IT Industry - Is There A Future?
don't agree that the glory days of the IT Industry are over. The days of having it all your own way are certainly over, however, for those who think outside the "box" there are still good opportunities to make a lot of money.
This article is the first in a series of identifying how the IT Industry can lift its game, in terms of not only improving profitability, but also strengthening cash flow, thus setting a platform for future growth in a global market.
If we study Graph 1 (supplied by Forrester of the USA,) it is quite clear that the indices are very strong, with the exception of the Supply index.
Although these indices are for the USA, we can be certain that the Australian indices will show a similar trend.
Graph 1
Methodology for the US Tech Sector Index
The Forrester/ITAA US Tech Sector Index is the markets most comprehensive view of overall IT industry economic condition. The Index is based on 11 measures of the health of the tech economy, organized under three major headings - Demand indices, Supply indices, and Firm Strength indices. All 11 are evenly weighted in the overall index score.
Demand Indices
These indices are designed to measure overall demand for IT hardware, software and services in the US.
Supply Indices
These indices are designed to measure the overall health of IT service and product supply in the US. >
Firm Strength Indices
These indices are designed to measure the overall strength of US IT solution providers and examine the interplay between supply and demand.
Let us now look at an excerpt from the Australian Bureau of Statistics on Income, Wages and Operating Profit for the ICT Industry. (Only the specific segments of the IT industry are displayed in Graph 2 and Table 1)
Graph 2
Table 1
If we look at the wages as a percentage of sales and consider that total wages and salaries should be around 22.5% of sales or less (depending on the nature of the core business,) there are only four sectors achieving anywhere near this mark.
If we now look at the profit before tax, the situation is dismal, when you consider that an acceptable profit before tax of 15% or better is mandatory. There are only two sectors achieving this, one other is close.
One interesting anomaly is that of the data processing sector. They have a reasonable profit but a shocking wages and salaries as a percentage of sales figure. This would be mainly because their primaryresource is labour and very little, if any material product. In this case, we would expect labour as a percentage of sales to be closer to 27.5% of sales or less.
As an example, let us assume that the Data Processing Sector had achieved salaries and wages of 27.5% of sales. The profit then would have increased 34.4million to a total of 63.6million, or it would have more than doubled.
Another interesting anomaly on the other side of the spectrum is of Computers in the wholesale trade. Here the salaries percentage is good, but the profit is hardly worth it, given the stress and risks involved. In this case, the material costs would be the dominant cost. The mark-up, however, would be very low. I do know that companies like Apple only allow a Gross Profit of around 7%. How then, would anyone make any money by selling Apple computers alone? The short answer is that they can't!
What does all this mean? The short answer is that too few businesses in the IT industry really know their true costs and do not have an effective analysis tool to diagnose their businesses.
In the future articles we will investigate systematically the tools you can use to improve your profit and your business model.
Michael Burdette is the Author of 'Contemplate Your Business Novel' a brilliant book on analysing your business. It is simple to read, very hands on and is template driven NOT formula driven. An interactive CD is also available. Books may be purchased through Dymocks bookstores of from Abbey's Bookstore in Sydney. The book is proudly distributed in Australia by Dennis Jones and Associates.
Further information may be found on www.bookbiz.com.au
