Back to insights

Enterprise Technology and the Jobless Recovery

Nate Lentz
January 7, 2011

Many people look at the current economic indicators and shake their heads.   Unemployment just under 10%, consumer debt issues lingering, over 3 million additional home foreclosures expected in the next 12 to 18 months, yet the Dow is close to or above where it was when the financial crisis hit in the third quarter of 2008.

How is it that business has recovered and jobs have not?

I came across an article written by the consultancy, Oxford Analytics, which was published on almost 18 months ago.   This article gave predictions for the jobless recovery and the reason for it.  I have pulled some key points:

“ Jobless recovery. Economic theory offers a possible explanation as to why the effect of downturns on labor demand can be extremely long-lived or, in other words, why recovery, in effect, can be ‘jobless’:

–When there is a downturn in economic activity, employment rates fall (i.e., jobs are lost) and companies stop investing in new technology.

–However, since the innovation cycle is much longer than most downturns in the business cycle, the rate of innovation in the economy is not overly affected–new discoveries continue to be made.

–This means that when demand starts to recover, surviving companies have the option to buy into the latest technology.

–Those that do so soonest are likely to be the most competitive and hence best able to increase productivity.

–For a time, companies can increase production by investing in new technologies, and thus delay re-hiring people. “

As enterprise technology investors, we at Osage Ventures have had the opportunity to see the impact of the recession and recovery on a variety of portfolio companies as well as on hundreds of businesses who come to us seeking capital.  What we have seen, especially over the last twelve months, is strong confirmation of these predictions.  Corporations that typically purchase technology from our portfolio companies are indeed opting to spend dollars to improve productivity through technology investment instead of hiring or rehiring and that the prediction of 18 months ago is being realized to the detriment of the American worker and to the benefit of enterprise technology innovators.

To extend this thought further, one could argue that the cutting of people and the temporary freeze on technology spending shifted the status quo for IT departments and that when spending on technology was restarted, it was done with a sense of urgency that this spending must be efficient, must address the most critical corporate issues, and must be focused on step change, not incremental innovation  –  innovation which had continued to evolve and to push forward during the recession

We believe that the benefits of this corporate technology spending shift will accrue to the new innovators in enterprise technology and not the traditional legacy technology providers, thus creating a very attractive investing environment in the foreseeable future.