Ongoing Vulnerability

By John Parkinson  |  Posted 11-01-2001 Print Email

Ongoing or Increasing Vulnerability
Weak Economy, High Threat Level

U.S. efforts to quell the terrorist threat at home and abroad are unsuccessful, as terrorists remain elusive and the homeland security effort bogs down in bureaucratic infighting and confusion about what measures can be effective. Additional terrorist actions around the world maintain or increase business and individual concerns over safety.

Meanwhile, the economy continues to struggle, keeping corporations skittish on a variety of fronts. Interest rates remain low, but lending continues to contract. The US economy experiences a third consecutive quarter of negative to no growth and unemployment passes 8.5%. The rest of the developed world enters recession with two consecutive quarters of negative growth. Second and third world economies stagnate as US and European imports from the third world drop dramatically. Global trade decreases by 3% - 5%. Global GDP growth goes to zero.

Several countries default on their sovereign debt. IMF and World Bank efforts keep the global financial system intact, but the US is too weak economically to support major bailouts and severe local economic contractions occur in Eastern Europe, South America and South East Asia.

What are the main economic and social consequences?

Regional trade is preferred over global trade. US multinationals begin to pull out of the most troubled areas (Indonesia, SE Asia and some parts of Africa) and re-deploy to more attractive areas (Russia, Baltic States, Central Asia). Major capital investment projects are abandoned or delayed. Government spending (on defense, infrastructure and security) helps offset corporate investment declines, but at the cost of budget deficits that threaten to cause inflation sooner rather than later.

There is a marked shift from consumption to savings and investment, but via insurance and fixed income products or debt reduction. Retail investing in equities essentially vanishes. Few people travel, even on business. A sense of "local is best and safest" affects travel, leisure and retail behavior. Energy costs rise as OPEC cuts production. One major US airline goes out of business and the survivors continue to contract. Commercial banking, badly hurt by the national defaults in South America and South East Asia, retrenches and lending remains weak.

Costs for basics (food, fuel, transportation, housing, clothing) start to rise. Costs for everything else fall, but sales stay flat or decline. Steady declines in all major indices reinforce/drive the drop in confidence. Dow hits 6000. Nasdaq hits 1200.

What would be the resulting business behaviors?

Corporate investment by all but a few companies dries up as margins and business volume shrink. Although interest rates are low, borrowing is expensive as lenders demand significant risk premiums from all but a few companies. Business focus is on maximizing returns from available assets and on maintaining customer loyalty.

There are a few acquisitions by financially strong players and a few unsuccessful merger attempts amongst struggling businesses, but most distressed businesses enter Chapter 11 from which few emerge. Marginally capitalized or high-debt-burdened infrastructure businesses collapse. Private Capital funds begin to look for LBO and rollup opportunities.

Brand focus shifts to local markets and patriotic/austerity themes. There is a sharp drop off in luxury and near-luxury products and services, which are seen as unnecessary and self-indulgent. Stabilize and survive strategies replace growth. Zero visibility reports replace earnings forecasts.

Businesses begin to look at how to be self-sufficient as public infrastructure is seen as increasingly vulnerable to destruction or interruption.

What impacts will this have on the IT organization?

There is a major retrenchment in IT spending and a slowing down of software development efforts. Emphasis is placed on managing costs down as fast as possible. "Simplify and streamline" is the core strategy - made easier in many cases as large numbers of recently emerged technology vendors shrink or disappear altogether. EAI products and portals are especially hard hit.

Contractors and consultants are laid off first, them in house staff are cut, then contractors and consultants are back but at lower rates and in smaller numbers. "Show me the money" deals and aggressive risk sharing with vendors become the norm. Size matters (because depth of talent and bench strength are still important), but so does efficiency and flexibility.

One stop shopping (justified by the need for simplification) replaces best of breed strategies. Experimentation is severely curtailed. Outsource deals dry up except in a few specific industries where economics overcome risk.

What will be the smartest IT response?

Batten down the hatches. Simplify everything. Outsource selectively with strong business continuity guarantees. Focus on results-weighted risk and success sharing. Balance the costs of ownership and need for diversification in operational infrastructure. Find others to share infrastructure risks and pool critical resources. Make as many fixed costs as possible into variable costs. Pick the one stop shop of choice - probably determined as much by cost and ease of resource management as technical capability.


Click on a response above for further analysis of each scenario.



 

Submit a Comment

Loading Comments...