Predictions for IT and the Global Economy
The global economic headwinds seen in 2014 will extend though 2015 – i.e., slow or no growth around the world with few exceptions. The U.S. will be the leader of the slow growing pack in the group with the potential of three to four percent growth but the Affordable Care Act (Obamacare), new EPA regulations in the name of climate change, and other onerous regulations could impair growth. This uncertainty will keep IT budgets constrained and complicate the IT executives' challenge to keep current in technology, meet new business demands, and develop the skills necessary to satisfy corporate requirements.
Third quarter U.S. GDP, just revised up to 3.9 percent, gives the impression that the U.S. economy is strong and has finally rebounded from the 2008 collapse but that is not necessarily true. Consumer spending is up and oil prices have plunged sharply but rate of productivity improvement is slipping, income is down, and the labor participation rate is quite poor. On top of this, the federal government just released more than 3,400 new regulations, including 189 rules that will cost more than $100 million each to implementation. After massaging all that, the Fed and many economists forecast next year's GDP to be about three percent – decent but not great – and that may be optimistic.
On the other hand, Europe remains weak and will barely be able to keep itself above water in 2015 – assuming Russia does not overstep its bounds (forcing actions by the West) and no major black swan events occur. The BRICS nations (Brazil, Russia, India, China, South Africa), whose growth had offset the weakness in the developed nations in previous years, are as a whole under performing. Growth in Brazil, India, and Russia has dropped significantly from the peak while China's are beginning to act like more normal numbers. Even Japan cannot seem to turn things around and spend its way into growth. This does not bode well for revenue growth, which, in turn, means tighter IT budgets. For small business this could mean struggles in some areas but opportunities in others if they can find their spaces.
IT Budgeting for 2015
Regulatory uncertainty and potential tax change impacts look to be causing companies to withhold some of their investment dollars. This leads me to believe that there will be pockets of growth but not all industries will share evenly in the expansion of revenues. For companies that earn a significant portion of revenues outside of the U.S. the probability of having a strong growth year becomes even less. For those firms where budgets will be cut, I do not see the IT budgets shrinking significantly.
On the financial front, banks are just beginning to loosen lending and interest rates are expected to remain low for the next few years. With the spigot opening up slightly and reasonable rates continuing, companies will invest more capital into new assets. However, with the rapid rate of technological change continuing, IT equipment should be leased, not purchased.
The Bellwethers Struggle
An examination of a number of IT bellwethers and their 2015 outlooks as an indicator of how the upcoming year will unfold does not prove promising. Some may say Cisco Systems Inc., EMC Corp., Hewlett-Packard Co. (HP), IBM Corp., Intel Corp., and Oracle Corp. are not indicative of the industry or of the economy in general. But the challenges they are facing are the same ones the private sector is experiencing overall and are therefore worth examining.
Cisco recently announced its first quarter 2015 results – one percent growth in revenues year-over-year. CEO John Chambers said the company's three-year transformation has paid off. The company went from selling boxes to delivering more innovative solutions at a faster pace. Revenues from emerging countries across the geographies declined by six percent, with China skidding 33 percent. The vendor now delivers a software defined network (SDN) solution and has become a major server player. The outlook for the rest of the year is good but moderate growth.
While EMC continues to enjoy decent growth (single digits for the legacy EMC products and double digit for VMware and Pivotal), it is being pounded for not having a long-term strategy and being pushed to split itself up. The traditional storage market is going though a cloud transformation and a flash revolution and EMC is working hard to keep up. But there is a concern is that growth could be better achieved though divestitures, as the sum of the parts would be worth more than the whole.
HP and IBM
HP and IBM have already concluded that divestitures are the best path to growth. HP is moving PCs and printers into HP Inc. and creating HP Enterprise out of the remaining components. IBM, on the other hand, sold off its System x server business and its microelectronics unit. The company aims to move upstream and become the dominant player in analytics, cloud, mobile, social, and security. HP revenues have stabilized and may start breaking out in 2015 but that remains to be seen. IBM revenues declined in the past dozen quarters and CEO Ginni Rometty has been challenged to turn the ship around since she took over command. The good news for IBM is that it is experiencing very strong double digit growth in the new areas it is pursuing.
Intel also has had its share of problems in getting all of its cylinders humming. It forecasts a good growth year for 2015, driven by an uptick in PC sales, but it missed out on the mobile market. It is now folding the mobile unit into the PC group. However, Intel is doing better than Oracle, which recently took the novel approach of dividing into three parts with a CEO overseeing each unit. One unit is the marketing, strategy and sales group under Mark Hurd; Safra Catz will oversee legal and manufacturing; and software and hardware engineering will become Larry Ellison's domain.
About the author
Mr. Braunstein serves as Chairman/CEO and Executive Director of Research at the Robert Frances Group (RFG). In addition to his corporate role, he helps his clients wrestle with a range of business, management, regulatory, and technology issues.
He has deep and broad experience in business strategy management, business process management, enterprise systems architecture, financing, mission-critical systems, project and portfolio management, procurement, risk management, sustainability, and vendor management. Cal also chaired a Business Operational Risk Council whose membership consisted of a number of top global financial institutions.