While last year's downturn may have slowed some emerging trends, it accelerated others. In both cases, these trends have enough momentum to move forward as the industry looks for signs of a recovery in 2002.
Resellers can anticipate the march toward the delivery of IT as a service to be slow and steady. Technology buyers have become serious about security and disaster recovery since 11 September and return on investment (ROI) will remain critical.
Industry observers also anticipate consolidation in the channel and a push by vendors into global markets, whether or not this has repercussions in the domestic market.
1. Why build when you can rent?
The outsourcing debate will continue in 2002, though most resellers believe the days when IT is offered strictly as a service are years away.
Dil Thomas, a partner at Accenture, said that the integrator is already seeing a spike in outsourcing requests, not just for straightforward infrastructure services such as data centre management, but for services that automate business processes.
"There is a huge amount of interest in a back-office utility that you just plug into," he said. "If you combine that with the bandwidth trends and with where I think the internet will go, you start to see something very much like a processing facility for data."
However, Graham Long, channel manager at Hewlett Packard (HP), maintained that, although outsourcing would be key for the channel, it was impossible to say when it would take off. "It is like asking how long a piece of string is," he said.
Companies such as Microsoft and Sun Microsystems are re-engineering their operating systems to handle the provisioning of applications or application features over the internet. But the outsourcing trend will not catch on until developers account for the new business model in their licensing strategies, Thomas said.
Among the tasks companies will increasingly outsource are stress and load testing, storage management, document management, analysis of web traffic and capacity planning, resellers have said.
Laurie McCabe, vice president at research firm Summit Strategies, predicted that the applications that will lead the services model are ones that were never offered in a packaged format.
With the global economy still uncertain, companies are open to experimentation, to cut costs and gain business advantages.
"Right now, with firms cutting back, I think a lot more customers are considering software as a service, whether it is from a next-generation reseller or an applications service provider," said McCabe. "They simply do not have the money or resources to hire their own."
Andrew Tilley, a consultant at reseller ACL, explained that his firm had been contracting out for a while. "IT departments will become extinct," he said. "Outsourcing is what companies are looking for. The savings are big and the up-time is much better because of the support factors."
2. Maximum security
The 11 September terrorist attacks pushed security and disaster recovery to the top of corporate agendas. Companies were forced to consider whether they were prepared for disaster and whether their corporate data was protected from attacks, whether physical or electronic.
Firms scrambled to protect their networks, and resellers expect the trend to continue in 2002.
"Security is finally real for a lot of people," said Duncan Alexander, vice president and principal at networking integrator Alexander Open Systems. Resellers such as Alexander say that before the attacks, security and disaster recovery often languished at the bottom of IT budgets. Not anymore.
"Companies are much more willing to talk about how they can protect their information assets," said Roger Blohm, director of managed services at security reseller Satel. "Our sales cycle has changed from convincing clients they need security services to convincing them that we are the right solution."
So far, though, much of the activity stemming from heightened security awareness remains in the planning stages, and it is not yet clear if it will translate into money spent, warned IDC analyst Allan Carey. "Whether companies are actually spending money on these services, I'm not sure right now," he said.
Still, even without taking into account the impact of 11 September, IDC projected the security services market to grow from $6.7bn in 2000 to $21bn in 2005. Meanwhile, research firm Computer Economics reported that businesses plan to increase spending on security by between 50 and 300 per cent.
"That has definitely come out of last year's incidents; there's no question about that," said Michael Erbschloe, vice president of research at IDC.
3. Channel consolidation continues
Shrinking capital and the recession seem the obvious culprits. But resellers say there is a more sinister reason why channel consolidation will continue in 2002: direct sales initiatives by vendors.
Larry Autorino, vice president of US firm ComputerLand, said: "We are going to see resellers getting bought up; we are going to see resellers with sales of $10m or less going out of business.
"We have always been profitable, but last year was the first year in which we will not have turned a profit. I could say this is because of 11 September or the recession, but I'm not going to say that. The real reason is IBM and Compaq."
Resellers have argued that moves by vendors to take more direct business in the small to medium sized enterprise market, coupled with new rules-of-engagement strategies from Compaq and HP that name vendor-direct accounts in the enterprise space, are likely to hasten channel consolidation.
One reseller, which asked not to be identified, claimed that HP took many of the firm's enterprise accounts when it outlined its Hard Deck strategy last year. "I told them: 'You've put all of my accounts above the Hard Deck, so you've taken all of my accounts away. I don't know why I'm a partner of yours anymore,'" he said.
He added that any reseller that was trying to go up against vendors in enterprise accounts would not survive because of their inability to compete with manufacturers on price.
Resellers acknowledge that the channel is migrating to a more services-oriented model, but when selling solutions it is impossible to eliminate hardware sales from the equation. As such, the sudden loss of hardware revenue is likely to unleash a vicious cycle: balance sheets suffer, and lenders cut credit lines.
