Business managers in IT service companies are putting out mixed messages about the state of the industry and their businesses. The recession appears to be over but many are still showing some signs of caution about expansion and growth.
Managers are extremely bullish about demand, turnover and revenue but most are also cautious about staff recruitment. This indicates either that they have learned the economic lessons of the 80s, or that things are not as buoyant as they appear.
At a recent dealer conference, a straw poll suggested most reseller managers were satisfied with the performance of their business over the past 12 months and planned to invest in new services and offerings this year.
It seems that the one lesson picked up over the past two years is the importance of focusing. The cliche of 'get big, get niche or get out' applies to just about all the successful reseller businesses even four years down the line.
Druid Systems is typical. Originally a reseller, then a systems house and now a specialist consultancy, Druid has just posted its best ever results. Director John Pocock attributes the company's success to its focus. 'We have found strong demand for all IT services but especially for consultancy,' he says, also citing close management of the company's resources.
'We aim for a high rate of occupancy,' he says, slipping into consultancy-speak. 'If we can get every consultant out on a job five days a week, not only do we earn good revenue but we can keep our charges down and be highly competitive.' Pocock agrees with a recent CSSA report that found mixed messages in the channel. Druid is doing well but there are no plans to expand.
'There is always a shortage of good consultants anyway,' he says. 'We can't just go out and pick up people who would fit perfectly into the business just like that.' Managing a business in the IT sector is a bit like sailing a boat, says Pocock. To avoid sinking, 'you have to trim the sails and get everything just right.' 'Managing staff recruitment and planning business expansion to match sales is a skill, and I suppose that those businesses that have been around a while and are doing well have got it fine-tuned.'
Druid has not focused just on consultancy, it has also refined that focus so that it concentrates on SAP's R3. He says: 'If IT businesses are changing, I expect it is to move from selling products to services.' Certainly the services market is continuing to expand, and for most reseller businesses, services is becoming a larger proportion of total revenue.
Pocock says: 'The trend towards services and consultancy is being encouraged by uncertainties in the technical world. There are new issues to resolve at the same time as price/performance/margin ratios are being squeezed further. Hardly surprising, then, that most resellers are looking at the revenue-rich side of the business.' Alan Cope-Morgan of Amdahl agrees that confidence is apparently high, with more users than ever now committing to replacing old systems with new, and plenty of work around for software providers and consultants.
As director of Amdahl's software business, Cope-Morgan sees the industry stabilising as technology that was innovative and leading edge a few years ago now becomes mainstream. 'Running a business in the IT sector demands a certain amount of confidence,' he says, 'but expansion to go with the confidence is certainly something we are thinking about.' But he adds that there are still plenty of issues to be resolved which some IT business managers sometimes assume are sorted out. 'Take openness,' he says. 'The issue is still important especially for customers who have a high investment in a system which is in danger of becoming a legacy millstone.'
He explains that although we may take openness for granted these days there are still many products in use and being sold which do not conform to industry standards. 'It is a worry for customers, and it is something that IT businesses have to deal with. Indeed, many businesses can't move on until they confront those issues. A company which is still selling a proprietary solution, for example, will not find it easy to achieve the confidence that the CSSA report talks about.' Steve Broughton of Synon agrees that sometimes it is the old issues which hold businesses back, at a time when most of us think that the world has moved on.
'The classic inhibiting factors like cost and scalability are what matter to customers,' he says. 'IT businesses which sell on those points are going to do better than those still locked into early technology.'
Broughton says that those businesses successfully selling IT in the late 90s are those which are concentrating on breaking through the traditional mindsets of the users. 'For example,' he says, 'a company which has always bought PCs is going to find it very hard to accept that the software for a proper system which will take them into the next century is going to be more expensive than the hardware.'
Broughton says that the trick of making such a sale, and implementing a serious client/ server system, requires the commitment of the board, and it is to them that the sale has to be made. He says: 'Successful IT software and services businesses are concentrating on selling concepts and simple non-technical messages to the senior board members, not by-passing the MIS managers but working with them to allay fears and build confidence.'
