360°IT Blog

In the aftermath of last week’s final Budget before the election, the equity market looked calm – almost indifferent. Wednesday and Thursday were both pretty flat days. The important change, however, was not in the price of equities but in the cost of borrowing. Although the Government’s debt forecast is slightly better than its own earlier figure of £178 billion, the gilt market wasn’t impressed. The rate at which UK plc borrows money went up to more than 4%.
 
What has this got to do with IT? Actually quite a lot. In the world of IT outsourcing, the availability of capital has been a significant factor. Outsourcing suppliers have very often had to make capital investments to provide their services. It’s also not unusual for customers to capitalise their transition costs and spread the load.

But with banks, governments and economic blocs like the Eurozone burdened with debt, investment capital will be harder to obtain and risk assessment will be tougher. Getting investment capital for IT projects won’t be easy any time soon. IBM’s response to this challenge has been to own its own bank — effectively saying to customers: ‘Don’t worry about the state of the market. We’ll lend you the money.’ Is this clever – or cheating? Maybe both. (If IBM was in a Harry Potter book, it would be a shapeshifter like Tonks.)

Meanwhile, you can almost hear Google and Microsoft rubbing their hands. Providers of software as a service believe their revenue-based, pay-as-you-go business models will be better suited to an era where capital budgets are under strain. And you can expect the traditional big hitters of the outsourcing market to respond, for example by building their own ‘app stores’.
 
Here’s where the picture gets interesting, and more than a little murky. A friend of mine runs an IT shop that has a sizeable outsourcing contract. His supplier manages a team of 200 staff for him. He recently asked the supplier’s CTO whether this team had the skills to match those of the ‘app traders’. The answer was, of course, yes. But do the math. Work out the volume and margin on a team of 200 professional staff. Then work out how many apps you’d need to sell to match that. No big-hitting company is keen to cannibalise its own business.

Of course, the traditional leading players in the global outsourcing market will tell you the cloud only helps with peripheral applications like email and conferencing. The central core of your IT – the heavy lifting that drives your business – isn’t touched by the cloud. But how long will that be true? We don’t yet know for sure, but it’s possible we’re on the cusp of a fundamental shift in the market.

David Butler is one of the UK’s most respected IT strategists and CEO of TripleIC.

Tags:

SaaS, cloud computing, IT outsourcing, the economy, Budget 2010, capital availability, cost of borrowing, IT investment
 

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