven by the popularity of Galaxy); whilst three days later, on 9th July, AMD (a company running for 43 years) was set for an 11% drop from the previous quarter.
What is your experience of IT on the ground? Is a ‘skinflint’ approach to business about to hit everyone too hard?
Phil Muncaster reports on China and beyond
Jon Collins’ in-depth look at tech and society
Kathryn Cave looks at the big trends in tech