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The Inside Line: Predictions for 2006
It’s going to be an excellent year!
I’m often asked my thoughts on the local economy, and for good reason. Taos works with a virtual “who’s who” of Silicon Valley companies, and we engage closely with executives at the highest levels of IT at many of these companies. Taos has worked with more than 75% of the public companies in the current “Mercury News 150” and more than 800 companies overall. We truly have our finger on the pulse of what’s happening locally.
This past November, as we entered our 17th year of service, Taos hosted its annual Fall IT Directions conference in San Jose. It was a remarkable gathering, with IT executives of nearly 50 companies sharing their views.
This month instead of our usual newsletter I thought I’d share my own predictions for 2006, accompanied by the thoughts from several other local IT leaders from IT Directions.
My Predictions for 2006
1. Overall Job Growth in the Bay Area
There will be significant overall improvement in the local job market with an increase of more than 100,000 jobs in the Bay Area Counties.
2. IT Jobs in the Bay
There will be strong demand for IT Jobs especially for “Tier 3 and Tier 4” technical and techno-functional roles, and at the project management, business analyst and management/leadership levels.
Moreover, executive management will increasingly award leadership roles to those IT professionals with business-oriented backgrounds. The IT professional with strong technical skills, but a lack of business savvy, will find it increasingly difficult to succeed in leadership.
On the flip side there will be a continuing trend towards outsourcing and offshoring jobs associated with routine tasks or roles which have become a commodity, and projects with well defined requirements.
IT leaders will continue to advance plans to operate IT globally, not only to take advantage of cheap labor and follow-the-sun structures, but also to support increasingly global business models trying to maximize opportunity in this world economy.
Even with offshoring and outsourcing, however, there will be an overall growth in the number of IT jobs in 2006. Additionally, the jobs will be in excess of the supply of talent to perform them and strict requirements for individuals to have all required skills and years of experience with those skills will loosen as companies accept that some skills will need to once again be grown on the job.
3. IPO Activity
2006 will be the “year of the IPO comeback” and we will see a very large increase in both the number and the total dollar value of local deals that get done.
4. M&A Activity
M&A activity will stay red-hot and swamp the prior global record of 3.3 trillion set in 2000. Large private equity companies will participate and we will see a number of public companies and spin-offs of major public companies privatize.
The Bay Area will benefit significantly from this.
5. NASDAQ
I like to track the NASDAQ because a significant percentage of our clients list their stock on it and I believe that it will be a banner year for high tech and the NASDAQ will outstrip the other major indices and grow a minimum of 20%.
Overly optimistic and pie in the sky you say? Let me give you some facts to back up my thoughts.
1. Job Growth in the Bay Area
For the 2nd straight year, job creation in the Bay Area went in a positive and upward direction. 70,000 jobs were added in the twelve months ended in October of 2005. 25,000 jobs were added in the twelve months prior to that. In all, 95,000 jobs have been added in the past 24 months. This is in sharp contrast to what we saw in the prior 3 years (October 2000 to October 2003) where several hundred thousand jobs were shed.
My data comes from published EDD labor market information and I took into consideration Santa Clara, San Mateo, San Francisco, Santa Cruz, Alameda, Marin, and Contra Costa counties. I’ve graphed it here for you as well to make it more straightforward:
2. IT Jobs in the Bay Area
On the individual contributor front, the jobs that are growing in availability are those that have a real key value to the operation. As I mentioned before these are the core jobs with roles such as architects, technical specialists, business analysts, applications experts, project managers, and IT leaders. One reason the availability of IT jobs in the Bay Area is increasing and will increase is because there is a shortage of the talent to fill these roles. Some of our clients have even described the struggle to find talent as more difficult than it was in 2000.
The shortage is in part because fewer individuals have been pursuing IT related careers in the past 5 years; you’ll notice that the average age of the IT worker is increasing. This is something CIO.com references in their recent article Blue Skies Ahead for IT Jobs.
At the same time there was an exodus of talent from the Bay Area between 2001 and 2004 as people became less confident in their ability to obtain jobs here. This is illustrated by the graph below built from the data of the same EDD report I mentioned above.
Another contributing factor is the low number of H-1b visa’s available to bring in people who trained in IT elsewhere, inhibiting the growth of the talent pool compared to prior years. In 1999, under pressure from high-tech companies and other manufacturers, Congress expanded the limit from the legislated 65,000 to 115,000. It raised the cap again to 215,000 in ‘00 and to 195,000 in ‘01 and ‘02. However this adjustment expired in 2003 and the cap is now set at 65,000, much less than the demand for skilled foreign workers, most of who are in the IT industry.
