IT industry analysis—2009 Week 30—on one page

Catch up on the past week's analysis

CHANNELS
HP could dramatically cut the rebates it pays to distributors and resellers on enterprise accounts next year. HP is said to be planning the injection of extra complexity into the fee calculation, because it believes it is not getting value for money from duplicate payments for both partners and its own staff. In the past HP has liked to think of itself as easy to work with, but this move could result in a backlash, with resellers no longer taking HP into their accounts. [1]

Dell has lowered the deal registration threshold to include server and storage technologies aimed at SMEs. Previously under Partner Direct, only orders starting at £30,000 that involved PCs, servers or printers could be registered by certified resellers, but that minimum value has now fallen to £20,000 and for EqualLogic and PowerVault storage it is £10,000. Virtualisation has skewed the market somewhat as customers can now virtualise 15 servers on one physical box, meaning that lower value orders have become more prevalent. Previously partners competing for deals that fell below the threshold were invariably given different prices from different Dell staff. Dell will increase headcount in anticipation of a significant rise in the number of deals being logged through the registration tool. The online process enables Dell’s sales staff to see partners’ deals in the pipeline. It should encourage them to collaborate, as the direct sales teams are now compensated on targets that include reseller business. [2]

Cash-rich resellers have been likened to "kids in a sweet shop" due to the high number of distressed competitors available at bargain-basement prices. Research from Plimsoll identified 189 UK resellers which have built up sizeable cash piles that, due to the record low interest rates, are generating nothing. The ICT reseller market is widely regarded as one of the UK’s most fragmented sectors. [3]

PCs and MICROSOFT
According to IDC, total UK PC sales fell 7% to 2.5m units in 2Q09. And HP lost its No. 1 position in the UK PC market to Dell and Acer, after a terrible quarter in which its sales fell 20% in desktops and 29% in notebooks. During the quarter, HP merged its professional and consumer PC businesses to cut costs, which may have resulted in lost sales across EMEA. HP was not actively pushing its netbooks, which is the highest-growth segment of the PC market.[4]

BT is to deliver Microsoft's online Office services to its own customers, and will provide unified communications by integrating these with its Global Onevoice service. BT said that, by integrating Microsoft's product suite into its 21CN network, it can provide integrated cloud-based business collaboration tools and ensure higher quality-of-service levels and guaranteed network performance. [5]

Microsoft posted dismal financial results last week. Revenues of $13bn for the quarter were down 17%, and $58bn for the full year were down 3%. The Windows client division was down 29% for the quarter, the Business division (which includes the Office cash cow and the Dynamics family of ERP and CRM applications, and is the company’s largest segment) was down 13%, and the Entertainment and Devices division was down 25%. Only the Server and Tools segment, was relatively unscathed: down 6%, all the more remarkable given a server hardware market that is down more than 20%. [6]

IDC forecasts that, by the end of 2010, 177 million units of Windows 7 will have been shipped accounting for 1% of worldwide IT spending. Amazon has reported more pre-orders for the operating system in eight hours than Vista achieved in its entire 17-week pre-order period. In its paean to the product, IDC went on to claim that 'The advent of Windows 7 will bring related and cascading economic benefits, from new employment to increased revenues and investments made in local country economies'. [7]

SERVICES
Despite customers hanging onto their hardware well beyond the warranty period, and therefore likely to face more costly down-time, the support services business is not booming. The reasons:

• greater competition. Almost every vendor offers heterogeneous systems support.
• Resellers are desperate to increase their support services businesses to make up for faltering equipment sales.
• customers are choosing different service levels for different types of system. The age of the one-size-fits-all SLA is long gone.
• the cost of maintaining a support field force is increasing.
• warranty upgrades purchased with new systems are in decline because the IT hardware market is declining.

So vendors are increasingly offering a managed services approach to support. These proactive services go beyond the individual boxes to provide integrated hardware and system-level software support, a focus on performance and availability, and a more customised approach to support. The key for the vendor is to be able to offer managed support services across the whole of the customer’s IT infrastructure: PCs, servers, routers, storage, system software and even middleware. The benefit to the customer is that the single ‘managed support services’ contract offers simplicity: one vendor to deal with; one contract; lower cost. The benefit for the vendor comes with increased deal sizes and the ability to upsell additional managed services to offset declining revenues from ‘commodity’ technical support.
The support services race favours the larger players with a global delivery capability and a local presence for on-site technical assistance (to serve the enterprise market), and strong partner programmes (to take their services to the mid-market). [8]

EDB Business Partner declared 2Q09 revenues down 5% to NOK 1.9bn. The fall was blamed on the Easter Holiday and low utilization rates in its application services business.

OUTSOURCING
Capita's revenues climbed to £1.3bn in 1H09 from £1.2bn last year. Although Capita has been a supporter of the Labour government, its CEO believes it will benefit if the Conservative party win the next general election. The company believes it is relatively underweight in central government work because there have been fewer opportunities for outsourcing, due to less severe cash constraints than those imposed on local government. [9] [10] [11]

US outsourcing giant ACS aims to grow significantly in Europe, according to its CEO. In recent years, ACS has added $200m in revenues through acquisitions: small local providers such as UK infrastructure outsourcers Syan and Anix, German IT services provider SDS, and French transport technology provider Ascom. The two key reasons for ACS's European interest are the ability to service key multinational customers in their European markets; and Europe's strong local markets and skills, which ACS can utilise across the group. ACS’s flagship European BPO centre is in Barcelona, from where it provides a range of customer call services. [12]

Next month British Petroleum (BP) will be awarding up to $1bn in outsourcing contracts. TCS, Infosys, Wipro and Mahindra Satyam have been bidding against IBM and Accenture for the business. BP already outsources the majority of its application development, system integration and infrastructure management projects to almost 30 suppliers, but now wants to cut 30% from its IT costs, by working with fewer vendors at lower rates. Each BP business unit runs its IT operations autonomously, with a different set of suppliers. This has led to complexity and a higher cost of operations. With the planned consolidation, BP now wants to work with no more than six vendors globally. [13]

OFFSHORE
Steria intends to achieve double-digit organic growth, thereby consolidating its position among the top ten services providers in Europe, according to its CEO. India will then contribute about 40% of revenues, he said. (In 2007, Steria acquired UK-headquartered Xansa, which had substantial BPO resource in India.) [14]

Tech Mahindra announced a 5% fall in revenue Rs 1,087 crore. [15]

TCS announced fiscal 1Q10 revenues of $1.5bn, down 3%, for the period ending 30 June 2009. The UK accounted for 16.9% of these revenues, compared to 19.5% a year ago. Both TCS and Infosys saw declining revenues from BT, but Infosys suffered more, due to BT bringing call centre work back to the UK. TCS added just 26 new clients in the quarter, and its active client list fell from 985 to 933. [16]

Wipro announced a 5% increase in revenue to Rs 6,274 crore. [17]

Wipro sees a big opportunity in green areas such as clean technology, green lighting and water over the next 10-15 years. Wipro plans to offer consultancy services in water treatment and has a team of over 100 consultants. Wipro has extended its strategy of copying IBM by opening a virtual innovation centre in Second Life. Wipro also has a Consumer Care business, and Santoor, its flagship brand, is now the top-selling toilet soap brand in South India.[18] [19]

EMPLOYMENT
The cost of bringing employees from overseas to the UK could rise by almost 25% next year when tax changes are made. The new 50% rate and loss of personal allowances will be especially painful for employers committed to equalising the net benefits that employees enjoy in their home countries, such as the USA, says experts. This comes on top of the new tax regime for 'non-doms' introduced last year. [20]

EDS staff have been told that if they don't accept a 5% pay cut, they will be replaced by HP people. "Project managers are running around with their heads on fire because there are experienced people leaving the company," said one source. He said contractors have already been offered a 10% pay cut and are now on a four-day week. [21]

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IT industry analysis—2009 Week 29—on one page

Catch up on the past week's analysis

[edit]

GREEN

• According to Forrester, customers are increasingly putting green criteria for supplier selection at the top of their agenda. These criteria include the energy efficiency of products, the use of sustainable materials and manufacturing techniques as well as whether products are recyclable. It also includes vendors’ commitment to sustainable operations such as policies on carbon emission reporting and employee commuting practices. Forrester said most vendors have at least one-quarter of their existing customers planning green IT engagements. Over 40% of the client base of Accenture, TCS and KPMG plan to hire a service provider for a green IT project in 2009. Forrester expects that the global market for such green IT services will grow by 60% a year, peaking at $4.8bn in 2013. [1]
  
• Forrester also says that the enterprise uptake of environmentally friendly IT products has slowed down for the first time since 2007. 11% of companies surveyed plan to slow down implementation of green IT initiatives, due to the recession. On the other hand, 12% of firms plan to accelerate their green IT initiatives. The study found that cost-cutting is the principal factor for companies adopting green IT programmes, followed by the need to conserve space and avoid building new datacentres. [2]
  
• BT has launched a 'Sustainable Workforce Assessment' service. This consulting-led service aims to help customers understand how flexible working arrangements for their staff, such as remote or home working, teleconferencing and hot-desking, can help reduce costs. By encouraging people to work from home and travel less, organisations should reduce energy consumption, CO₂ emissions and costs.
  

