January 22, 2001, Issue: 1702
Section: Feature
Bottom's Up -- How solution providers try to find the
upside in an economic downturn
Rich Cirillo
IT solution providers are preparing for a new kind of odyssey this year as they
embark on a mission to grow their businesses in an uncharted economy. There
can be little doubt that fortunes throughout the high-tech industry have soured.
Solution providers began the new year amid slumping PC sales, lagging
services revenue and sinking stock prices.
Worse yet, problems aren't isolated to technology. By the end of last year's
third quarter, growth in the nation's economy slowed to its lowest rate since
1996, with the gross domestic product increasing 2.2 percent annually, down
from 2.4 percent in the previous quarter. By the middle of December, federal
officials said the economy was slowing more than desired, a result of
decreased consumer confidence, shortfalls in business sales and profits, and
falling stock prices.
Clearly, the economy has deteriorated to the point where the "R" word
(recession) is back in the vernacular of analysts and investors. Now the big
questions for solution providers are how much worse can things get and how
will prevailing conditions affect business.
"If the economy starts slowing, it affects discretionary spending," says Rudy
Puryear, president and CEO of Chicago-based e-services company Lante. "If
a company was planning to pursue seven major initiatives this year, maybe
they will only pursue four or five now."
If the economy doesn't rebound quickly, Web services companies like Lante
may be in for the most difficult times. But other types of companies-ASPs,
MSPs and hosting providers-might very well find themselves in the catbird
seat, says Rich Young, an analyst with The Yankee Group's E-Sourcing
Strategies unit.
"In the conditions we have now, the value proposition of outsourcing grows
tenfold. The low cost of ownership works well for the ASPs, MSPs and
hosting providers," Young says. He expects to see consolidation in the ASP
community as solution providers rush to complement core services with
integration skills and services-in essence, becoming more like Web integrators
themselves.
Customers' Spending Slowdown?
A survey by Morgan Stanley Dean Witter predicts technology spending will
rise by only 8 percent this year, down from 12 percent in 2000. A separate
Merrill Lynch survey of IT executives also forecasts a slowdown, with 15
percent of corporate technology managers saying they will spend less in 2001.
Perhaps most dramatically, Gartner Dataquest said companies will spend
some $2.6 trillion on IT services this year, well below the $3.9 trillion it
estimates they spent in 2000.
Despite the predictions, some traditional channel players say history has
shown that their business isn't directly tied to overall economic conditions.
"I don't know that technology spending necessarily falls into the same cycles
as other recessionary behaviors," says Mike Mogavero, vice president of
corporate development and alliances for Woodland Hills, Calif.-based Data
Systems West (DSW). "To not invest in technology during times of recession
is to basically say that you're giving up on doing business."
For DSW, which was founded in 1971, successfully navigating periods of
economic turmoil has helped the company transform itself from a VAR into an
e-solutions company.
"In fact, we've experienced downturns in business at other points in time when
the overall economy was doing well," Mogavero says.
Other channel veterans say past economic downturns have only increased
demand for IT outsourcing by putting more pressure on corporations to make
do with less, says Jeffrey Lynn, vice president and general manager of
Compaq Global Services.
"I think the solution-provider community is going to do fine, and a lot of that is
because of the competition for IT talent," Lynn says. "The reason enterprise
customers turn to us for outsourcing and turn to solution providers for other
services is because they realize they are not in the IT business...The demand
for IT technical talent is so far ahead of the supply, so a lot of them are
concluding to look outside."
In fact, a number of companies say evidence of a downturn isn't strong enough
to put the brakes on IT spending plans for 2001, though they are keeping a
wary eye on the economy. They agree that a demonstrated return on
investment and a focus on new technology solutions help shield solution
providers from losing outsourcing deals.
For example, HIP Health Plans in New York is going ahead with plans to
work with IBM Global Business Intelligence Solutions to build a new system
to monitor the quality of health care provided by its members and cut down on
potential fraud. Because HIP anticipates a quick return on investment from the
new system, a downturn will likely have little impact on its decision to proceed
as planned.
"We see nothing in the economy that would cause us to stop any [outsourcing]
plans," says Dr. Randall Spoeri, HIP vice president for Medical and Quality
Informatics.
And packaged-foods giant Kraft Foods is sticking with its plans to embrace
wireless technology this year, utilizing Norwalk, Conn.-based Modem Media
to develop an application to deliver information to customers using the Palm
VII and integrate Palm technology into its Web site.