HP's Long said: "Businesses will be on the look out to buy value-add companies which can be added to their existing portfolios. At a time when the economy is the way it is now, the channel will always consolidate."
Resellers agreed that, even if the economy rises out of recession this year as expected, the channel is still likely to be poised for more consolidation.
"The faster you grow, the more capital you need," said Larry Holzenthaler, executive vice president of sales and marketing at US storage integrator Total Tec Systems, which was acquired in November by distributor Bell Microproducts.
"As you compete with the bigger players, you need critical mass," he added. "When you get to the $100m range, you become an awkward size. There are some economies of scale that you need to address as you expand the business."
Brian Burke, manager of D&B Computanet, said he believed that consolidation has been happening in the channel for the past three to five years and is set to continue.
"We have had a lot lately; there was Landis and Westcon last week, and there is the HP/Compaq merger in the wings. Companies are looking to add more skills to their businesses. One area where consolidation has been happening is in the distribution sector. Companies are after a more global presence, and they have to keep to a global scale if they want to compete and succeed," he said.
4. Reign of ROI set to continue
Selling technology became a little tougher this year because buyers started to demand greater proof of ROI, and this emphasis is likely to continue driving technology spending decisions in the year ahead.
Take, for instance, Jack Burrows, director of technical services at a temporary nurse staffing organisation with 140 locations. Like many technology buyers, Burrows predicts ROI to increase in importance in 2002. "ROI is going to be the driving force for deciding whether or not we move forward with a project," he said.
Burrows added that he relies heavily on his strategic reseller, GreenPages, with which he spent close to $1m last year, to help make the ROI case to senior managers. "Because of the overall spending constraints we are operating with, I don't have experts on staff for every piece of hardware and software I run," he admitted. "I have to rely on GreenPages."
GreenPages has responded with a stepped-up focus on ROI in its technology assessment and pilot programmes. "These types of assessments, pilots and evaluations will be increasing," said Tobi Gagne, director of professional services support at the company. "We are doing a much higher number of pilot projects."
Gagne explained that IT spending decisions were increasingly being made at the chief executive level, with input from chief technology and financial officers. "Multiple signatures are needed before a project is signed off," she said.
The focus on ROI is a dramatic change from a year ago, when the heads of business units had open chequebooks, industry executives said. "Right now chief executives at a lot of companies are reviewing any major purchases," said Ben Horowitz, chief executive at managed service provider Loudcloud. "Now, we always see the financial officer in the decision making process."
Whereas the focus in the 'old economy' was on scalability and speed to market, the focus now is on "cost reliability and security", according to Horowitz.
The ROI focus has not been as intense in the SME segment of the market, according to Brian Young, sales manager at IPT Northwest, a 17 year-old US-based reseller. This is because businesses have outsourced technology decisions to a reseller which they rely on as a trusted partner, he added.
GreenPages' stepped-up focus on ROI methodology is also a result of its desire to become a trusted partner for clients and "help them improve their profitability", according to Glen Jodoin, vice president of operations at the firm.
That kind of long-range thinking may be the critical reason why resellers should pay closer attention to ROI in the coming year.
5. Going global
If the world is getting smaller, the market for IT goods and services is expanding. With the outlook for most markets uncertain, many IT companies are looking overseas for opportunities to sell products and services and maintain growth rates.
Executives say that, while overseas markets are also struggling with the economic slowdown, they still offer opportunity for expansion into new and untapped markets. "A lot of the demand that companies like Siebel and i2 are seeing now is coming from overseas, and Europe in particular," said Bob Beach, vice president of the technology business unit at US-based Inforte.
Inforte's customers are asking for more solutions, especially when it comes to customer relationship management and supply chain management.
In addition, clients are opening offices overseas and developing a more aggressive worldwide presence.
"That is certainly creating additional opportunities for application providers, and for consulting firms like us," Beach said. "Globalisation applies to all of these companies and, if our market is picking up there, that means demand for other technology is as well."
Andrew Tilley, of UK-based reseller ACL, which has already opened an office in France, said: "It is a case of recognising other markets. The French resellers are not as strong as we are in the educational sector, so we have pulled in a lot of business there.
"And the French government has put lots of money into getting people onto the internet, which is another space in which we can make money."
The recent launch of Opodo's service in Germany provides some proof of that notion. Sapient, an e-services company, managed a team of 20 vendors to design and implement multiple internet sites for Opodo, an online travel service created by nine of Europe's leading airlines.
Anne Smith, vice president of consultants and integrators at IBM, predicted global demand for server consolidation, disaster recovery, data management and the like would continue in 2002. She explained that Big Blue's growth rate was about equal across the company's sales regions, including Europe, Middle East and Africa, Asia Pacific and the Americas.
She said that strong sales of IBM's high-end z-series servers in a variety of regions across the globe supported the notion that the server consolidation trend was spreading.
"We have grown z-series server sales globally more than 40 per cent every quarter this year," Smith said. "So you can see the focus relative to the investment clients are making."
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