Depending on which side of the despatch box an MP rests his feet, the recession is either over or nearly so, or is still with us and is likely to deepen.
In many ways the IT industry is an excellent barometer of the economy as a whole. An increase in expenditure on IT projects, products and staff means that business in general is confident of expansion. A delay in implementing projects, a decision to soldier on with older products and a reduction in staff or the freezing of recruitment indicates that business confidence is at a low ebb. For the IT industry itself, business confidence is no less a critical issue than for other parts of the economy.
The Computing Software and Services Association (CSSA), the trade association of software houses and systems integrators, carries out a quarterly survey to gauge the business optimism of its 500 members. For the first three quarters of last year less than half of CSSA members felt confident about an increase in business. Forty seven per cent of members polled in the first quarter were optimistic about the general business situation, 40 per cent in the second quarter and 43 per cent in the third. But there are some fluctuations in the CSSA?s quarterly figures. In the first quarter of 1996, 51 per cent believed that 1997 would see an improvement in business, 54 per cent came to the same conclusion in the second quarter, but this figure dropped to 48 per cent in the third quarter.
Rob Wirszycz, director general of the CSSA, is in no doubt about the mood of his members ? it is one of optimism. ?The recession is definitely over and has been for a couple of years, but some people are acting as if it still exists. Companies are not investing in training and products. But I believe we are in a boom time and it is sustainable,? he says.
?Those companies that are slow to invest in new projects and products are doing so because of memories of when they expanded fast prior to the onset of the recession in the 1980s, and were later forced to cut back.?
The CSSA believes that changes in the technical and business environment will spur companies to invest in IT. Wirszycz believes that the internet and intranet are fuelling investment in IT and the next wave prompting companies to invest more in technology will be electronic commerce. A second factor is the demand for mobile communications and greater bandwidth.
Another indication that the recession is over is a demand for good, qualified staff. ?Good technical staff and sales people are hard to come by, and it is creating a bottleneck. When you get bottlenecks, things are improving,? Wirszycz says.
The worldwide PC market continues to grow, but not as spectacularly as in recent years, according to analysts Dataquest and IDC. Dataquest third quarter figures for 1996 show an average growth of 17 per cent. During 1996 the market grew by 17.7 per cent. IDC reported similar figures, suggesting the market grew by 16 per cent.
While on the surface these figures may look good, they are, in fact, at an all-time low. From 1991 to 1995 the market grew in excess of 10 per cent per year. The second consideration is that the figures for the whole year reflect the Christmas period when sales of home market PCs are unusually high.
But even so, an annual growth rate reaching double figures is not something to be sniffed at, and is the envy of other industrial and commercial sectors. ?I think we are spoiled. We have still got a double-digit growth rate. How many other industries can say that?? says James Wickes, MD of Ideal Hardware.
As in all recessionary periods it is the smaller companies that are hardest hit. The CSSA figures reveal that companies with a turnover of #3 million or less were the least optimistic about their future prospects. Rob Wirszycz ascribes this to a tendency to over-trade during the recession because of a lack of cash flow and a lack of sympathy from financial backers and the banks. ?As many companies fail coming out of recession as going into it,? he says.
The CSSA believes this is because many IT projects and purchases are not abandoned until the third quarter from the start of the recession, and are not resumed until at least the second quarter after the recession is deemed to be over.
The view that it is the smaller companies that are suffering is borne out by research from Templeton College, Oxford, where Tony Rands, a fellow in information systems, has been tracking the fortunes of the software package sector for the past eight years.
The Templeton research covers 3,000 software companies from the largest to the smallest. Prior to the recession, all companies in the sector had a similar growth rate, according to Rands. ?Pre-recession, all companies showed an annual growth rate of about 25 per cent. Now, smaller companies with a turnover of #500,000, which make up 40 per cent of the sector, are showing growth rates of two to three per cent.?
The 1995 Templeton figures show a median growth of about 11 to 12 per cent, according to Rands, but the smaller companies are only averaging three to four per cent. He says: ?It really is a struggle for these smaller companies.? But even this is an improvement after four years of decline, Rands believes.
Overall profit margins for the packaged sector are running at about 4.5 per cent ? the best figure over the eight years of the survey. Rands endorses the CSSA view that companies are over-trading. ?They are chasing sales at all costs,? Rands says. Wickes believes even the smaller companies will have to start adding real value to their systems if they are to survive.
