IT companies cannot pin their hopes on rapid revenue, or bottom-line growth in 2011, despite the fact that the worst of the global recession has passed.
Large projects in the sector will be few and far between, as both the public and private sector are keeping a watchful eye on costs and the need to add business value - and not every company will survive the continued belt-tightening.
Industry leaders are cautious about the economic outlook, pointing to several issues that place pressure on both top and bottom line growth. However, there are opportunities for companies with the courage to take on the challenge.
Yesterday, Merchantec released its CEO Confidence Index, which showed a mere 1.04-point improvement in the fourth quarter, as business bosses are “cautiously optimistic” of SA's prospects in 2011.
CEOs in the technology sector polled by Merchantec are feeling less confident now than they were a few quarters ago. The index shows confidence in the tech sector rose steadily for three quarters in a row, but then fell for the first time this year in the last three months.
Altech CEO Craig Venter explains the fall-off in outlook in the sector is because of the challenging operating environment, where “consumers and corporates alike have not materially changed their spending behaviour since the economic meltdown in 2009”.
Venter adds there is a view that economic recovery will be slower than originally expected, partially because of worrying signs in the economies of some of SA's key trading partners, most notably in Europe and the US.
Tough going
CA Southern Africa CTO Andrea Lodolo highlights the concern that Standard Bank's retrenchments could have a knock-on effect on the rest of the banking sector, and lead to slower tech spending at banks, which is an important sector for IT companies.
Lodolo adds there will be opportunities, but large projects will be few and far between - and not every IT company will survive to benefit from big deals. “I think that vendors will have to keep their belts tight for another year or so while the economy strengthens.”
Internet Solutions MD Derek Wilcocks says the economic outlook is “marginally” positive, although uncertain in some industries. Wilcocks adds growth over and above inflation will be far harder to achieve in the next few years than it was over the past decade.
Clients are not cost-cutting the way they were in early 2009 when the recession hit hard, but companies are still cautious about new investments, explains Wilcocks. “We expect the climate to remain one of cautious budget growth in line with the previous year's inflation adjusted budgets in 2011, with some upside in projects that demonstrably improve efficiencies,” says Wilcocks.
Wilcocks adds SA's stronger rand is a cause for concern, as is the trend towards globalisation, he says. In the telecoms sector, falling unit prices have put top-line growth under pressure.
However, these challenges are forcing companies to focus on costs, which is aiding bottom-line growth, explains Wilcocks. Private sector spending is focused on improving operational efficiencies and trimming costs, while public sector spending is also moving towards improving operational efficiencies, and there are fewer large projects on the table, he adds.
External threats
Gijima CTO Emson Moyo expects the economic climate to continue to remain challenging for at least the next nine months. Moyo explains competition in the sector is increasing, partially because of convergence, as telcos enter the IT space. However, there is also a threat from globalisation as more global players look to SA for growth.
“Cloud computing is changing the ICT services game,” says Moyo. He explains it is forcing ICT services providers to revise their service delivery model, and annual licence fees will be one of the first casualties to be hit by the move to cloud.
The good news is that private sector spend is picking up, although slowly. Public sector is more static and projects that have been out on tender are being delayed, or suspended, says Moyo.
“There are forces pulling in different directions, the stronger rand is good for importers, while it hurts our exporters especially the mining sector. Any weakening in commodity prices will be quickly felt and, therefore, we feel like we are walking a tightrope between recession and rebound,” says Moyo.
However, says Moyo, with the industry at a point of inflexion, “opportunity beckons for those companies that have the requisite courage and foresight”.
Green grass?
Dimension Data's CTO of Middle East and Africa, Mayan Mathen, adds that companies in crowded markets are shifting their focus to new areas and channels, which could bolster ICT companies.
Mathen says, as there is still cost pressure on companies in both the public and private sectors, ICT groups will have to innovate and focus on aligning business goals with IT solutions. “Service providers that are not trying to drive efficiency within their business will be under pressure to deliver to their clients and ultimately survive.”
Heinz Stephan, Comztek technology director, says the local economy will be impacted by external forces, but recent rate cuts will drive consumer spending next year, which will aid channel players. However, weighing on consumer spend will be the challenge that government has to grow the number of jobs, says Stephan.
Stephan explains profitability is more difficult to achieve in the current climate, but growth will be aided by the push towards cloud computing, which will open up new revenue streams.
Gartner research VP of global forecasting Richard Gordon says the uncertain economic outlook is going to continue to curtail business and consumer spending on IT, and in this environment, competition will be fierce and purchases will be highly price sensitive.
Opportunities to grow the top line will come from geographic diversification, such as targeting the higher growth emerging countries of Asia Pacific, Latin America, Middle East and Africa and Eastern Europe, says Gordon. In addition, the hype around cloud computing will reduce overall spending, he says.
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