For companies looking for talent in IT management roles, there is yet one more challenge. Corporate governance, regulatory and business alignment objectives for IT are maturing within businesses and so the jobs at the top of IT are naturally going to need to be more business oriented as a result. What do all the IT leadership magazines and journals talk about – alignment and business savvy and the continued challenge IT professionals have to develop further in these areas.
The above arguments say there will be competition for employees, but I also believe there will be an overall increase in the number of IT jobs available. For one thing IT spending is rising. According to Gartner it will increase 3 percent in 2006; Forrester Research predicts 7 percent. Additionally, IT continues to offer more ways of facilitating productivity and effectiveness in the workplace (as a reference look at the rise of VoIP, wireless, and PDAs in the workplace over the last few years). There is more IT to take advantage of, and there is the continued difficult task of integrating all these wonderful technologies together.
I’m seeing the results of the above playing out in real terms for Taos. Our business is booming. In 2003 and 2004 we grew at roughly a 40% annual rate and in 2005 that rate accelerated to about 50% with the 2nd half of the year being stronger than the first half.
3. IPO Activity
Bay Area VC Investment in 2005 continued it’s upward trend as illustrated by the chart below1.
It’s interesting that if you erase the years ’99, ’00, and ’01 you have a nice and steady growth line and I see no reason for that line not to continue in an “up and to the right” direction.
Also, according to Hoovers, there has been a steady increase in IPO filings on a national level with a remarkable jump in the last 2 quarters. Here’s the data:
4. M&A Activity
When it’s all tallied up, 2005 will be the best year in M&A since 2000. Year-over-Year growth will be up about 28% domestically and 37% globally. This is because interest rates are low... and so are valuations.
On the interest rate front, even though the Fed has continued to tighten its belt, a 4.5% Fed Fund Rate is still considered cheap money and a large majority of deals have been all cash or have had a significant cash component. CNNMoney.com’s recent article on M&A activity for 2006 resonated with my thinking on this.
And in terms of good value, the Mercury News article “Valley rakes in record profit” points out that the largest 150 public companies in the Bay Area recorded record profits in 2004 while lofty market caps were down more than 3x from their peak in March of 2000. Here is a great quote from that article:
“..investors were willing to pay only about $2.85 for every $1 of sales at valley companies. That's down from the $3.36 they were paying for every dollar in sales a year ago. And near the height of the boom, investors were paying about $10 for every $1 of sales at Silicon Valley's largest companies.”
Further, sales at valley companies increased significantly from 2003 to 2004, and while the official numbers aren't in yet, 2005 was also a signficant increase over 2004 and I have every confidence that 2006 will be more of the same, or better. To quote the same Mercury News Article:
“[In 2004] the 150 largest public companies basked in record profit of $31.4 billion -- up 170 percent from 2003 and 35 percent higher than the previous, inflation-adjusted peak of $23.3 billion set in 2000 at the height of the Internet boom... SV150 companies generated sales of $336.3 billion that were 14 percent higher than in 2003 and, when adjusted for inflation, equaled the previous high set in 2000.”
5. NASDAQ
I believe the NASDAQ will rally in 2006 and end the year at or above 2600, approximately 20% higher than it’s 2005 ending, simply because a good majority of NASDAQ companies have grown significantly in the past 3 years but their stock has not been rewarded for it. They’ve also managed their cash better and now have an opportunity to put it to use (organic growth, acquisitions, R&D, innovation, etc.) To get a sense of these things for yourself sample a few companies from the “Mercury News 150” and use Yahoo Finance to look at their cash flow and income statements vs. stock trading over the past three years.
Many of these companies are paving the way with amazing technological advancements that allow enterprise customers to adopt and integrate increasingly sophisticated technologies into their organizations at price points never thought to have been possible.
Coupling these thoughts with my other supporting evidence - job growth, increased M&A activity, and increased IPO activity – leads me to my bullish conclusion.
I start this year with a great deal of optimism and gratitude. To all of you I am very grateful; I’m grateful to have an amazing wife and 3 wonderful kids; I’m grateful to be the CEO of a thriving and exciting business; I’m grateful to have a staff of 250+ of the brightest, most energetic, hard-working people on the planet; I’m grateful to my clients and prospects, not only for your continued support but for your willingness to help us evolve our offerings through participation and feedback; I’m grateful to my competitors for keeping me on my toes; and I’m grateful to capitalism… the robust years have put dollars in my bank account and the two recessions its thrown at me have made me a much wiser man.
These days, I’m even grateful for little annoying things like heavy traffic. Happy New Year to you all and Welcome Back Gridlock!
Sincerely,
Ric Urrutia
CEO & Founder
"delivering excellence in IT"
1Joint Venture: Silicon Valley Network for Graph Information
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