[edit]

CHANNELS

• Computacenter reported revenues down 8% in constant currency for 1H09. IT hardware sales are suffering as customers put new projects and system refreshes on hold. This has a knock-on effect on professional and support services: the fewer new systems sold, the less demand there is for the implementation and support services that go with them. Computacenter recognised this earlier in the decade and began to diversify into outsourcing, managed desktop and other contractual services. In the UK, contractual services revenues increased 10% compared with the first half of FY08. [3]
  

[edit]

FINANCIAL RESULTS

• Google declared a 3% increase in revenue to $5.5bn in 2Q09. CEO Eric Schmidt boasted of revenue gains from Google Apps sales, mobile ads, and even YouTube display ads. [4]
  
• IBM announced a 13% decline in revenue to $23bn in second quarter, with EMEA falling 20%. Worldwide STG revenues were down 26% to $4bn. Gross profits were down 9% to $11bn, but net profits were up 12% to $3bn. GTS (strategic outsourcing, integrated technology services, and business transformation outsourcing) was down 10% to $9bn in revenue; and GBS (consulting, systems integration, and application outsourcing) had sales of $4bn, down 15%. [5] [6] [7]
  

[edit]

SERVERS

• Now that Sun shareholders have approved Oracle's takeover, HP is trying to attract Solaris customers and migrate them to ProLiant or Integrity machines running Windows, Linux, or HP-UX. HP says that Solaris customers pay up to 80% more to run certain workloads on Sun iron than on comparable HP iron. HP is offering Sun shops free migration and TCO assessments if they consider ditching Sun iron for HP boxes. HP is also tempting customers with several financial incentives, such as deferrals of payments on leased equipment for 90 days and 0% lease offerings (in the USA and Canada). HP is also offering software discounts of up to 85%, and education discounts of up to 30%. [8]
  

[edit]

PCs

• Intel announced a 12% revenue increase over the previous quarter—its most dramatic growth in 20 years. But the $8bn revenue was still $1.4bn down on the same quarter of a year ago. But enterprise PC spending has not yet joined the party. As CEO Otellini put it: "Consumer purchases led the way, with a strong rebound in mobile-processor shipments." [9]
  
• According to Gartner, worldwide PC shipments totalled 68m units in the quarter, a 5% decline from the same period last year. "PC shipments in Asia/Pacific and the US were better than our expectations, but shipments in EMEA indicated ongoing weakness." [10]
  

[edit]

CLOUD COMPUTING

• Viviane Reding, the European commissioner for telecoms, says that European clouds should be set up to encourage small business take-up of on-demand IT services. Reding pointed out that nearly all cloud services are US-owned and US-based, and complained that "once again, the US has started to exploit a business model before Europe has managed to do so. We cannot let this continue. A recent study estimated that online business services could add 0.2% to annual GDP growth, create a million new jobs and allow hundreds of thousands of new SMEs to take off in Europe over the next five years. So what are we waiting for?" [11]
  
• Microsoft has revealed some details of its Azure cloud computing platform, which offers a pay-as-you-go virtual Windows Server to host .Net-based business applications on the internet. Datacentres in the US, Dublin and Singapore will be open in November to deploy applications on what Microsoft is touting as an inexpensive, massively scalable platform, with no hardware management for users. Azure services will have a service price, a charge for data storage and a charge for data traffic. A standard Windows Azure compute unit is $0.12 per hour, with storage charges of $0.15 per GB per month, with 10,000 transactions costing $0.01. [12]
  
• Microsoft has responded within a week of Google's announcement of the Chrome operating system, by declaring that a free version of Microsoft Office will run on the Web next year. Microsoft risks cannibalising one of its most profitable products. (Its business software division, which includes Office, made $9bn profit from $14bn in sales during the first three quarters of its 2009 fiscal year. According to a Forrester survey, about 80% of firms use Microsoft Office.) Microsoft declined to say how it would make money with the move, but hinted that its business model could include advertising and fees for premium services such as online storage of large files. [13]
  

[edit]

ACQUISITIONS

• Infrastructure ISV Software AG has made a €230m takeover bid for IDS Scheer, a maker of BPM (business process management) software. IDS Scheer, based in Saarbrucken, Germany, had approximately €400 million in sales during 2008. The combined company would have more than 6,000 workers and €1bn in revenue, according to Software AG, which is based in Darmstadt, Germany. Software AG said the acquisition would lead to growth through sales of the companies' combined SOA and BPM products, and through IDS Scheer's strength in SAP consulting services. This is the first major move by Software AG since it acquired webMethods almost exactly two years ago. [14]
  
• Perot has beaten Wipro and TCS to the $700m acquisition of the European business of BearingPoint. PricewaterhouseCoopers recently completed the acquisition of BearingPoint’s North American, Japanese, Chinese and Indian businesses, intended to give the consulting firm a strong presence in emerging markets. The 100-year-old BearingPoint was one of the world’s largest management and technology consultants, which was spun off as a separate firm from KPMG in 1999, but slipped into bankruptcy two years ago. [15]
  

[edit]

CONTRACTS

• Nortel’s contract to provide the networking infrastructure for the London 2012 Olympics has been cancelled and awarded to Cisco. Nortel’s latest strategy of selling off key parts of its business meant it would not be able to honour the contract with the Games’ organising committee. [16]
  

IT Industry Quarterly Summary: 2Q09

Welcome to Northings, a quarterly summary of the IT market written from a UK perspective. Please encourage your colleagues to subscribe to this and its weekly companion newsletter, by sending a brief email to gavinjwilson@hotmail.com .

Contents 1 A brief apology for the diagrams 2 Summary of Summaries 3 Employment 4 Other Countries 4.1 Scandinavia 4.2 Europe 4.3 Middle East 5 Verticals 5.1 Central Government 5.2 Local Government 5.3 Government Relations 5.4 Health 5.5 SMEs 6 Buying IT 6.1 Buyer Behaviour 6.2 IT Spending—the customer and analyst viewpoint 6.3 IT Spending—the vendor viewpoint 7 Solutions 7.1 Cloud Computing 7.2 Virtualisation 7.3 Unified Communications 7.4 Mobile 7.5 Failing Ideas 8 Systems 8.1 The Stack Argument: Oracle buys Sun 8.2 PCs 8.3 Servers 8.4 Storage 9 Software 9.1 Applications 10 Services 11 Exposure to Risk 11.1 exposure to the declining hardware market 11.2 dependent on a small number of large clients 11.3 protected by resilient industries 12 Marketing and Sales 12.1 Creating Demand 12.1.1 ...by creative use of social networking 12.1.2 ...by near-shoring 12.1.3 ...through active fans 12.1.4 ...through very visible sponsorship 12.2 Selling Tips 12.3 Sales Organisation 12.4 Channels 12.5 Pricing 13 Corporate Strategy 13.1 Acquisitions 13.2 Outsourcing 13.3 Offshore 13.4 Next Steps

[edit]

A brief apology for the diagrams

Some of the articles in this summary are accompanied by a diagram written in system dynamics notation. To understand these, all you need to know is that:

• the direction of the arrow implies cause and effect;
  
• a circled '+' linking two boxes suggests that an increase in one causes an increase in the other; and
  
• a circled '-' linking two boxes suggests a negative relationship: an increase in one causes a decrease in the other.
  