Similarly, San Diego utility services company Sempra and Los Angeles-based
Southern California Edison expect to move ahead with plans to upgrade their
IT operations. The utilities are coping with economic fallout from an
increasingly deregulated business environment and are seeking to improve
efficiencies. A slowing economy won't change that approach.
Efficiency Through Automation
Companies' needs for nimble, experienced IT talent may help smaller
companies carve their niche with specialized services and deep technology
skills, Puryear says. Some keys to success will be the capability to provide
clients end-to-end e-business services, vertical industry expertise and deep
technology skills. Experts say specific areas of growth will continue to be
CRM, supply-chain management, security solutions and intranet/extranet
development.
Another view is that an economic downturn could actually be favorable for
integrators because it would force end users to shore up their businesses by
increasing efficiencies through automation.
"IT is a huge enabler of that," says Kevin Murai, president of Ingram Micro
U.S., Santa Ana, Calif. Murai recalls that was what many SMBs did a little
over a decade ago during the last economic crunch. He predicts demand in
the SMB arena will continue to grow faster than the overall IT market. That
spells opportunity for the channel.
The key, Murai says, is knowing where the opportunities lie. He says the
server market will continue to grow faster than workstations, while storage will
be a big opportunity, particularly in high-end, mission-critical areas like SANs
and NAS. He also sees application-type software as a growth area.
A downturn might not be such a bad thing for traditional resellers, either.
When times are good, hardware vendors start to gradually explore direct sales
models, and their dependence on partners begins to wane. But when the
economy slows, they look to the channel to complement their internal sales
arms.
Growth opportunities won't be limited to low-end products, either, as long as
vendors can use their own consulting operations to help other resellers best
utilize their gear.
"Customers of all sizes are using multitiered architectures in their data centers,
with very large servers for databases [scaling] down to lower-end servers at
the application level," says Roy Vandoren, director of product marketing for
HP's business systems and technology operation. "That requires us to make
sure our resellers understand our entire product line."
Still, solution providers won't emerge completely unscathed, says Steve
Raymund, chairman and CEO of Tech Data. For the short term, there will
likely be fewer project opportunities, and solution providers may have to
tighten their belts a notch or two. Once the technology they've sold has been
absorbed, and once users learn to make optimum use of it all-which Raymund
thinks will take a quarter or two-things will pick up again. His advice to
solution providers: "Don't be caught flat-footed. Don't lay off half your
engineers just to make it through the lean times if you believe that, around the
corner, things will pick up. You [may] need them to compete for...the flurry of
projects that will emerge as we recover from what I expect will be a relatively
short downturn in the IT sector."
Chris Bucholtz, Karen Franse and Al Senia contributed to this story.
---
Worldwide IT Spending Forecast
1999: $2.1 trillion*
2000: $3.89 trillion
2001: $2.67 trillion
2002: $2.96 trillion
2003: $3.29 trillion
2004: $3.67 trillion
*Actual
Source: Gartner Dataquest (forecast includes: hardware, software, services
and telecommunications markets)
--
Hot Spots In a Cold Economy -- Where to focus to maximize profit
Looking to find your niche in the midst of an economic downturn? Analysts
from Boston-based The Yankee Group's E-Sourcing Strategies unit say the
hot spots for solution providers this year will include:
- Mobile Solutions: Smart service providers will ramp up their efforts to
support the development of mobile solutions.
- Hosting Services: The continued commoditization of co-location offerings
will force hosting providers to build out complex and managed-service
offerings.
- Managed Service Providers: With so many new MSPs emerging, there is a
need for well-defined offerings, which leads analysts to predict an increase in
mergers and acquisitions.
- Application Service Providers: 2001 will be a make-or-break year for many
ASPs looking to expand services. Analysts predict consolidation activity and a
market shakeout.
- Consulting Services: The demand for e-business consulting services is
expected to rise, leading e-business consultancies to ramp up skills in areas
such as wireless and CRM. Integrators and hosting service providers will
acquire or build consulting arms to meet rising demand.
- Vertical Opportunities: Service providers will increasingly target vertical
industry segments that are struggling with profit pressures and/or deregulation.
The Yankee Group says the telecommunications industry will overtake
financial services as the top vertical industry for SPs.
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