Network in progress

After a difficult few years, the networking arena is profitable again. Martin Lynch argues that resellers can clean up if they expand their service offerings and demonstrate return on investment.

When I wrote my first feature back in 1990, the internal network we used was somewhat less than state-of-the-art. Copy was saved on large 5.25in floppy disks, which were promptly 'frisbeed' across the room to the editor.

The stationery cupboard in the corner of the room was stocked up with typewriters for those older IT journalists who, ironically, would have nothing to do with the new-fangled PCs. Messages were sent around the building using SneakerNet.

To say that networking has moved on since those days would be an understatement, but no one could have predicted the scale of the changes.

The market has moved from an internal hub, router and cable-based industry to the centre of nearly every IT-driven business process. The networking infrastructure has become external and international, and now provides the basis not only for sending and receiving data, but for storing and securing it.

In just 12 years the internet arrived, grew up and blew up. Now it is the leading form of consumer and business-to-business communication and the underlying delivery mechanism for converged solutions, online storage, web services and e-business.

Today there are more diverse technologies and market sectors making up the networking industry than any other. While at times it can cause confusion, it guarantees that the networking sector is nearly always dynamic.

This time last year, networking was suffering along with other IT sectors. Ask anyone who went to the Networks Telecom show last June and you will hear them describe one of Europe's biggest networking/telecoms events with words like 'morgue' and 'dead'.

"This year's show was much better than last year's, for sure," recalls Mark Lewis, UK and Ireland marketing manager at 3Com. "Last year's show was quite tragic and downbeat compared with shows of the past. This year there was a lot more optimism and more of the big players in the market were exhibiting again."

If the show this year was a good sign, then reports about excellent growth rates in some sectors and budding futures for others are an indication that things are coming about.

Last year was characterised by the major players reporting heavy losses, implementing brutal restructuring plans and making tens of thousands of people redundant. Even resellers felt the pinch, with some smaller companies failing to ride out the storm.

Reasons to be cheerful
But things have brightened up, and companies that until recently wielded the axe like enraged Vikings have this year reported positive results, hit the acquisition trail and started rehiring.

Cisco has just posted solid results and has agreed to acquire Andiamo Systems, a developer of storage switching technology, as part of a big push into storage networking.

And 3Com, a company that had cut 7,000 jobs and struggled financially, recently posted its first profit since March 2000 and is back on the recruitment trail in the UK.

"We are in better shape now than we were 12 months ago, and we are hiring again here," said Lewis. "Like many other companies we needed to get the focus right. We put a greater emphasis on the channel and on driving sales through the channel. In fact, most of the hiring so far has been for sales people who work directly with our resellers."

James Smee, marketing manager at fast-growing systems integrator Prime Business Solutions, said: "It's been good for us this year. We have had record growth rates, which is not typical for the market.

"We have seen a lot of other companies suffering and some have gone under. The reason we have been OK is that we had a strong customer base before things got really bad and that helped us weather the worst of it."

Cisco claims that it has had a more successful year too. Dave Kelly, channel programme manager at the vendor, said: "Our recent results were good and there has been lots of movement in the commercial sector. It has been a huge growth area; a lot of IP telephony solutions have been sold in that space.

"From the UK's perspective, businesses have been more insulated. The UK economy is still growing. We may be closely linked to what is happening in the US, but not so much that we have been dragged down to the same extent by events over there."

Lewis agreed. "Generally, the market has grown, despite the fact that everyone thinks things are in the doldrums," he explained.

"The UK market has been a lot more resilient than the US and some other European markets. The economic impact was mainly in the US and it did not filter across the Atlantic to the same extent. The events of 11 September only added to the trouble.

"Here, there has been a lot of resilience in the public sector; more so than in the commercial one. But, according to a Europe-wide survey by IDC, a lot of businesses are ready to start buying again over the next 12 months."

The biggest blow to many networking sectors, as well as all other IT markets, has been the extreme tightening of the purse strings. The economic uncertainty has shifted many companies' focus onto survival rather than experimentation, a fact that has sent many budding projects into hibernation.

Companies ready to experiment again
That said, networking is not exactly a luxury and, while dabbling with the latest and greatest technologies has been put on ice, maintaining and upgrading essential networks has carried on apace.

"IT is now more embedded into the core of the business," said Lewis. "IT and business managers know its importance, and their dependence on connectivity internally and externally is total. For instance, failure of email would cripple many businesses in a day."

Smee added: "Looking back to last year, it was a heads-down scenario with many reining in their spending. Now companies are experimenting again. Technologies such as converged solutions and wireless local area networks [Lans] are a lot more accepted, and sales are growing quickly."

Lewis argued that the bigger the company, the more adverse to risk the IT manager tends to be. "Larger companies have been more cautious than the small ones, which can see the advantages of investing a smaller amount for a much bigger pay-off," he said.

"However, there are usually two types of commercial customer: those that tend to purchase in huge amounts every three to five years; and those that purchase more frequently, constantly upgrading in small increments.