Confusingly there are also some diagrams which have been created using the same tool but which carry no system dynamics meaning. They contain a coloured box or two to distinguish them from the monochrome system dynamics style.

And finally a belated apology for all the typos in my weekly summaries that neither I nor my spell-checker spotted at the time of writing. No doubt there are still some that I have copied into this quarterly report. Many thanks for continuing to subscribe.

[edit]

Summary of Summaries

IT spending, particularly on hardware, is suffering —
budgets are being cut —
decisions are being postponed —
prices are falling —
deal sizes are declining — due to credit restrictions, SMEs are suffering more than most.

As a result, IT vendors are making employees redundant — salaries are stagnating or falling — contractor rates are falling

Many sectors of the IT industry continue to consolidate — Oracle is pursuing its stack ownership strategy by acquiring Sun — many resellers are at risk of going under or being acquired.

The Middle East is today a more promising target — cloud computing, virtualisation and smart mobile are also markets forecast to grow.

[edit]

Employment

Even in the highly automated IT industry, employees are a necessary evil: they represent both cost and liability, but they are also assets required to generate revenues. Reducing headcount in a downturn is a difficult decision—the firm may have too much capacity now, but how much will it need when the market recovers, and what skills will be required? However, this global downturn is different in that it is the first in which nations in the East, such as India and China, have been able to provide the excuse for switching services jobs away from relatively expensive Western countries.

Among the headcount reduction stories from 2Q:

• 37,000 IT services jobs are expected to be lost in the UK between 2008 and 2010, according to the centre for economics and business research. But the total should rise a little to 528,000 the next year.
  
• According to a survey by Experteer, an online recruitment company, the average UK salaries of IT specialists have dropped 6% in the past six months, from £66,000 to £62,000.
  
• HP began consultation with its European Works Council over the cutting of 5,700 jobs from its total European staff of 80,000. 700 of the jobs would move from the Erskine plant in the UK to a 'partner firm' in the Czech Republic. According to an HP spokesman, "a lot of employees understood the sites were under-utilised and the [server and storage] products they make are becoming commoditised".
  
• Between 25% and 30% of Sun's direct sales force in the UK were likely to be made redundant, as the company handed more customer accounts over to resellers.
  
• Google prepared to eliminate 200 sales and marketing jobs. The firm blamed overlapping organisations which duplicated effort and complicated decision-making.
  
• BT announced another 10,000 redundancies—'huge', in the words of The Times—in addition to the 10,000 cut last year. BT Global Services, intended to be the group's growth engine, had been a financial disaster, said The Times.
  
• BT was accused of laying off expensive UK contractors and replacing them with Indian staff. Workers brought in using intra-company transfers are replacing contractors for about half the price, a contractor told BBC Radio 4. According to a contractor working for BT Global Services on the National Programme for IT, the NHS project, workers from Tech Mahindra earn about £220 a day whereas UK contractors earn £400 a day. BT said that it was looking to cut its dependence on expensive contractors and that anyone brought in from India was a specialist; intra-company transfers are meant to be for people with skills not available from the British workforce. It said it had not replaced any permanent staff with Indian staff.
  
• Tieto announced revenue down 6% to €0.44bn for 1Q09, and a number of streamlining actions, including 350 redundancies, to reduce its cost base.
  

Not even jobs in India were safe:

• 13,000 of Satyam's 53,000 employees left the firm this year as a result of the scandals hitting the company, further damaging client confidence in the firm.
  
• Infosys fired 2,100 of its 105,000 employees for 'non-performance', a move seen by some as simply a cheap alternative to redundancy.
  

And maybe cutting jobs is not such a good idea:

• Firms cutting IT staff could be ill-prepared for the economic recovery, said Affiniti, a consultancy firm. Worries about job security also affect the morale and performance of those who avoid the axe.
  
• Quocirca suggested that there is an opportunity for the services and channel partners of vendors cutting staff to step in and grab some high-calibre expertise.
  

[edit]

Other Countries

[edit]

Scandinavia

• In Scandinavia, Steria reported 17% revenue growth in FY08 and 16% growth in 1Q09.
  
• EDB Business Partner, which obtains 70% of its revenues in Norway, announced 1Q09 revenues up 5%. Organically, that was a 2% decline. EDB said it was seeing good demand for outsourcing from clients in Sweden.
  
• TCS is considering the acquisition of a small or mid-sized ISV in Finland. A Wipro executive said that North Europe is attractive due to low stock market valuations. And an Infosys executive agreed that "Finland is very hot".
  

[edit]

Europe

• Atos Origin reported a 1% drop in revenue to €1.3bn in 1Q09. SI in the Netherlands was blamed for a big slowdown in demand.
  
• Logica reported revenue up 11%, largely thanks to currency movements. Logica said it was cutting jobs in the Netherlands due to significant weakness.
  

[edit]

Middle East

• Wipro, TCS and Infosys are refocusing on the Middle East and Asia to compensate for falling revenues in America and Europe, wrote The Times. TCS reported revenue growth of 35% in the Asia Pacific region for the year ended 31st March. But the managed services and outsourcing market in the region is still nascent. “Regional customers still like to see work delivered in front of their eyes and are uncomfortable with offshoring and the remote model of service delivery,” said a Wipro VP.
  

[edit]

Verticals

[edit]

Central Government

• CSC beat Fujitsu to win a £385m contract to upgrade the Identity and Passport Service's (IPS) enrolment systems. This replaces an existing deal with Siemens and Atos Origin. Biometrics and identity management is one of CSC's global strengths, but it has been relatively underweight in the UK public sector. Both this and an associated £265m win by IBM were conducted under the IPS's procurement framework which covered CSC, IBM, Thales, Fujitsu and EDS. Fujitsu may end up with nothing if it fails to win the ID Card Design and Production contract. HP-EDS has definitely ended up with nothing, a significant blow for EDS, which has not won any significant UK public sector deals for several years.
  

[edit]

Local Government

• Derbyshire County Council signed a £6m contract with Capgemini to replace its mainframe technology with SAP systems, scheduled to go live by April 2010. The implementation will be carried out by a team of 25 people based at the council's offices in Matlock. Capgemini will also use staff based in India as well as in China, Poland, Morocco and Latin America.
  
• The Competition Commission ruled that Capita would have to sell IBS, which it acquired last year for £77m, because the combined firm might damage competition in the UK local authorities market for revenue and benefits software.
  

[edit]

Government Relations

Given the current strength of public sector spending on IT, it is astonishing that IBM UK came close to deselecting the public sector as a target market some 20 years ago. Selling to central government agencies is a long-term process which involves the building of relationships, e.g. through membership of committees, donations to good causes, exchanges of employees, support for government projects etc.

• Accenture's board voted for a plan to change the firm's place of incorporation from Bermuda to Ireland. Given the growing political hostility towards tax havens, many large firms are looking towards sympathetic tax regimes in Europe. Accenture admitted in a regulatory filing that new laws being brought in by the Obama administration had motivated its flight from Bermuda. Unlike Bermuda, Ireland has tax treaties with the USA which Accenture believes will bring "economic benefits". As well as Ireland, Switzerland is also expected to benefit from the US clamp-down.
  

• Insiders questioned why the Labour government handed BT almost £100m in advance payments for computerising patient records, just days ahead of BT's full-year results which were its worst ever. BT Global Services' record on delivery has been dire: it was due to install core IT systems at 31 hospital trusts by 2005, but has so far installed just four.
  

[edit]

Health

• The value of BT's contract with NHS Connecting for Health (CFH) increased by over £500m in the last year. Written parliamentary answers revealed the lifetime value of BT's contract is now expected to be over £1.5bn. BT declined to comment on 'the commercial detail' of its contracts. BT originally underpriced the contract—at the time IBM's rival bid for the London contract was rumoured to be £1.4bn, according to Ovum. In its haste to secure a landmark IT services deal, BT underestimated the challenge the London contract represented. BT had NHS CFH over a barrel during contract renegotiations. As one of just two remaining providers, BT's very public threat to walk away from the contract carried real weight. Health minister Ben Bradshaw's response to the parliamentary question also revealed that BT's spine contract is now worth £889m (up from the original contract value of £620m over ten years).
  

[edit]

SMEs

• SMEs are suffering more in the UK than elsewhere, according to research by AMI. Slower payments, cash flow issues and tightening credit are worldwide problems. But 76% of UK SMEs are seeing slower payments compared to 49% for the world as a whole, and nearly half of British firms are seeing tighter credit, as opposed to the worldwide average of 36%.
  
