Much of the work that goes on in the information technology (IT) industry is discretionary. System modifications, hardware upgrades, software updates, etc. — all of those projects that businesses undertake on a periodic basis tend to get put on hold if the company is concerned about economic uncertainty.
“When the economy slows down, whatever discretionary spending was planned usually gets chopped out of the budget first,” says James P. Sacher, CPA, a partner with Skoda Minotti. “Businesses will try to get by with the servers for one more year, even though their policy may be to replace them every three years. If a vendor comes out with a new version of the software and there is an upgrade cost, the company may say, ‘No, the one we have is working fine, so we’ll leave it in place and see what happens.’”
As a result, many IT firms have to adapt to survive.
Smart Business spoke with Sacher about how today’s challenges have affected the IT industry and what companies are doing to succeed.
How are IT companies adjusting to the new economic realities?
The cost structure of an IT firm is largely people-driven. As a result, when you can forecast downturns in the economy and company spending, you have to be very quick to adapt your staffing to what you see is going on in the industry around you.
Most IT firms are taking a good, hard look at their project backlog and seeing it shrink quite rapidly. You have to be reactive to that. The well-run IT firms are changing their staffing accordingly. Those that can be nimble and react quickly will be able to weather this storm a lot better than those who can’t reduce staff fast enough because they don’t see the downturn coming or because they have very large fixed costs they can’t work their way around.
Well-run IT firms keep their cost structures lean. They don’t have big offices or a lot of fixed infrastructure and overhead costs, so when things do turn down, they are still able to maintain certain levels of profitability and continue on until things turn around.
What can companies do to keep their cost structure lean?
You need a system in place to really track your backlog of work or, at least, the projected workload. You need to be able to stay on top of that and always be ahead of what’s happening in the market. Then, when things start to dry up and projects start to not recur, you are in a position to change staffing levels accordingly.
You need to have an infrastructure in place that is commensurate with the cyclical nature of the IT business. For instance, if you have very large office space for dedicated staff, if you cut your staff back you might be stuck with that lease for a long time when you don’t have a lot of bodies in the building.
So when thinking about your infrastructure, ask yourself how much space you really need. Is there a way to share space between staff or just not take as much? Can you have people working from home, because they are just as effective at home as they are in an office location?
It makes sense for IT firms to spend money on systems to get things organized so they can do more with fewer people. If you can automate your typical accounting system, you’re much better off than a firm that hasn’t automated and needs a lot of people to do billing, customer service tracking and scheduling.
What can other industries learn from the challenges of the IT industry?
First and foremost, they should have a strategic view of where their businesses are going. Because IT is so project-driven, you tend to look out three to six months to find out what kind of staffing you need, what kind of products will be out there and what is going to change in the market.
For instance, we know Microsoft products are going to change a lot over the next 12 months, so companies that are at the end of a product life cycle will probably switch over. We’re looking at changes happening in our market, and we’re already preparing how we’re going to sell those services and products to clients. We’re making those plans now because we see those changes coming.
Any business has to think hard when the economy changes about how it can change its service offerings to fit what the market needs. For example, more companies are selling managed services. An IT firm will take over and manage a client’s network on an outsource basis because it can do it less expensively than that company can by having its own IT staff.
Ask yourself, ‘Since they may not be buying what I was selling, what can I sell that they would buy?’ A client may not spend a lot of money on a significant network upgrade, but spending a fixed monthly cost on IT management might make a lot more sense because it would allow them to eliminate a fixed cost — a position. In a down economy, a business loves to understand what its cost structures will be like.
James P. Sacher, CPA, is a partner with Skoda Minotti. Reach him at (440) 449-6800 or email@example.com.