Broughton accepts that early client/server implementations brought a whole swathe of problems which in many ways damaged the industry as a whole. He says: 'There was a time when there were rumours of high cost, poor data integrity, unreliability, poor scalability and so forth, and there is no doubt that the industry suffered. Now we have moved on and second generation client/server is settling down, it is working out well, and users are regaining their confidence.
'That has a trickle-down effect on the whole industry, so it is hardly surprising that the CSSA report found that there is a new confidence among IT business principals.
'But because of the difficulties of the past few years, it is also reasonable that they are cautious about their confidence for the time being. Now is probably not the time to be expanding fast.'
Dun & Bradstreet's Tom McDonagh reinforces the view and says: 'There is no doubt that client/server is an easier sell now than it used to be, so there is an increased demand for all the software and services that go around it. 'In many ways now is a very good time for IT businesses.'
McDonagh says that the early 90s were perhaps, with hindsight, a pretty bleak time for the IT software and services sector. 'There were plenty of problems, particularly with performance and scalability and, inevitably, confidence among users was low. Much of the technology sold then was untested and unproved, but now it is well accepted.'
The whole picture is different now, he says, and companies at the sharp end of technology then are now finding themselves comfortably established.
Another report by Coopers & Lybrand reinforces the view of the CSSA report that we are still at an early stage in the evolution of the IT software and services sector, and the best is definitely yet to come.
The Coopers report said that computer projects are still failing to deliver business benefits, are still costing far more than the original budgets and are running over predicted deadlines. It's hardly surprising then that MIS managers are still cautious.
But things are settling, and as more projects are delivered on time, within budget and with effective software, confidence will grow and the IT software and services sector will benefit as a result.
The problem is that many IT business managers have been 'talking up' the IT market for several years when the reality has been quite different.
But the same Coopers & Lybrand report, which found that around 85 per cent of projects have a serious problem such as late delivery or failure to deliver any significant business benefits, indicates the route that IT business managers have to take in order to ensure success.
Rob Wirszycz of the CSSA says: 'There is a big gap in many IT user firms and corporates between what the MIS managers say and what the board thinks. If software and services companies can tackle that discrepancy and set about bringing the two parties closer together, then industry will continue to grow smoothly. The danger is if the gap between board expectations and what they get widens, the industry will end up suffering by reputation.' The key concerns for many board directors, particularly those not involved in the IT function, are that IT is losing them money instead of delivering benefits.
They see projects breaking deadlines and budgets and they worry, understandably, when the MIS manager comes back for more money after 18 months, and still the system is not implemented. The solution is simple. Service companies which include education of the board as part of their agenda, says Wirszycz, are more likely to be successful.
Wirszycz says that the trend of many software and services companies to reduce their level of recruitment, which is interpreted by the CSSA report as a truer reflection of performance than an optimistic attitude, could perhaps more reasonably be attributed to seasonal influences.
He explains: 'A reduction in growth rate might be partly attributed to the effect of the hot summer weather on the activities of freelance programmers,' but he admits that this cannot account for any continued reduction in growth.
'Outsourcing continues to be one of the best performing sectors,' says Wirszycz, 'and undoubtedly accounts for considerable growth in staff numbers in software and services businesses. Overall however, the figures show that companies are taking on fewer staff and that, on the surface at least, indicates a drop in business.' The mixed messages coming from this particular survey are probably representative of the general state of the UK economy. But the general increase in business optimism, as typified by Pocock, indicates that the services sector can probably look forward to further improvements over the next 12 months, according to the CSSA.
More of those customers who invested heavily in IT in the 80s are now looking at reinvestment, and the business benefits IT can offer have become more widely acknowledged. Customers are beginning to demand systems which give them the power to access data externally and to make the best use of the internal data they already have.
For those software and services companies poised to meet that demand, things have never looked so good.
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