In our last post, we reported on a comment made at the OpSource SaaS Summit in San Francisco in early March. The comment was “70% of SaaS companies will not exist in twelve months’ time”.
We pointed out in that post that while we fervently believe a revolutionary technological step-change is inevitable, the worsening condition of the larger economic environment would drag out the process beyond the capacity of many SaaS companies to balance their burn rate with revenues and profits.
The latest crop of economic statistics have caused us to increase our estimate of the number of SaaS companies that go out of business as a direct result of the recession. This time we are not going to limit the forecast period to twelve months, since nobody appears to believe that economic recovery will happen that fast.
Here’s our revised take then: 90% of SaaS companies will not exist in their present form by the end of the recession – and that change will extend to the majority of major players in the I.T. sector.
Consolidation by way of mergers and acquisitions will accelerate as the major players scramble to maintain market share and revenue in a shrinking and probably deflationary market. The first round (and in some cases, the second round) of redundancies and cost-cutting has already taken place in the majors, but sales of new business have continued to shrink in lock-step with the deteriorating economy.
Forrester Research has cut its projections for 2009 following bleak fourth and first quarters (see full report). According to Forrester, companies large and small have been shut out of credit markets, and even those that still have access to bank loans, markets for commercial paper, or corporate bonds often have had to pay much higher interest rates. Businesses have responded by going into a cash-hoarding mode, with big and dramatic cutbacks in all forms of capital investment. Since many IT goods are in the capital budget, IT markets have taken a disproportionate share of the capital investment collapse.
How long is the recession going to last? One year, three years, seven years, or ten years? The estimate depends on which economist you read. Very few of them think that recovery will occur in one to two years. Three to seven years seem to be the majority view (it took seven years to recover from the 1981-82 recession). A few pundits take the view that, short of a war (they mean in addition to the two we already have), it could take as long as ten years before U.S. production returns to 2007 levels.
Sixteen months into this recession, the economy is operating at 7 percent below its potential capacity, the Congressional Budget Office reported last month. If that were to continue, today’s $14 trillion economy would be a $13 trillion economy by this time next year.
Labor is contributing hugely to the shortfall. More than 24 million men and women, or 15.6 percent of the labor force, are either hunting for work or working fewer hours than they would like to work, or are too discouraged to seek work, although they would take jobs if offered them, the Bureau of Labor Statistics reports.
The ranks of this “underutilized” group — the bureau’s label — are up by 10 million since early last year. Generating work for so many people would take several years, even if the nation’s employers stopped shedding more than 600,000 jobs a month, as they have done since December, and began hiring robustly.
“We have rarely been in this deep a hole,” said Nigel Gault, chief domestic economist for IHS Global Insight.
His concern is that nearly every nation — not just the United States — is suffering from idle capacity as the recession that started in America grips Europe and Asia. Struggling for sales in a marketplace swamped with goods and services, companies are cutting prices and shutting down operations, trying to keep supply in line with dwindling demand.
One thing that they all agree upon is that when recovery starts, it will be sluggish. It takes time to bring idled capacity – workers, factories, retail outlets, transportation capacity, bank lending, and not least of all, damaged confidence, back on-stream enough to allow the economy to operate at full throttle.
“Excess capacity, once entrenched, perpetuates itself, and that is what is happening now,” said James Crotty, an economist at the University of Massachusetts, Amherst. “Companies cannot hire workers to make more goods and provide more services until their sales go up. But people can’t buy goods and services until they are hired — so the excess capacity just sits there.”
Signs of a protracted recession are everywhere. Professional service providers are booking fewer hours. Retail space goes begging. Tourism is down. So is cellphone use, airline bookings, freight traffic and household borrowing, which is less than half what it was on the eve of the recession, the Federal Reserve reports.
With orders dwindling, U.S. manufacturers are using less than 68 percent of the nation’s factory capacity, the lowest level since records were first kept in 1948.
Recovery from the current recession could be very sluggish. New occupants have to be found for empty stores. Factory owners who are hesitant to ramp up production will wait until they are sure of demand. Hiring the right people for an operation will take time. And imports, entering the country in ever greater quantities, will slow any expansion by siphoning sales from domestic producers.
On the subject of U.S. imports, China’s 2009 exports may shrink by as much as 10 per cent, a researcher said.
Exports fell for a fifth month in March, adding urgency to government efforts to stimulate domestic demand to revive growth in the world’s third-biggest economy. Overseas sales declined 17.1 per cent to $90.29 billion from a year earlier, the customs bureau said yesterday.
“We should be thankful if only 2009 exports can show zero growth, or maintain at the same rate as 2008,” said China’s central policy deputy research director Zheng Xinli, at a financial forum in Beijing.
“My concern, and my own forecast, is that exports may decline by 5 per cent or up to 10 per cent this year.”
Collapsing world trade and China’s slowest economic expansion in seven years have cost the jobs of millions of factory workers and prompted Premier Wen Jiabao to roll out a 4 trillion yuan stimulus package. To spur consumption, China is subsidising rural purchases of televisions and refrigerators and plans a 29 per cent increase in welfare spending this year.
The Chinese government needs to keep the economy expanding at least 8 per cent every year to generate enough jobs to feed the estimated 20 million people who enter the labour force annually.
“China’s main economic goal this year should be to ensure growth and create jobs,” said Jiang Zhenghua, a former deputy head of the Chinese legislature, at the same forum.
Returning to the global and U.S. scenes, if there is an upside for the recession, it is the absence of inflationary pressure. With so much excess capacity rattling around, shortages do not develop that would push up prices. Indeed, interest rates are kept low to encourage more borrowing and spending. Neither is happening. Instead, demand continues to shrink and idle capacity to build up.
The countries and companies and that will emerge from the recession ready and willing to maximize their share of the recovering global pie are those that recognize NOW that the recession will be long and arduous. They also understand that technological innovation (such as Cloud Computing, SaaS, PaaS and virtualization) is both the key to survival during the recession AND the turbocharger for a drag-racing recovery start. Finally, they understand that technological innovation inevitably means major changes to, or even discarding, traditional models.
The countries and companies that DON’T get that are going to be left behind in a cloud of other people’s dust when the recovery finally fires up.
Tags: China, cloud computing, cost cutting, emerging markets, Forrester Research, global economic recession, job losses, PaaS, SaaS, software-as-a-service
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