These views are supported by Creditwatch, a provider of credit information for the IT industry. Brian Burke, Creditwatch manager for computer sector intelligence, confirms that it is the smaller companies that are getting squeezed. One of the reasons, Burke suggests, is that companies now find it more economical and easier to upgrade systems rather than replace them. ?You are not going to see corporate customers going out and replacing 5,000 PCs,? he says.
The larger firms are faring better than their smaller counterparts. Oracle?s director of alliances, Allen Swann, says that the company?s revenues are rising after tailing off two years ago. ?We are experiencing very strong growth again. We are now experiencing growth in the software sector of 30 to 40 per cent after dropping to about 15 per cent two years ago. Over a 10-year period our prices have decreased 10 times, but our revenue has increased 10 times.?
From these figures he concludes that Oracle is shifting 100 per cent more product. The company is also relying more heavily on the channel to shift its products. ?We have a strong partner programme. Four years ago, 10 per cent of business came through our partners; in November 1996 it was up to 47 per cent, and if you count the number of sales that are influenced by our partners it is nearer 60 per cent,? says Swann.
Oracle?s revenues from the services sector are also rising by 30 to 40 per cent a year, he says. But, like the CSSA, Swann is aware of the bottlenecks caused by the lack of skilled staff in some sectors.
Increasingly, as margins on hardware and software packages fall, resellers are offering their own services to bolster profit margins. Consultancy, systems integration, training, support and maintenance are all seen as a necessary part of a sale. A recent report from the market research company Romtec highlighted the growing importance of reseller services.
The report, Channels in Europe 96, says: ?Common across all reseller types, there is a clear trend in growth in contribution of resellers? own products/services to their overall revenues, from 38 per cent to 45 per cent within three years.?
But the report is critical of the level of support given to resellers by vendors. ?Reseller satisfaction levels with vendor support are generally low, not meeting a standard of excellence, and in almost all areas, they are lower for distributor support,? it says.
Business development director for training at Azlan, John Kaufman believes that much depends on the services that resellers are prepared to offer. ?All our training is offered through our resellers, and in the past three years it has grown 50 to 60 per cent a year,? he says.
Kaufman believes that the customers are now so sophisticated ? either through their own experience of building systems or through internal and external training courses ? that they are much more conscious of what the channel should be providing.
Larger resellers with the capacity stand a greater chance of being able to provide the pre-sales and post-sales support services, consultancy, system integration and maintenance that the customer requires. Smaller companies suffer from cash flow problems and cannot afford investment in staff and facilities to offer the same services, so they are at greater risk of failure.
It is a vicious circle. To maximise cash flow and provide money for investment, dealers must chase every sale and cut margins to the bone. Inevitably this means heavy discounting to secure orders, leaving very little money for reinvestment.
The larger resellers are in a much better position to cope with this. First, they sell into the corporate market where the orders tend to be larger and discounts are based on volume rather than the need to win business. Second, they generally have the staff and expertise to provide the support the customer requires. They also have the advantage of being able to buy in volume and take advantage of manufacturers? discounts and extended lines of credit.
Brian Burke believes that smaller companies have a chance in specialist areas or niche markets. But the problem with the niche market approach is that if the niche suddenly becomes a critical market and grows, then the big battalions start to pay attention and bring their own products into the area. ?If you have a small Var or dealer with a niche market you have high margins. The problem is when it becomes a large market the bigger players come in,? he says.
Templeton College?s research into the software packaged industry also highlights the problems of smaller firms. ?Although the profitability of small producers increased during 1995 and funding improved, continuing a post-1992 trend, their propensity for cash crises remains high. Somehow this propensity seems remarkably stubborn to improvements in funding and profitability, leaving firms vulnerable to insolvency and/or takeover,? the report concludes.
Recession in the IT industry is viewed differently from recession in other industrial and commercial sectors. The IT sector has been seduced by high growth rates for almost two decades, particularly in the PC sector. This has been fuelled in part by the rate of technological innovation and the belief that customers would immediately upgrade to the latest, more powerful machine.
To some extent this view was justified but, as Burke points out the, large companies are no longer writing off their investment in the last generation of PCs in favour of the newest family of machines.
A growth rate of 17 per cent does not mean that the IT industry is in recession ? many other sectors would be overjoyed at such growth. But the expectation that the industry will return to growth rates of over 20 per cent appear ill-founded.
Manufacturers and software houses will continue to experience growth rates, but the next two years are likely to see smaller Vars and dealers coming under greater pressure than ever before.
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