IT Workers and the Gathering Economic Storm

By Kurt Cagle
July 3, 2008

Among those in the IT industry, the years from 2001 to 2004 were known as the Tech Nuclear Winter, after the crash of the dot-com bubble caused the bankruptcy of thousands of small and mid-sized companies. It was a time when computer programmers who had been paper millionaires a few years before suddenly found themselves unemployed and seemingly unemployable, living in their family's spare bedroom or in some cases on the streets. Recruiting agencies disappeared in droves, and the ones who were left were down to skeleton staffs.

The irony in that period was that for many people outside of tech, the nuclear winter was little more than a mild cold spell. The day traders lost money, perhaps, though this may have been more due to incompetence or bad luck than real hardship. Housing markets hiccupped a little, but returned fairly quickly, and those chasing after easy money simply moved on to greener fields. Indeed, there was more than a little satisfaction that those spookily smart nerds had "gotten theirs" from the rest of the populace.

Half a decade later, the shoe would appear to be on the other foot. The housing industry has, to put it bluntly, collapsed - house prices are falling at a rate not seen in twenty five years, even the largest builders are going under, and as more and more people find themselves figuratively underwater with their mortgages, foreclosures are reaching all time high levels as people walk away from existing obligations, leaving behind suburban ghost towns that are increasingly being mined for their metals and fixtures.

The financial sector is similarly facing its own collapse as exotic securities formed by slicing and dicing risky mortgages are now being exposed for the toxic waste that they are, even though, on the books, these securities were priced as being premium quality and consequently foisted off on other investors.

Those investors included municipalities, venture capital funds that had chased after more lucrative rates after the dot-com, companies using the returns from these funds in order to expand their operations or buy back stock (or increasingly just to better managege day to day operating expenses). Worse, similar dark tricks have been taking place in the auto industry, commercial real-estate sector, student loans and most scarily, with credit cards that are now being used, disturbingly, to pay off mortgages that have become too onerous.

Add into this scenario the dramatic rise in prices globally in food and energy (for reasons that are in fact interrelated to what's happening in the previous sections), and what little satisfaction IT people have in seeing situations reversed should be tempered by a sobering awareness about how serious the economic problems facing everyone are ... and how they may especially hit hard in the IT sector.

IT employment in the last few years has been surprisingly resiliant in the face of such events as the Bear-Stearns collapse. This can be attributed to a trio of factors:

  • IT Shortage. The dot-com bust caused a lot of people who were in IT to seek other careers, ones that were typically more fulfilling and often paid better and more predictably, while it also made computer technologies less attractive to a generation of students. Ths upshot of this was a dearth of skilled technical workers.
  • Aging Infrastructure. Another legacy of the dot-com bust was that there was a significant infrastructure investment in the late 1990s that worked well for several years, but by 2007 was getting old in the tooth. This meant new systems were needed, which in turn meant more jobs.
  • Declining US Dollar. Outsourcing was attractive in the 1990s when the dollar was strong against most world currencies, but the dollar has lost roughly 35% of its value compared to most currencies in the world in the last decade, which translates into outsourcing costs jumping by 50%. This has made outsourcing considerably less of a deal, especially given the inherent costs associated with outsourcing.

Unfortunately, while none of these trends are going away, others may end up swamping them, at least in the short term. The Federal Reserve is in a very uncomfortable position - a deteriorating economic picture on the one hand means that they would prefer to loosen interest rates and provide more stimulus to the economy (although there are many who feel that there is definitely a law of diminishing returns acting on this) while at the same time the fairly rapid decline of the US dollar compared to other currencies is a big part of the rise in food and oil prices, and more is causing many countries to move away from the dollar as the world's "supercurrency", including a few that supply oil to the US.

This is also being exacerbated by the fairly torrid rate that the "emerging economies" are in fact growing, a rate that in turn is both contributing to the rise in oil prices and that is exporting additional inflation to countries such as the US - including inflation of electronic equipment that has been made now increasingly in the Pacific Rim countries.

Energy costs are also accelerating the dissolution of the corporation in a number of ways:

For instance, as the cost of commuting rises, employers are being forced either to raise wages to compensate or are embracing telecommuting (it's cheaper than paying to heat and power a building). The problem with such telecommuting is that, even with the advances in communication technology, it turns such workers from being an onsite, interacting workforce into being a distributed one with considerably fewer scruples about filling up their spare time with projects for others.

On the flipside, the moment that a person leaves the building, his or her "presence" within an organization also diminishes - which in turn translates into slower career progression, greater likelihood of being "downsized" and often less real authority. It also effectively transfers the responsibilities of maintaining a workspace, computer system, and the like from the company to the employee, which serves as yet another "tax" on people who are beginning to struggle with daily expenses as it stands.