• One third of UK SMEs will count 2009 a success if their business does not shrink. And a half of SMEs expect to spend less on IT this year than last, according to new research conducted for Salesforce.com. A third said IT is their business's biggest overhead—ahead of HR and facilities.
  

[edit]

Buying IT

[edit]

Buyer Behaviour

• The chief executive of Sage said that sticking with what we've got is a dominant theme for IT purchasing in the small business sector. Sage expects a big sales stimulus from new business formation as the economy comes out of recession. Sage is weak in both Asia and South America, and expects to use cloud computing to penetrate these markets.
  
• Infosys reported revenues for the year of $4.7bn up 12%, but Infosys downplayed expectations for the next financial year. Over half of its revenues come from the financial and retail sectors—not the best places to be today. Having surveyed its top 135 clients, Infosys revealed that:
  
  • It now takes 8-10 months to close a deal, compared to six months a year ago.
    
  • Average deal size is declining.
    
  • Price fell by 3% in the last quarter alone.
    
  • Only 61% of clients had finalised their IT budget for the year.
    
  • 89% of clients will cut spending this year.
    
  • 69% will cut offshore spending this year.
    
  
  
• Negotiators are being too cautious when agreeing new contracts, according to a new survey. The top negotiated terms are: limitation of liability; indemnification; price changes; intellectual property; protection of confidential data; service levels and warranties; delivery/acceptance; payment; liquidated damages; and jurisdiction. The report says that:
  
  • 'The global economy has swung increasingly towards services. Most major manufacturers have sought to avoid the pressures of commoditisation by moving towards packaged solutions and services. These relationships demand outcome-based commitments, weakening the traditional principle of caveat emptor and making the ability to bear and manage risk into a source of competitive advantage.
    
  • 'Today’s focus is wrong because it concentrates on assumed failure. It does not manage risk because it fails to enable opportunities, growth, and mutual benefit. The focus of negotiation today stifles collaboration, and results in many contracts being dangerously incomplete when they are signed. This is because battles over the allocation of risk frequently prolong negotiations and divert attention from the real issues, which are what the parties want to achieve and how best they can do it.'
    
  
  
• The FT listed seven signs of corporate inertia—indicators that the board is too locked into its past:
  
  1. Your CEO appears on the cover of a major business magazine. Praise from the press reinforces management’s attachment to their commitments.
     
  2. Management gurus single out your firm for special praise. Just remember the curse of In Search of Excellence.
     
  3. The CEO writes a book while still in his post.
     
  4. Building a grand corporate headquarters often signals that executives have declared victory. The best giveaway is an indoor waterfall.
     
  5. Have a sports stadium named after the company.
     
  6. Competitors share the same zip code. Entire communities of similar companies can fall prey to active inertia.
     
  7. Top executives look like clones. A homogeneous group of top executives often selects and promotes other managers based on their adherence to existing commitments. They also lack the diversity to envision alternative way of competing.
     
  
  

[edit]

IT Spending—the customer and analyst viewpoint

• British Airways slashed its IT budget by nearly a third as the airline struggles to cope with high fuel prices and the slump in passengers caused by the recession. The firm reported its biggest loss in more than two decades and is reviewing all areas of the business where savings could be generated. During the review, BA decided to postpone a number of projects, including a company-wide ERP rollout which began last year.
  
• According to a Gartner survey, about half of CIOs have changed their IT budgets since the start of this year, and 90% of them said the change was negative. They've cut back on consultants, software and hardware purchases and they're renegotiating vendor contracts.
  
  • In the data centre, the average cost of a transaction continues to fall, but the volume of transactions continues to grow by 10% to 15%—hence the growth in storage purchases. In the past, as revenues grew, so did transaction volume. But since the start of this year, CIOs began reporting that relationship is broken. Transactions continue to grow even though revenues are flat. In banking, for example, balance enquiries are one of the fastest-growing transaction types. It doesn't generate any revenue, but it does generate a lot of work.
    
  • When the economic recovery begins, IT budgets will lag by one or two quarters, because IT spending is a trailing indicator.
    
  
  
• Worldwide IT spending will fall by 4% in 2009, according to Gartner. Hardware spending will fall by a staggering 15%, the firm says. Even IT services spending will fall by 2%. Forrester made the fourth revision to its 2009 forecast for the USA: it now forecasts a 3% decline, but back in February of last year, Forrester forecasted 10% growth.
  

[edit]

IT Spending—the vendor viewpoint

More than one vendor could be accused of boundless optimism during the quarter:

• Cisco reported revenues down 17% to $8.2bn, but CEO John Chambers remained undaunted: "For the first time in many quarters...global customers...are finally beginning to have something reasonably solid beneath their feet."
  
• Dell's revenues fell 23% to $12bn in its fiscal 1Q10 results. PC shipments fell 22%. But founder Michael Dell was optimistic that 2010 would see a major client refresh with the arrival of Windows 7, given that most businesses have bypassed Windows Vista. "At home they have a brand new product with the latest operating system. [At work] their machines are going into the fourth or fifth year. This can't go on forever."
  

[edit]

Solutions

[edit]

Cloud Computing

• Gartner predicts that the Cloud Computing market will grow to $150bn by 2013, from $46bn last year. 83% of the market was accounted for by business processes such as advertising, e-commerce, HR and payments processing. Systems infrastructure services made up just 6% of last year's total.
  

[edit]

Virtualisation

• The virtualisation market in EMEA will grow by 55% this year to €512m, says Gartner.
  
• VMware, just coming to the end of a period of very rapid, virtualisation-driven expansion, reported growth of 7% to $0.47bn in 1Q09. VMware faces increased competition from Microsoft and Citrix, although both sets of rival products are regarded as inferior.
  
• Oracle is acquiring Virtual Iron, which will add management features to Oracle's current virtualisation strategy. With the proliferation of virtual machines (VMs) comes the threat of rampant sprawl. VMware's dominance in this market is under attack from just about everyone; with the hypervisor becoming a commodity, the issue is over who controls management of the VMs: the operating system, the appliance, or middleware provider? It's all about account control.
  

[edit]

Unified Communications

• In a bid apparently intended to take on both Cisco and IBM, HP and Microsoft announced a four-year alliance to target the Unified Communications (UC) market. This is an extension of their 20-year Frontline partnership, initially constructed to target the enterprise market. HP will provide its ProCurve networking products as well as IP desk phones, and will certify PCs and smartphones to run Microsoft's Office Communications Server. Although the long-term outlook is good for UC, the solution is suffering from clients' current reluctance to invest in major new projects.
  
• HP launched what it described as 'the industry's first converged, software, server, storage and networking platform that automates service delivery for data centres' and called HP BladeSystem Matrix, in order to counter Cisco's announcement of its UCS blade server. Since this solution is composed of existing HP components, it is available immediately, unlike Cisco's UCS which will arrive later this year. And while HP positions the Matrix as its own technology, Cisco relies on partners such as EMC.
  
• IBM and Juniper Networks were on the road together in the USA, hosting seminars describing their joint vision for 'dynamic infrastructure'.
  

[edit]

Mobile

• Many iPhone applications cost just a few pounds to load onto your iPhone. Although some iPhone apps have generated hundreds of thousands of dollar sales, most developers have barely broken even. But soon Apple will enable developers to take further payments within applications sold through the iPhone App Store. This will change the economics of the mobile application market, and is likely to increase Apple's market share because, until they have exploited this enhancement, developers will be in no hurry to work with rival platforms such as the Google Android or Palm Pre. Apple's App Store uses a well-established ecommerce platform, iTunes, to bill customers, which has helped make downloading and paying for applications as easy as purchasing and downloading a song. By contrast, Apple's competitors have had to build their own mechanism for discovering and paying for new applications from scratch. And as a result, virtual storefronts, such as Google's Android marketplace, have been slow to get off the ground.
  

• Collective intelligence could be the biggest revolution in IT since the advent of the Internet. Mobile phones have evolved into handheld computers which record the details of our lives:
  
  • GPS in the handset reveals where we are, when we go to work, when we get home and where we go at weekends. Online calendars show where we have been and where we will be next. Social networking reveals who our friends are, and location services reveal where they are. Our online search history reveals our interests. when we start paying bills with our mobiles, they'll record our purchases. Because we take our mobiles everywhere, they create a crucial bridge between the real and virtual worlds.
    
