How to survive a recession in the IT industry

The downturn in the U.S. economy may not have affected your business yet, but prudent service providers will heed this advice to protect themselves.

By Yuval Shavit, Features Writer

It's nearly impossible to open a newspaper or watch the news these days without hearing concerns about the economy and debates over whether the United States is heading into a recession -- or is already in one. With all this talk of an impending economic downturn, you may be wondering what you can do to survive a recession in the IT industry.

The good news is that value-added resellers (VARs) and managed service providers (MSPs) seem to be in a relatively good position. Several VARs and MSPs said that while they are keeping a watchful eye on the horizon, business is still running as usual so far. A study by

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Cambridge, Mass.-based Forrester Research predicts that IT spending will grow by almost the same amount in 2008 as it did in 2007: 5.2%, compared to 5.7%. Outsourcing will grow at 6% -- the same as 2007 -- while spending on consulting and integration services for new projects will grow at only 3%, down from 5%, the report predicted.

Even so, several VARs said they're watching out in case the effects of an economic slowdown trickle down to IT in three to six months. Here are some tips to help you survive a recession in the IT industry if it occurs.

Monitor your income

Even if business is going well right now, you should keep a close eye on your income so that you won't be caught off guard if clients start cutting back. But don't just look at whether clients are still signing deals; you should also make sure they're paying you on time, said MJ Shoer, president of Jenaly Technology Group Inc., an MSP in Portsmouth, N.H.

The last time the economy slowed down, late payment was the first major indicator, Shoer said. Instead of clients paying within 30 to 60 days, they were paying after about 90 days, he said. That hasn't happened yet, but Shoer said he's paying close attention so that he'll know the moment his revenue flow slows down.

Although leads for new outsourcing projects may be harder to find in a recession, companies will be quicker to push through projects already under evaluation, said Andrew Bartels, a vice president and principal analyst at Forrester, who authored the firm's predictions for 2008. Starting a new outsourcing proposal takes six to 12 months of researching vendors and calculating costs, so companies may not want to consider outsourcing as a short-term fix, he said. But if a client is already contemplating using your services, the incentive to save money by outsourcing will cause them to approve the project quicker, he said.

Edge toward recurring revenue

If part of your business already relies on managed services or another form of recurring revenue, you may want to move a bit more in that direction, Bartels said. But he emphasized that channel companies should be looking to adjust their focus rather than shift their businesses altogether.

You may want to follow up on old leads, too, Bartels said. Companies that previously turned down outsourcing certain operations, like help desks, may want to take a second look as a way of stabilizing their spending and avoiding infrastructure investments, he said.

Offer leasing or other payment options

For your clients, the way to survive a recession in the IT industry may be to put off spending until later, Bartels said. A pricing scheme that costs the same or even slightly more in the long term could be attractive if it reduces costs in the short term, when budgets are tight.

Leasing from vendors is a popular way to do this, and Shoer said he has seen more clients considering hardware leasing recently. But he added that leasing is an increasing trend in IT that started even before people began worrying about the economy, and that many companies that consider leases don't end up going for them.

Another possibility is to adjust pricing schemes for projects that pay on a per-user basis, Bartels said. Historically, resellers have charged based on average usage over a long period of time, he said. If you shorten the time span that you average over, the project will cost less for the client at first, when there are fewer users, but more as the user base grows. Over time, that could average out or even net resellers and vendors more money. The trick, again, is timing, Bartels said; a client may be willing to sacrifice a bit in the long term to be able to pay for something now.

How much are you at risk?

Depending on your services or the companies you target, it may be harder or easier to survive a recession in the IT industry. Potential clients will still need to invest in projects if they address an urgent problem, like security, disaster recovery or regulation compliance, Bartels said. And although many long-term projects will be shelved, companies that are investing in service-oriented architecture (SOA) will continue to do so, he said. Because SOA represents a dramatic change in infrastructure, companies will want to invest in it so that they come out of the recession already running on the latest generation of IT infrastructure, he said.

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