Recent checks of our networks indicate that the belt-tightening at technology vendors has begun. As we communicated to clients in Q4, the headcount reductions being discussed among tech sector CFOs was in the 10-20% range. Marketing budgets appear to be under the greatest pressure, but even sales forces are being culled. Some of the cuts appear to be pre-emptive, while others strike us as indications that management teams are planning public announcements of 2009 cost containment measures during their Q4 earnings calls. We look forward to updating the MGI benchmarks of companies as they report their Q4 numbers.
Industry Analyst Firms - An Indication of Marketing Cutbacks
Most of the industry analyst firms like Gartner (NYSE:IT), Forrester (NASDAQ:FORR), and AMR Research (private) have already begun cutting staff, or have active plans to trim headcount. As their revenue mix has become more dependent upon vendors (and less user-oriented), Gartner, Forrester and AMR are all at risk due to a) vendors slashing their marketing spend, b) a significant decline in conference sponsorship and attendance, and c) the impending consolidation of tech vendors.
User (i.e., Fortune 500 and SMB companies) appetite for IT industry information from the likes of Gartner, et al is also diminished. As IT budgets dry up, there is less need for supporting documentation of new hardware and software purchases. As an example, the financial services sales team led Gartner's sales force production in 2007. Given the turmoil on Wall Street, it's hard to see this repeated in their current results. Further consolidation among the analyst firms is likely, although the much-discussed Forrester acquisition of AMR Research may fail to materialize due to falling revenues and an inability to bridge the gap on valuation. On the bright side, with highly predictable revenue streams, the analyst firms are able to easily adjust expenses to match expected revenue bookings.
Technology Giants Looking to Cut -- SaaS, Midsize Firms Slower to Act
Larger companies, such as Oracle (NYSE:ORCL) (MGI rating:2,023) are constantly managing their expenses, and we expect Oracle to continue managing headcount through its fiscal year (May 31). For its part, SAP (NYSE:SAP) cut 1,000 VP-level employees in North America in 2008, and has plenty of room for additional cuts.
Ironically, the vendors who could benefit from more disciplined cost controls are least likely to take action. For example the high majority of application software vendors do not have margins (35%++) anywhere close to Oracle's, and over 50 of the ASV's that MGI covers have MGI benchmark scores below 1,000 - an indicator of inefficient operations.
SaaS vendors will need to prove they can generate more revenue per dollar of sales and marketing expense, as their high sales and marketing budgets will be forced to shrink. SaaS vendors typically have less margin to cut in their R&D budgets, relative to their on-premise competition. We expect most of these companies to announce cuts in the 3-7% range, if at all. Investors and users concerned about their vendors' viability should be pushing for cuts in the 15%+ range.
Bottom line: News will begin to leak of technology vendors making headcount reductions. The industry publishing firms like Gartner, Forrester, et al are planning or actively executing employee layoffs. As earning season approaches, we expect more announcements of cost control efforts. Those midsize companies not making significant cuts will likely face further cost challenges (and earnings disappointments) later in the year.