  • Logica demonstrates a scenario in which shops sense the arrival of a particular customer in a shopping mall and send a discount coupon to her mobile. Later the phone notifies the woman that two of her Facebook friends have entered the mall.
    
  • TomTom, the Dutch sat-nav firm, no longer tracks traffic conditions through roadside cameras but instead measures the speed at which mobile phones in cars are travelling. So TomTom can spot traffic jams as they happen and predict their likelihood by calculating the number of cars due to arrive at a pinch-point.
    
  • The big issue is, of course, privacy, with many users unwilling to hand over their digital footprint to third parties. Operators defend their proposals by saying they will be 'opt-in', and that each user will be known by a string of data, not their real name.
    
  • One analyst says that collective intelligence has all the right qualities to spread rapidly: “History shows that market-changing technologies are ones that enable a broad class of people to do what, previously, only an elite class could do. That’s exactly what the network does. It gives individuals and companies access to the kind of information only previously available to the likes of governments and vast corporations.” See The Times.
    
  
  

[edit]

Failing Ideas

• Microsoft is to shut down its Encarta online encyclopedia, which has struggled against Wikipedia and online history sites.
  
• BT says it has slowed down its £10bn investment in 21st Century Network (21CN) and has withdrawn a converged voice-on-broadband service because it wasn't likely to be profitable. The pilot migration to 21CN in South Wales continues.
  
• Industry analysts are suggesting that Business ByDesign, the SaaS-based suite that SAP has been developing for five years, has been a marketing disaster. To differentiate itself from the likes of Salesforce, SAP tried to provide a complete set of enterprise software. SAP was too ambitious when it should have allowed more space for partners to adapt the code. A Forrester analyst said that SAP may have to ditch the product and acquire a SaaS firm such as Netsuite instead.
  

[edit]

Systems

• In its 2Q results, HP reported worldwide sales up 3% (in constant currency) to $27bn, thanks entirely to the acquisition of EDS, which HP didn't own in 2Q08.
  
  • HP reported a 28% decline to $3.5bn in its server and storage revenues. Customers haven't spent so little on HP servers and storage since before the Compaq acquisition in 2002.
    
  • PC sales fell 19%.
    
  • Imaging and printing fell 23%.
    
  • But services revenues were up 99% to $8.5bn.
    
  • CEO Mark Hurd's comment that its customers' reluctance to spend on hardware could continue into 2010 caused Dell shares to fall in sympathy.
    
  • HP also announced it would cut a further 6,400 jobs (2% of its workforce).
    
  • HP now expects full-year revenues to fall 4-5%.
    
  • HP continues to focus on cost-cutting—HP has no new story to tell the industry or investors about growth opportunities.
    
  
  

[edit]

The Stack Argument: Oracle buys Sun

Oracle gained shareholder approval to acquire Sun for around $7.1bn. CEO Larry Ellison described Solaris as "by far the best Unix technology available" but it's unclear what he plans to do with much of Sun's portfolio:

1. Will Oracle retain Sun's $9bn-a-year server and storage business?
   
   • Being able to sell everything from disk to application will give the customer one neck to choke if things go wrong..
     
   • Microsoft's Steve Ballmer is reported to have said last week: "I have no idea why a software company would buy a hardware company."
     
   • Oracle arguably has a good track record for integrating software acquisitions, but it has never before taken on a hardware vendor.
     
   • Why should Oracle want to saddle itself with servers based on Sun's outdated SPARC chips?
     
   • More copies of Oracle's database run on Solaris than on any other operating system.
     
   • Many expect Oracle to sell the hardware business to Fujitsu.
     
   • If Oracle chooses to slug it out in the server market, it could push rivals HP, Dell and IBM into the arms of Microsoft.
     
   • Sun derives strong revenue streams from support and maintenance of its hardware, says Ovum.
     
   • But there is a trend for getting fast access to huge quantities of data on massive networks and making sense of it. An appliance consisting of a hardware and software stack attuned to that need is seen as a way to tackle this.
     
   • Ovum believes that Oracle could use its hardware and software stacks to market a series of pre-built specialist appliances.
     
   • Oracle's lack of hardware experience may cause some resellers, SIs and VARs to pause.
     
   • CEO Larry Ellison said that Oracle would "definitely" not sell off Sun's hardware business, once acquired: "If a company designs both hardware and software, it can build much better systems than if they only design the software. That's why Apple's iPhone is so much better than Microsoft phones." He plans to increase investment in Sun's SPARC processors, and work with Fujitsu (which has been helping Sun design its SPARC chips for many years) to improve the performance of Oracle's database software running on Sun's servers. Fujitsu has recently made hefty commitments to the alternative x86 chip architecture, so Oracle will need to work hard to persuade Fujitsu to stay in the Solaris/SPARC business.
     
   • Despite its CEO's claims that it wants all of Sun, Oracle has continued to try to sell Sun's hardware business since the announcement of the acquisition. But the asking price was "unrealistic", say sources close to the deal. It is also rumoured that Sun has cancelled development of the Rock processor, which would have powered its high-end Solaris servers. The budget for the project had shrunk as Sun lost market share, and key employees left Sun, causing the chip's planned 2008 launch to be delayed.
     
   
   
2. What will Oracle do with Java?
   
   • Java runs on 800 million PCs and 2.1 billion mobile phones.
     
   • CEO Ellison described Java as the most important software asset he had ever acquired.
     
   • Oracle no doubt wants the clout that comes with controlling Java as a weapon in his long-running battle with Microsoft and .NET.
     
   • While much of IBM's software is currently based on Java, Oracle could impose restrictions on IBM's use of the language in future products, says Forrester.
     
   • Equally, Oracle's concern about Java falling into IBM's hands may have been the primary motivation for this acquisition.
     
   
   
3. And what about the MySQL database?
   
   • Sun claimed more than 11 million people use MySQL, but unfortunately most opt for the free, unsupported version.
     
   • The former CEO of MySQL admits the acquisition has sent a chill through the open-source community. The software has already been 'forked' into new versions beyond Oracle's control, but stripped of a big company's sponsorship, MySQL could lose momentum.
     
   • Oracle doesn't have the same collaborative reach to the most innovative developers that Microsoft enjoys, but MySQL might enable it to get there.
     
   
   
4. How will the culture clash be resolved? Will the easy-going Sun folks get on with the hard-nosed Oracle management style?
   
   • Sun is considered to have one of the most bloated cost structures in the IT industry.
     
   • But Oracle is seen as arrogant and a blot on both independence and innovation.
     
   
   
5. Is it good news for Sun customers?
   
   • One analyst said that Sun customers should "expect to be dealing with more aggressive salespeople and tougher contract negotiations".
     
   • But Oracle's ownership should given them confidence that they have a long-term enterprise Unix strategy.
     
   • Sun customers should expect Oracle to raise Solaris maintenance prices. Oracle has a track record of doing this.
     
   
   
6. What are the implications for the IT industry?
   
   • Ovum believes the IT industry is condensing into four large players: IBM, HP, Microsoft and Oracle.
     
   • From Oracle's viewpoint, the acquisition is actually smaller than the BEA, PeopleSoft and Siebel transactions.
     
   • Ovum estimates that over $100bn has been spent in the past few years on acquisitions by Oracle, SAP, HP, IBM and Microsoft combined. The industry is now radically different to how it was in 2000.
     
   • This acquisition should remove any doubt that the pendulum has swung back towards large, integrated systems companies.
     
   
   
7. How does the acquisition affect Oracle's relationship with HP?
   
   • A spokeswoman said HP, already a close partner of Oracle and Sun, would seek to strengthen its ties with Oracle.
     
   • HP and IBM are both big partners to Oracle, and now Oracle has acquired one of their biggest rivals.
     
   
   

[edit]

PCs

• Fujitsu, which has recently purchased Siemens' 50% share of Fujitsu Siemens Computers (FSC) for €450m, has set itself the goal of doubling its sales of Intel server units in two years, and of increasing its worldwide share from 4% to 10% by 2012. Fujitsu's global server and storage manufacturing and R&D will be centralised in EMEA.
  