Higher energy costs also raise the cost of airline flights and (perversely) hotels, making enterprise-level sales more costly, making conferences more expensive to attend (and hold), making recruiting and regrouping more problematic. If your company ships a physical product, the cost of distribution goes up, which either has to be eaten by the company or comes out of reduced sales, especially as purchases of everything from laptops to iPhones drops because everyone else is facing the same costs. If your company sells a virtual product, the incentive for people to pirate that product goes up dramatically as the economy fades, and a services based economy only holds value until someone else can reproduce the service at a lower cost.

The continuing collapse in finance is also impacting the "other" fuel for both startups and large corporations - financing. Venture capitalists are investors, they want return for their investments, and if external factors diminish the overall return from such investments, they will be less inclined to provide funding.

Banks, meanwhile, are now in a position where they are having to recapitalize - in effect pulling in non-performing loans in order to increase their primary capitalization, and in reducing the loans that they are making only to those that are seen as having little to no rish. This is especially devastating for startups that require ongoing capital infusions before they'll realize a profit.

On the other hand, the deteriorating economy is also making it harder for large companies to execute mergers and acquisitions even when those are already on the books, as many companies tend to make such acquisitions with borrowed money. The M&A rate has dropped dramatically in the last year, sometimes with disastrous consequences for both acquiring and acquired companies.

What makes this process even more dangerous for the typical IT worker is that this is all going on against a backdrop of a technological shift from stand-alone applications to provided online services, which provide similar capabilities at a fraction of the cost. Those people that are working in the services sector are thus engaged in a battle to the death for becoming the relevant player in comparatively low-profit niches.

So if you are a developer, project manager, designer or in a similar profession, what do you do? Many of the strategies that worked in the "nuclear winter" still hold true today -

  • Network. Networking opens up opportunities. Keep your networks fresh, keep your name in other people's linked networks, blog frequently and intelligently.
  • Be unconventional and flexible. Not all work is 9-to-5 in a cubicle. Software is, after decades of becoming commoditized, now becoming increasingly custom at the local level. While having one job all year may be less stress inducing, 8-10 jobs that fill the same space over that year will still pay the bills.
  • Join professional organizations - and reduce your health insurance liabilities. Health care costs are rising as dramatically as everything else, and many companies are reducing employees benefits, raising premiums, or in some cases going without altogether. This is playing with fire. Many professional organizations offer basic health care packages that while fairly minimal, nonetheless are less likely to be cut in the face of rising costs. Such organizations also offer networking opportunities.
  • Keep your skills fresh. There will be fewer opportunities for IT people in the next couple of years, but the underlying technical worker shortages will still there. This means that between working gigs you should keep your skills fresh by working on open source projects or community service pieces; additionally, because a lot of organizations are likely going to be moving towards open source solutions due to cost as budgets are slashed, people able to customize those solutions will still be in demand.
  • Reduce Debt Exposure. In good times, financial institutions will fall over themselves offering you opportunities to go into debt; in bad times, they'll be the ones funding the collections agencies to get their money back. Reduce your debt exposure now while the markets are still somewhat liquid, as there is nothing so psychologically sapping as having a collections person call you in the middle of a meeting with a client.
  • Invest in Equipment for the Long Haul. On the other hand, don't stint on computers and other tools. There's some anecdotal evidence to suggest that you won't see the price deflation in computers that arose in the last recession because most of these now have components coming from China and the Pacific Rim countries, which are effectively now exporting their own (fairly horrifically high) inflation back as consumer goods. Thus, investing in a solid computer system now while you have the funds is probably a good idea.
  • Simplify. Current trends point to energy prices increasing anywhere from 20-30% before retreating back to existing levels, then taking off again over the course of the next 2-3 years, with food, goods and services all following suit. Take advantage of web communications technology when you can, reduce your travel when possible, start biking or taking mass transit where available.

A final note - changes in communication technology often have a profound effect upon the long term social infrastructure. Combine this effect with a world in which competitive pressures for resources (coupled with a potential drop in those resources - aka Peak Oil) and what you get is a phase shift - a radical change in the way that we interact as a society. The financial crises, sporadically occuring explosions along the network, are as much driven by technology that has moved beyond the ability of society to govern that technology as by any egregious economic policy (though those didn't help) and as with so much that has changed with the rise of personal networked computing, the resulting world is almost impossible to discern for sure.

In essence, the global economy is now reshaping itself in response to these pressures, and like all such transitions is causing earthquakes all up and down the many existing faults within the previous system. Overall, IT workers are in general perhaps better prepared for the upheavals in that emerging world than most - a world where knowledge, flexibility, indepence of action and thought, and an ability to network will prove to be the most desirable characteristics, but that nimbleness comes at the cost of not tying yourself down to the older society's expectations. Even if the economy does manage to avoid the worst of the doldrums, these are traits to encourage in the days ahead.

Kurt Cagle is the managing editor of xml.com, and is an online editor for O'Reilly News.


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