The services sector is weathering the slowdown better than the pure hardware or software vendors, according to Gartner analyst Rolf Jester. However he says that not all services companies are weathering it well.
Jester describes the sector's performance as "patchy", saying that of the top five services suppliers in Australia, the number one company has grown 20 per cent, number two is enduring a flat year, number three is seeing revenues down 3 or 4 per cent, four is up 17 per cent and five is flat. It makes for interesting times as they jostle for market share. "The services companies are quite competitive for the big deals,"says Jester. "Some are getting more creative and offering new services.
"In these times the strategic and tactical approach needs to be adjusted. Rather than focusing on systems which will lead to revenue expansion and new opportunities as they did in the dotcom boom, there needs to be more focus on [delivering] cost savings,"Jester says. "There is a perception among the IT managers that they ought to cut back, so they are going for shorter projects and more contained projects. They are putting in point solutions with a quicker payback and the smarter suppliers are recognising that and working with them. The smarter vendors are cutting their cloth for different times."
The suppliers are also learning that they cannot browbeat CIOs into making a purchase. Much more refined lures are required for the big fish.
The mature members of the vendor community have learned to accept that "no means no"when a customer says their budget is too tight to invest in new systems or upgrades, according to the CIO of a bank. "If you have a good relationship with the vendor they generally understand that if the money is not there, then no matter how good a deal is, it doesn't make the rest of a project's resourcing suddenly possible."He points out that buying a product, or a software system or service is only one element of an IT development project. "In my shop no is no."
In any case, he says that the "best deals are available when the vendors are having good years. When they are chasing bigger and bigger bonuses is when they are prepared to put a ridiculous deal on the table. Now they are going through hard times and they are sticking to the price list because they can't afford to give anything away,"he says, but swiftly notes that there is really no such thing as a price list in IT any more. "The price list depends on the customer and what the market will bear. I am sure that the price of the same software differs between organisations of different size - what the organisation can afford being a significant factor in pricing."
The IT manager at a publishing house confirms this view saying: "I would not say there are any really stunning deals. It is a good time to shop around, but we are not making a killing on what we are buying. We are not at the point where the vendors are making cutthroat deals. In most cases people are making a decision on service and quality not on cost anyway."
This was the approach that secured Brisbane-based Technology One a recent deal, even though its multinational rival offered the software licence for free to try and swing the deal. Adrian Di Marco, the company's CEO, says that Technology One won that particular piece of business because the client was astute, and recognised that if he was getting a software licence for free, the vendor would try to claw back revenues somewhere else. After conducting an analysis of the five-year cost of ownership, the client backed away from the free software and toward Technology One.
Di Marco says that Technology One, which has weathered the downturn better than most thus far with a 40 per cent increase in annual revenues in the 12 months to the end of June, has not moved his margins an inch in response to the slowdown. "One thing we have noticed is that with the economic downturn vendors are pricing things where it's not good business,"he says, adding that this is particularly the case with the multinational vendors that are under pressure from their overseas parents to make budgets in order to make forecasts when quarterly NASDAQ reports are due. "I'm prepared to walk away from that sort of business,"says Di Marco. "Our margins have stayed the same; if you start writing bad business it comes back and bites you."
Nevertheless discounting is rife. One CIO has observed an increasing trend toward discounting by overseas companies over the last three years, from SAP in particular and more generally in the IT sector. "These companies were on the crest of huge waves of growth heading into Y2K and they tried to prolong that by discounting. But we learned it was the beginning of a cycle, and we never bought at the beginning of a quarter, always at the end of a quarter when they had to report to NASDAQ and then there would be some fire sales."