  • Fujitsu appears to be downplaying its volume PC business and substantially reducing its exposure to the consumer market in EMEA, wrote Canalys. But this will make it less relevant to the volume channel, which will harm its prospects in the server market.
    
  • Fujitsu has no chance of doubling its server market share unless its PC business returns to growth. This is not the first time FSC has declared an implausible ambition—some years back it said it would become a top three player in every national market in which it participated.
    
  
  
• Acer is close to overtaking HP in the PC market in Western Europe. According to Gartner, Acer's share is now 22.1% versus HP's 22.8%. Dell's share is just 10.6%, because of its focus on the corporate market and late entry into the netbook market. Although HP is still No. 1 in the UK, Acer takes the top slot in both France and Germany.
  

[edit]

Servers

• Worldwide server revenues fell by 25% in 1Q, according to IDC. Shipments fell by 27%, indicating that low-price volume servers suffered the biggest decline (30%). HP and IBM shared the No. 1 slot with 29% revenue share, while Sun and Dell tied for No. 3.
  
  • Even blade server revenues fell, for the first time in their nine-year history, by 14% to $1.1bn. HP dominated this market with a 52% share.
    
  • IDC does not expect to see any halt to the general decline until 3Q09, because the server market stalled in 3Q08.
    
  
  
• According to IDC, EMEA will be hardest hit by the downturn in server buying. Spending on servers will fall 33% to $12.4bn this year, with spending on enterprise servers falling a shocking 52% to $2.1bn. Delays to various chips—Rock, Nehalem and Tukwila—shoulder some of the blame. Midrange and high-end servers will not return to growth until 1Q11, forecasts IDC.
  
• There is a bloody price war going on in the server market, wrote The Register, and it will worsen during the rest of the year. It will be very tough for any server maker to get a dollar to the bottom line this year. And Moore's Law will make the price war even worse: the vendors will have to sell more iron to get the same revenue. Among the 'highlights':
  
  • Yet again Sun didn't make it onto the list of the top five x64 vendors.
    
  • IBM is the top Unix vendor by revenue, gaining three points of market share. (IBM's Unix revenues fell only 14%, against HP's 19% and Sun's 27%.)
    
  • The once booming Eastern European market was particularly awful, with sales plummeting 48%. Western Europe was only slightly better, with revenues down 34%.
    
  
  
• IBM's worldwide STG sales were down 23% to $3.2bn in 1Q09. The Register wrote that with Cisco now wanting a piece of the server pie with its Unified Computing System (UCS), and Oracle wanting to take a lot of cost out of Sun to make it more efficient, IBM may find the server market 'tough sledding' in the near future.
  

[edit]

Storage

• The worldwide storage market fell 18% to $5.6bn in the first quarter, according to IDC. The total capacity shipped rose 15% to 2.1 petabytes. HP led the market with a 17% share, with EMC second on 16%, IBM third on 14%, and Dell fourth on 12%.
  
• EMC started a bidding war with its storage rival NetApp for data de-duplication specialist Data Domain. This a defensive move by EMC, which seems to be prepared to pay a premium to keep Data Domain out of NetApp’s hands. De-duplication is extremely useful when dealing with backups, because it can dramatically shrink what are often huge volumes of backup data. Data Domain is a very strong player in data-centre backup de-duplication, and by some estimates last year owned two-thirds of that market. (Neither EMC nor NetApp have such a product today.) The other high-profile company in this sector was Diligent. Last year IBM snapped up Diligent for a reported $200m, which is now looking like a very good move.
  

[edit]

Software

[edit]

Applications

• The worldwide market for business intelligence, analytic applications and performance management software increased by 22% in 2008, from $7.2bn to $8.8bn, says Gartner. Industry consolidation has resulted in customers accelerating their migrations and upgrades. SAP was the top BI company, with a 24% share in 2008, following its acquisition of Business Objects.
  
• SAP reported a 33% decline in licence revenue (down to €0.42bn), substantially below expectations. Licence revenue is a good gauge of future fees from maintenance and consulting. SAP told investors not to expect an upturn before 2010.
  
• Oracle reported a 13% decline in new licence revenue to $2.7bn for the quarter ending 31st May. Oracle claimed it was gaining market share at the expense of SAP, but it is comparing its best quarter (the last of the financial year) with SAP's traditional worst (the first quarter of its financial year).
  
• Sage, the UK-based accountancy software firm, announced half-year revenues up 17% to £0.75bn. But with currency movements stripped out, this became a 3% revenue decline for Sage. Revenues from North America fell 9% to £0.30bn. Services revenues fell 3% in North America but gained 7% in Europe. Sage's chief executive said he expected demand in the second half to remain "muted".
  
• Symantec reported a 13% decline in EMEA, in a quarter when worldwide revenues declined just 4% to $1.5bn.
  

[edit]

Services

• According to IDC, the European IT services market is set to enter negative growth (down 0.6%) this year as support, training and project revenues fall.
  
  • Project revenue is predicted to drop 3% while firms get cold feet about investing in major deployments or costly upgrades.
    
  • Outsourcing is still expected to grow this year, with revenue projected to hit 4%.
    
  • Support and training will have a particularly awful 2009, with revenue dropping almost 5%. The IT training market will plummet by 10% as firms book education only when courses are needed.
    
  
  
• Outsourcing providers experienced business as usual for the first six to eight months of 2008 but then encountered the beginning of the downturn, cccording to Gartner. This surprised the firm's analysts because the potential cost savings from outsourcing usually keep the segment buoyant. The Indian vendors were affected early in the economic downturn, as they rely heavily on the financial sector, and typically lead with offshore application development projects which can easily be delayed in tough times. Gartner believes the global IT services market reached $806bn in 2008, up 8%.
  
• More than half of companies and clients polled for the Black Book of Outsourcing said they expected spending to come back to the pre-recession levels by the end of the year. But clients will be looking for short-term projects of less than six months and will steer clear of complex pricing deals.
  
• Accenture reported a 17% fall in revenue to $5.2bn. Consultancy was down 20% to $3.0bn for three reasons: price pressures, the move away from large contracts, and customers postponing the decision to extend existing contracts. Outsourcing saw a 9% drop to $2.2bn, due to the continuing shift to lower-cost resources and the lower volume of scope expansions on existing contracts. $6.6bn in new orders was booked.
  
• Fujitsu Services reported revenues of £2.8bn (up 7%) for the year. Its order book was down to 6% to £6.7bn. Revenues in the UK grew 4% to £1.7bn but Fujitsu Services did not win a single large deal last year.
  
• Unisys reported a 16% decline in revenues to $1.1bn: 14% for services and 29% for products. Even outsourcing was down 14% to $0.43bn.
  
• Atos Origin reported an 8% increase in UK revenues to €0.2bn on the strength of contracts in the public sector and with Brakes and Premier Foods. Atos's worldwide revenues fell 1% to €1.3bn. A 15% fall in consulting revenue and a 6% drop in SI were offset by a 6% rise in managed operations. Of Atos's 20 key wins in the quarter, only one featured a significant offshore component.
  
• Phoenix IT Services reported sales growth of 4% to £104m for the year ended 31st March. The firm's chief executive said there had been fewer multi-million pound, multi-year contract opportunities; consequently new business wins were smaller. Customers are taking longer to reach purchasing decisions, renewal rates declined from 86% to 66%, and the order book had dropped 17% to £142m.
  

[edit]

Exposure to Risk

[edit]

exposure to the declining hardware market

• Sun's revenues for 1Q09 fell by 20% to $2.6bn, in part because of rumours of it being acquired by IBM. Sun's European revenues fell by 24% to $0.84bn. Product sales were down 24% to $1.5bn. Even services revenues were down for the third successive quarter. In recent years, Sun has made nine attempts to restructure, resulting in fewer employees with reduced productivity. It was already on a death spiral before the credit crunch.
  
• Shares in Morse fell by nearly 25% on news of an operating loss of £0.4m for the quarter ended 31st March and a 10% fall in revenues to £157m for the nine months. Earlier this year Morse announced it was proud to be selling hardware, which makes up 70% of its UK revenues.
  
• Computacenter, which is switching sales from hardware to services, announced an 8% constant-currency fall in revenue to £0.6bn, but an improvement in profits for 1Q09.
  

