In the previous post, we took a look at market factors that suggest the technology sector could be on a multi-year bull run, in a bubble, or possibly both. In this post, we'll look at what that means for leaders of captive IT departments and tech firms.
If tech is in a bull market or bubble, it means inflation and volatility for a lot of tech businesses and captive IT shops.
Lets look at inflation first. Excess liquidity fueling a lot of tech companies will create a lot of tech jobs. So will tech investments made by traditionally non-tech firms (e.g., automakers and appliance makers are all in the software business now). Despite all the progress in global sourcing, labor and jobs aren't universally mobile. This means that demand (jobs) may outstrip supply (candidates) in specific markets. When that happens, prices (wages) tend to rise. It's reasonable to expect that salaries and tech are going to inflate.
But inflation takes many forms. In this case, a bull market for labor will inflate career paths. When there are more jobs than people, hiring standards tend to decline. Availability becomes a skill for candidates. This leads to people being over-promoted to fill vacancies, which creates misplaced expectation of competency. It is just as bad for the hiring firm as it is damaging for the person hired. The more a business hires, the poorer it will perform, the more vulnerable it becomes. Employees will find themselves in roles or on career paths for which they have few qualifications.
Inflation begets volatility. When there's both wage and title inflation afoot, firms are likely to see higher staff turnover. While a little staff change isn't inherently a bad thing, no firm wants to be desperately trying to fill positions in a job market where job seekers have the upper hand. Staff volatility will obviously impair operations as situational knowledge erodes along with it.
Bull markets and bubbles create volatility of commercial technology. New technologies such as tablets or rapid replacement markets such as smartphones are contests for market share of new units sold. A large installed base of legacy customers isn't as valuable as costs of change are relatively low.
Bubbles, though, tend to amplify the effect of volatility with a sharp correction. Tech marketplace battles can go on for a long, long time, especially when it's a market share game with high customer turnover. Don't under-estimate the power of the sell side to buy customers, particularly if the sell side has deep pockets laden with investor capital. Don't underestimate the stars buyers get in their eyes with the idea that they'll be able to get some slick tech capability unique to their business. And don't underestimate the value-added resellers, custom appdev shops and other middle-men who will willfully exchange the hard money earned by being little dogs in the mainstream for the easy money that comes with being big dogs on the fringe. The 1980s and 90s saw a lot of fringe technologies carry on for far longer than was economically justified. Investor cash - sometimes it's just excess liquidity, other times it's just dumb money - fuels the party. The longer this cycle perpetuates, the bigger the bubble inflates, the more severe the correction when the money runs out.
Bull or bubble, this will place a lot of demands on tech execs. What can you do?
Create resiliency in your staff. Get in front of tech inflation by setting expectations with the CFO and head of HR. Reduce the risk of exit of key people and create broader bases of knowledge (less specialization, more generalization). Recognize that it's one thing to fend off competition with other firms for staff you have, it's entirely another to have your staff poached by headhunters or former employees. Be hypersensitive to staff targeting and have a plan at the ready (agreed already with the CFO, HR and key partners) should you need to aggressively retain.
Be creative in evolving relationships customers and suppliers. Inflation and volatility will strain relationships between sell side and buy side, particularly between captive IT and tech services. A lot of relationships became genuine partnerships in 2008 as firms found creative ways to sustain contracts and projects in what were difficult times for everybody. But as the economics change in favor of the sell-side, the relationship dynamics will change, too. Sell-side firms will pass salary increases to customers. Loss of key people in delivery or relationship roles will reduce customer confidence. Benevolence and capitulation are rarely rewarded, but creativity is.
Hedge your technology exposure. Take nothing for granted (remember that CP/M was going to be the dominant OS for microcomputers, until it wasn't), and pursue opportunities on alternative platforms to hedge your portfolio of business partners and revenue. A little exposure to what looks like a short-play platform may provide outsized benefits if the supplier succeeds or if it brings you some long-term customer relationships.
Finally, whether you're a sell-side exec or a CIO, sweat over the durability of your revenue and funding. Look for risk in your book of business. A customer or business sponsor prepared to invest in something today may suddenly have that funding cut by mid-year. For example, a tech services firm doing business with a bank that holds a lot of assets that suddenly turn sour (contracting liquidity and threatening solvency in the process) may find allegedly strategic projects suddenly cancelled. We still face these risks: recall that Irish banks passed the European stress tests in the summer of 2010, only to require recapitalization before the year was out.
When tech is on the rise, it makes everybody in the sector a little more optimistic about the future: new technologies, new career challenges, and a bit more money in the bank. But a rise in tech could put the squeeze on the businesses we run. We would do well to temper our optimism with the pragmatism that there's no such thing as a free lunch.