ANALYSIS: What to do in a decreasing IT market

Tuesday, July 21, 2009

Although Chile has traditionally been considered one of the most mature Latin American markets in terms of adoption of information technologies, the truth is that the global economic crisis has impacted its market as much as any other.

According to IDC statistics, in 2008 Chile's IT market moved US$2.74bn, with the hardware segment representing the largest slice of the pie at US$1.75bn, followed by IT services at US$736mn and software with US$252mn.

Initial forecasts for 2009 put expected growth at 7%, but new estimates established by Chile's IT industry association Acti are closer to 4%.

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Early this month, the annual ENTI study, developed by local university Universidad Católica, confirmed the trend towards reduced ICT investments in the country, showing that on average, corporations' annual IT budgets were down to 1.88% of revenues in 2009, compared to 2.28% in 2008 and 2.32% in 2007.

Considering this scenario, IT vendors need to strengthen their sales processes, with a greater emphasis on showing the benefits of investing in IT as a way to reduce costs and improve productivity, and should focus on those areas that continue showing growth despite the crisis.


In addition to the reduction in the percentage of budgets going to IT solutions this year, the ENTI study found that overall, there has been a redistribution of IT budget components, with more financial resources going to services this year.

In 2008, hardware accounted for 19.9% of the average IT budget, while this year the percentage is pegged at 18.3%. And software has fallen to 25.9%, from 26.5% in 2008.

On the other hand, services are expected to account for 31.4% of the budget this year, up from 29.9% last year.

According to Pablo Rebolledo, IBM (NYSE: IBM) Chile global technology services manager, during this time of economic uncertainty, there are more and more companies outsourcing areas that are not part of their core business.

"In uncertain periods, there are clients that want to focus on selling more or adding more value over their existing customer base, so they tend to outsource the non-core services, which allows them to work in a technologically flexible environment that can rapidly answer to market needs," Rebolledo told BNamericas.


Furthermore, companies have canceled an average of 4.91 projects per company this year, which represents 25.5% of total planned IT investments, according to ENTI.

For those companies that are canceling projects, the general manager at Chilean IT holding Coasin, Raúl Ciudad, has some advice: "Even though it might seem like a reasonable measure, the truth is that now is when you need to use technology to increase productivity and reduce costs. An increase in productivity can only be achieved with technology."

However, Lionel Graff, general manager at the Chilean unit of German software developer SAP (NYSE: SAP), believes companies in Chile have learned from previous crises and already know that reducing their IT investments can be a dangerous move, especially in projects that are directly related to their business processes.

SAP itself has had more difficulty closing contracts, a problem that started in the last quarter of 2008, as companies are being more cautious about their investments and are more sensitive to cash flow issues.

"But projects that are considered strategic continue, and most organizations are doing their utmost to maintain their infrastructure and replace tools that are technologically obsolete," Graff told BNamericas.

According to Rebolledo, the IBM executive, the company has not seen a large impact, and is indeed benefiting from companies' increased need to reduce costs, increase productivity and outsource non-core processes.

"Our strategy has allowed us to provide continuity to several long-term projects. We haven't seen an impact, and we believe that is because of the way IBM sees IT, not in terms of the acquisition of hardware or software, but as a means that represents a plus in times of uncertainty," he added.


As the ENTI study shows and industry players confirm, there is a realignment of the way companies are investing in technologies, whether it is by concentrating more on projects that will have a profound impact on their business, or by selecting service contracts instead of dealing directly with the technical obsolescence of previously acquired hardware and software.

This new investment method is particularly relevant for SMEs, which can find a specialized provider in their niche segment and engage in specific projects that, with technology, will solve a particular business situation.

Graff believes it is the SME segment that has been analyzing investments with the greatest care, and that is why SAP is working closely with its partner network in order to provide them solutions according to their needs.

And as vendors and their partners adjust their methods in this and other segments under the new global economic scenario, they have an opportunity to change their market ranking and emerge as stronger companies, with more satisfied customers and better expertise, once the recovery process starts.