[edit]

dependent on a small number of large clients

• The revenues of Tech Mahindra, which derives 52% of its business from a single customer, BT, fell by 9% sequentially, due to a 17% drop in revenues from BT. This 17% drop is in addition to an 18% fall the previous quarter. Tech Mahindra now has to cope with the integration of troubled Satyam and the management of the huge debt needed to fund the acquisition.
  
• T-Systems reported 1Q09 revenues of €2.1bn, down 4%. Germany still provides 70% of T-Systems' business, but these revenues fell 8% largely because business from its parent, Deutsche Telekom, dropped by 12%. T-Systems wants to shift the balance away from onshore towards offshore, and to that end it is cutting 3,000 jobs at home and developing its partnership with Cognizant.
  
• Despite revenues up 3% to £21bn, BT announced its first-ever full-year loss of £0.13bn. Ian Livingston completed a horrible first year as CEO by declaring the performance of BT Global Services "unacceptable". BT is taking a further charge of £1.3bn, of which £1.2bn relates to just two Global Services contracts. 15,000 job cuts have been announced, to add to the 15,000 axed last year. Livingston intends to target contractors and agency staff, but some permanent BT employees will have to go. The powerful Communications Workers Union warned of possible strike action if BT ditches its policy of only seeking cuts through natural wastage and voluntary severance.
  

[edit]

protected by resilient industries

• Capgemini predicted a 2% decline in like-for-like sales in 2009, but it is benefiting from crisis-resilient industries such as the public sector and the energy sector.
  

[edit]

Marketing and Sales

[edit]

Creating Demand

[edit]

...by creative use of social networking

• Dell has achieved $3+m in sales to Twitter followers who clicked through its posts to its websites to make purchases. Dell says it posts 6-10 times per week to its DellOutlet account, which is where the majority of Twitter-based sales have come from. Almost every post includes a coupon or a link to a sale, and about half of the posts are Twitter-exclusive deals. The PC maker, which has about 600,000 followers, is one of the Top 100 most-followed accounts on Twitter.
  

[edit]

...by near-shoring

• Atos Origin made its first acquisition in China. It will add over 100 SAP consultants to its workforce with the acquisition of Shanghai Covics. Ovum described this as a smart move because Chinese businesses often prefer local vendors over foreign ones for their ability to provide customer-facing services and support.
  
• The CFO of Wipro said the firm is keen to make acquisitions in France and Germany, because the outsourcing markets are less mature. "It's not a market share game yet. It's more about creating the demand," he said. Near-shoring—i.e. establishing centres near the client—makes sense in the face of potential protectionism by governments who fear a political backlash if locals lose their jobs to outsourcing.
  

[edit]

...through active fans

• A number of journals celebrated the 21st birthday of the AS/400, noting that with the mothballing of HP's MPE and the outsourcing of OpenVMS development to India, AS/400 is essentially the only surviving midrange platform. IT Jungle welcomed the formation in Japan of iManifest—a group of customers, ISVs, and resellers dedicated to promoting the AS/400 platform and growing the System i market. IT Jungle suggested that System i needs an advocate inside IBM.
  

[edit]

...through very visible sponsorship

• Atos Origin has extended its relationship with the IOC to include the 2016 Olympics. Financial terms of the deal were not disclosed, but it's clear that Atos is relying on spin-off sales in order to make any profit.
  

[edit]

Selling Tips

• CEO Hark Hurd has already met more HP prospects, customers and partners in 2009 than in the whole of last year. The reason is simply: the meetings work. The company has metrics which prove that getting top-level executives in front of customers and VARs leads to increased sales and more loyal buyers. Partner comments include:
  
  • "He took the hard questions and had good, honest answers. He is HP's best salesperson in front of customers. He's believable and trustworthy."
    
  • "Mark is very articulate on HP's overall business, whether it's printers, servers, storage or PCs."
    
  • "Customers were very impressed, very happy. It gave them a better understanding of HP's direction."
    
  
  
• TCS won the contract to deliver the IT system for the Child Maintenance scheme. This follows EDS's troubled $0.5bn contract with the Child Support Agency. But whereas EDS created bespoke software, TCS will use an off-the-shelf package. The win puts TCS on the UK public sector map, wrote Ovum. Suppliers no longer need to have a tier-1 client list to win a tier-1 client—they just need a sound offer, a keen price and a proven ability to deliver. Success has not come overnight for TCS: it worked hard to understand the market, build up contacts, win friends and influence people.
  

[edit]

Sales Organisation

• Capgemini is concentrating its business consulting activities in a new structure, Capgemini Consulting. Previously its consulting activities were attached to regional business units. Its new boss explained that in normal times, many client decisions to seek outside help were taken regionally or even nationally. Now those decisions are being taken at the global level.
  
• BT Global Services was re-structured during the quarter after making a massive loss for the firm:
  
  • UK Domestic has 1,100 customers and £2.5bn revenues,
    
  • Multinational Corporation Business has 400 customers and £3.5bn revenues,
    
  • GS Enterprise is a portfolio of non-UK businesses specialising in domestic telecoms and professional services, with £2.8bn revenues.
    
  
  

So BT Global Services is becoming more geographically organised, and clients can expect more local attention. The firm has, for example, given up on a single, worldwide billing system. £200m of UK business has been transferred from Global Services to BT Retail, further emphasising BT's more localised approach. We should expect BT Global Services to partner more, e.g. with Vodafone.

[edit]

Channels

Channel companies must take their transformation from box-shifting middlemen to solution provider more seriously, say industry players. Many are still relying on a core of product sales, and merely wrapping a few services around the hardware or software. At the solutions or managed services level, a far greater degree of consultancy should be apparent, focusing directly on customer needs, with little or no emphasis on selling product. Product margins will continue to erode. End-user businesses are increasingly demanding a single point of contact for IT provision. These factors will force change in the channel. One of the biggest obstacles to this channel transformation is the vendors themselves. Vendor incentive and channel reward programmes are almost invariably linked to product sales. Vendors need to figure out how to reward VARs for selling SaaS. And vendors must avoid stealing deals from their own channel partners.

• According to Plimsoll, 29% of the UK's top 1,000 resellers should be rated as 'Caution' or 'Danger'. “Their management are now operating under severe financial pressure where even normal trading is proving hazardous. Many of these firms seem likely to be sold off; they are at an extremely high risk of failure unless they turn their performance around fast.”
  
• Distributors expect the number of reseller collapses to increase later this year. The CEO of Ingram Micro expects to lose about 15% of its reseller population this year, compared to a usual churn of 5-10% a year. While some resellers might be able to hold on for six months of downturn, he said, 18 months was not viable. In a downturn, it is often the lack of credit that administers the killer blow to resellers.
  
• After Cisco admitted that the level of channel partner engagement in two key programes—managed services and financing—was lower than anticipated, partners told Cisco that the complexity of its programmes is deterring them from getting involved. Others aren't engaging with the firm because of the requirement that they hand over customer details to Cisco.
  
• Resellers in the UK say that HP's direct sales team has been stealing deals from them, even those officially registered. The majority of HP field sales continue to behave honourably, said one, but one group of people had lost the trust of his people after the loss of three sizeable orders. One HP Preferred Partner said that its business with HP was down 80% year-on-year, partly through economic conditions but also because of the deal-stealing issue. Some of HP's Gold partner said that HP's increasingly desperate actions are driving them into the welcoming and "incredibly supportive" arms of Dell.
  
• But UK resellers make three complaints against Dell:
  
  1. Dell's direct sales team sometimes undercuts partners on price even though the partner had registered the deal with Dell.
     
  2. Dell's deal registration system takes far too long: the target is 4-6 hours to get each deal approved, but Dell can only promise that resellers should get an answer "within a day". Partners are used to HP's system which takes just 1-2 hours.
     
  3. Resellers wants Dell to introduce into Europe the distributors it uses in the USA—Tech Data and Ingram Micro—in order for them to be able to offer next-day delivery.
     
  
  
• Tech Data produced an impressive set of 1Q results in Europe: revenues down just 3% (compared to Ingram Micro's 12% drop), and worldwide net profit up by almost 50% (compared to Ingram's decline of more than 20%). These results reflect two different strategies:
  
  • Ingram's focus on profitability saw it pass freight charges onto customers, quit much of the Nordic region and move away from low-margin product lines. But this came at the expense of scale and...profitability.
    