"At the start of this year, businesses were holding off on very big projects - deferring them, not cancelling them. A lot of that has lifted now and things are starting to move."

This penny-pinching might be easing up slightly, but it has led many customers to place greater emphasis on return on investment (ROI) up front, before parting with any cash.

"ROI and risk management are two issues that are more prevalent now when talking to customers," explained Smee. "They want something solid in advance: tangible ROI with concrete timeframes for results. A solution has to solve a business problem or provide a competitive advantage.

"There used to be more solutions out there that would not necessarily do so, but now the reseller has to go in and say: 'Here is the solution and within this timeframe you will see results.' Customers want to see the facts and figures before seeing the sexy technology."

Kelly agreed. "Customers are now thinking about how to increase productivity and boost ROI," he said. "They are what the new drivers for customers are today and they are right to demand it. They want the ROI numbers up front, asking us when an immediate investment will result in a decent return."

Lewis added: "The economic conditions have changed how businesses spend, and what they expect in return. IT managers have to justify their spending more carefully now, aligning the technology bought to the business needs. They want to know about the payback first."

Networking sales buck the IT recession
So what are customers buying? Converged solutions such as IP telephony are now beginning to shift in bulk, as are wireless Lans.

Last year's confusion over what exactly converged solutions are seems to be less prevalent, while the high-profile security fears about wireless Lan technology are no longer a barrier to strong sales.

In fact, sales of wireless networking kit have managed to buck the IT recession and are on the up, according to research company In-Stat.

But, while volumes are up, revenue is less than stellar. In-Stat indicated that hardware shipments in 2001 rose by more than 175 per cent, which it claims was the direct result of ruthless cost-cutting.

Business wireless Lan volumes are expected to grow by almost 60 per cent in 2002, but total turnover, which jumped by 92 per cent in 2001, is expected to increase by just seven per cent.

"Converged solutions are doing alright now, finally," said Lewis. "There was a lot of talk about them but now they are taking off. Wireless Lans are also doing very well now.

"People were initially sceptical about them and didn't fully understand them. But they are a very cost-effective and simple way of getting a network installed and running without the fuss of cabling.

"The security issues highlighted earlier in the year have now been overcome by most of the big manufacturers."

Smee added: "The growth rates we have seen for IP telephony in the past 12 months have been massive. It now has widespread acceptance. Two years ago our customers were just experimenting with the technology but now they are implementing it on a large scale."

IP is a lot more mainstream now, according to Kelly. "Customers are moving on from pilot projects as they see how a converged network can save money," he said.

"As for wireless Lans, they represent a big market for us. From smaller companies wanting a network without the cost of cabling, to larger companies supporting mobile workforces, wireless is selling in all sectors. We have all seen the security scare stories but there is a lot more security in-built now."

Other areas that continue to defy the recession are network-based storage, network services and management. The thinking seems to be that if you cannot afford or do not need a new network, you should invest in the tools and skills needed to get the most out of your existing one.

According to research firm IDC, network and service management turnover will increase from $3bn in 2001 to $4.9bn in 2006 at a compound annual growth rate of 10.3 per cent.

It seems that, in the tough times, network management vendors have done a particularly good job of getting close to their customers, focusing on their particular needs and changing the nature of their offerings to target services, not products.

"Rapid growth in the past couple of years buffered network management vendors from the effects of strategic sloppiness," explained Paul Bugala, senior analyst for the network and services management programme at IDC.

"The critical opportunity for network management in the forecast period is to fill in the gaps where network equipment and enterprise management strategies have fallen short."

In the next few years this will materialise in network and service management solutions which will help to bridge the gap to newer technologies, including IP virtual private networks, wireless Lans and storage networking.

Focus on services
For resellers, it means more focus on services, an area some vendors are promoting heavily to their channel partners.

"Being able to grow your services business is very important for resellers," said Lewis. "I think it is easier for resellers to sell boxes rather than services. We are trying to get them to sell more services, but they have to change the way they sell.

"Our Focus programmes are free to resellers via the 3Com University, and we have started providing consultancy alongside our resellers when they go out to meet potential clients."

Kelly added that it has been a hard time in the channel, with a lot of consolidation in the marketplace. "What we are doing now is encouraging resellers to specialise in particular areas of the market rather than looking for the hardware sell across all sectors," he said.

"Resellers want good, loyal customers that keep coming back. This makes the value-add proposition more important than ever, because selling solutions is the way forward."

SUMMARY

• The network industry is moving back into the black, with many big players reporting profits.
• 'Baby' technologies such as IP telephony and wireless Lans are selling strongly.
• Customers are demanding return-on-investment facts and figures up front.
• Resellers need to specialise in fewer sectors and boost their service offerings.

CONTACTS

3Com (01442) 438 000
www.3com.co.uk

Cisco (020) 8824 1000
www.cisco.com

IDC (020) 8987 7100
www.idc.com

Prime (01635) 568 000
www.prime-uk.com