  • Tech Data, in contrast, continued to make acquisitions across Europe, focusing on market share and revenue growth, as well as adding vendor lines and strengthening its presence in key regions, such as the Nordics, Spain and Germany. Its strategy of managing separate volume and specialist divisions, through Tech Data and Azlan, has also proved successful, as it allows the company to capture growth opportunities in areas such as security, virtualisation, storage and software. Ingram Micro’s approach means it has excluded itself from some of these areas.
    
  
  
• Dixons Store Group closed all eight of its PC City stores in Sweden, 19 of its 23 Markantalo shops in Finland, and 43 shops in Italy. Its share price jumped 12% on the news.
  

[edit]

Pricing

When many firms are struggling to get credit, price has become a critical factor. Clients are employing many techniques to try to make their money go further. Vendors with their eye on the long term should do what they can to help them.

• SAP has announced a benchmarking programme under which it will postpone 30% increases in its maintenance prices until it can document cost efficiencies enabled by its new enterprise support programme, using 12 agreed performance indicators at 100 nominated customers.
  
• Capita is renegotiating the rates it pays to its contractors in response to client pressure for lower deal prices.
  
• HP has enhanced its managed enterprise services with new licensing options. Proposed structures include multi-tenanted systems where all users are supported with a single configuration, subscription plans based on individual usage, and long-term, perpetual service offerings. "Customers can do more with flat or shrinking IT budgets when they have a choice of procurement models for software and services," said HP's VP of worldwide alliances and software and solutions.
  
• Wipro is offering more fixed-price contracts, because clients are looking to cut costs. Previously Wipro billed customers according to the number of employees working on the project.
  
• Ovum reported on the way Accenture handles client demands for cost-cutting on existing contracts: Accenture tries to shift the discussion to a discussion on the price or scope of the contract. With its flexible pricing models, Accenture describes its approach as 're-solutioning', rather than renegotiating.
  
• In recognition of the financial realities among many of its clients, Accenture is rumoured to be planning a new subsidiary in India operating under a different name with rates well below the premium prices it has traditionally charged.
  
• The global outsourcing market is predicted to grow by more 8% this year as businesses look to save money on IT expenditure, yet companies may emerge from the recession lacking in innovation and locked into cheap-and-not-so-cheerful contracts that are expensive to renegotiate or cancel. Some companies are going to suppliers and saying: 'Look, you've got this contract, but we need 20% off it. So how are you going to do it?' But you can't cut costs by 20% unless you don't do certain things. Other cost-cutting practices include:
  
  • Companies bundling contracts together into one supplier so that they can ask for a much greater cost reduction, or
    
  • By going to more contractors, slicing it even smaller, companies can then go for the lowest bid on each contract. It might look attractive to break up large contracts or, indeed, to move work you have done in-house into this multi-sourced environment,but companies need to invest in staff to manage the relationships with suppliers.
    
  
  

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Corporate Strategy

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Acquisitions

• There was a 3% increase in the number of acquisitions in Europe in 1Q09, compared to 4Q08, but a 25% fall in their total value, due to the shortage of credit.
  
• Acquisitions in Europe's IT channel gained momentum as credit dries up for weaker resellers and distributors, reports Canalys. It will largely be the niche specialists which are acquired, not the volume players. Rather than acquire a struggling volume player, its competitors will simply wait for it to go out of business and gain market share by selling direct to its customers. And the talented sales and technical specialists at such firms can be recruited. The downturn will eliminate the least healthy channel players, but the down-side is that many of the most technically competent players don't have the most effective financial management skills. Vendors should look for ways to support the smaller specialist.
  
• CEO Michael Dell said that, with technology firms currently receiving relatively low valuations, the economic downturn provides a good opportunity for Dell to digest a big acquisition.
  
• Microsoft issued $3.75bn of debt for the first time in its history, but denied that the cash was needed to fund a rumoured acquisition of SAP. BNut Could Microsoft (or even IBM) afford to buy SAP, whose market capitalization is $47bn? The cash that Microsoft raised in debt is trifling in comparison, and not enough when added to Microsoft's £25bn cash pile. Though IBM has spent $86bn on share buybacks since 2000, it now has only $12bn in cash, according to its 1Q09 balance sheet, meaning that it doesn't have anything like enough for a cash offer. So it would have to be a merger, not an acquisition, between IBM and SAP, and IBM's $134bn capitalisation means a roughly 3:1 balance of power between IBM shares and SAP shares. But given that IBM's revenues are about nine times SAP's, and its profits about six times, giving up quarter of the control of the resulting Bigger Blue might not be worth it.
  
• Rackable Systems bought SGI (the server company formerly known as Silicon Graphics) for $25m. SGI's stock market value was less than $5m just before the announcement, when it filed for Chapter 11 bankruptcy protection.
  
• Capita acquired Carillion IT Services, the external IT delivery unit of Carillion plc, for £36m. The business, with its 440 UK employees, will be renamed Capita IT Services.
  
• Tech Mahindra, the Indian services provider 31% owned by BT, won the auction to buy scandal-ridden Satyam for about $1.1bn. One can see some benefits: Tech Mahindra gets to diversify away from its telecoms specialisation, a vertical accounting for around 95% of its revenues, and away from BT, which provides over 50% of its business and is desperate to cut its costs. But there are many reasons to consider this a highly risky acquisition:
  
  1. Tech Mahindra overpaid. Its bid was 58 rupees a share; the next highest was 49 rupees.
     
  2. Satyam is subject to potentially enormous legal liabilities, including a class action from US investors, and a $1bn lawsuit from a former client for forging signatures on a patent.
     
  3. There is no accurate financial information available on Satyam. Its former auditor, PricewaterhouseCoopers, said in January that its audit reports were no longer reliable.
     
  4. Satyam has nearly twice as many employees (48,000) as Tech Mahindra (25,000).
     
  5. Tech Mahindra has almost no experience of digesting an acquisition, let alone one of this size. Said one advisor: "What Tech Mahindra has bought is the dog and the clients are the tail. Trying to absorb Satyam is going to be like eating an elephant."
     
  6. Some analysts believe that Tech Mahindra is basically buying a set of contracts and Satyam's employees. But Satyam has already lost 46 customers and 13,000 employees since the scandal broke at the end of last year.
     
  7. Tech Mahindra is forbidden from selling any of Satyam's "material assets" for two years.
     
  8. Tech Mahindra's work for BT has sometimes been of questionable quality. The distraction created by this acquisition might further damage Tech Mahindra's work; and, if Satyam's potentially enormous liabilities are realised, BT's 31% holding might end up being worth almost nothing.
     
  
  

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Outsourcing

• Sun was said to be outsourcing its whole UK service organisation—150 field engineers—to a specialist, pan-European third party. Some of Sun's customers, which include banks and government agencies, may be concerned by the move, which would give non-Sun staff access to their confidential data.
  

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Offshore

The global economic crisis precipitated a re-think about offshore, with some Indian firms pulling back staff from Western countries, and clients in Europe more inclined to base their support staff at home rather than in Europe.

• One research firm is advising clients not to buy shares in any Indian services companies. The factors that PINC Research cites are: reduced growth rates, price pressures, project delays and cancellations, the return of economic nationalism, and a lack of orders.
  
• The relative savings from offshoring are diminishing, leading some users to bring back work to Europe. The CTO of Citigroup said that whereas offshoring had a 50% cost advantage five years ago, today it may be only 15% cheaper due to new efficiencies at home.
  
• Two services providers—Calyx and ANS—claim that with sterling down by as much as a third, it makes sense to run a services operation onshore in north-west England rather than in central and eastern Europe. "We're not just talking labour rates. The cost of land, buildings and insurance is equal to or less than CEE, plus you have the benefit of the English language."
  
• TCS has cut its UK headcount by 10% to control costs in a stagnant market. TSC is pulling back sales and admin staff from customer offices in the UK and delivery centres, in order to fill other posts in India. Its European head said they could return to the UK when the market picks up. TCS says it has 170 customers in the UK and Ireland, including British Airways, BT and the National Grid.
  

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Next Steps

• If you think this newsletter is of any value, or if you have a suggestion to improve it, please let me know by email. And encourage your colleagues or business partners to subscribe, again by sending me a short email.
  

Many thanks

Gavin Wilson

IBM system engineer, instructor, product manager and market analyst (1980-2009)

gavinjwilson@hotmail.com

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