Why resellers might not cash in this Christmas

Resellers should be rushed off their feet in the next few months as IT managers prepare to clear their budgets. But dotcom failures and the millennium bug may have put paid to a spending spree.

As anyone who has spent more than six months in the IT industry knows, the fourth quarter is the busiest time of the year. It's the period when every IT buyer spends whatever's left of their budget for fear of having it trimmed next year. If the events of the last 15 years are anything to go by, there always seems to be a substantial amount of the budget left to be spent.

But everyone is rushed off their feet and too busy to sit down and read an article like this, even one which will help make sense of what promises to be one of the least predictable sales quarters in the history of IT.

Opinion differs sharply among market analysts about how the IT industry will fare in the next three months. There are so many variables: retail, small business and enterprise sectors will all be differently affected by market conditions. The difference is that this year, there are two unusual market conditions: the post-millennium effect and the rise - and temporary fall in confidence - of ecommerce.

Steve Hampson, business development director at Diagonal, a SAP reseller that has been feeling the pinch this year, said: "The fluffiness of the dotcom startups did more damage to the IT industry than the year 2000 issue. Everyone has been waiting on SAP, for example, for a cohesive internet strategy, and that has slowed things down enormously."

However, this has achieved a temporary block on sales of SAP solutions. Hampson claims that in the fourth quarter, or the beginning of next year, the floodgates will open.

One variable that is almost certainly not a temporary influence is the application service provider (ASP) market. This could have massive implications for resellers if, as every software company climbing on the bandwagon is eager to point out, neither small to medium sized enterprises (SMEs) nor big corporations do anything other than rent their applications in future.

Consumer retail goods will, of course, enjoy the usual boom. The only uncertainty is whether DVD will outsell personal digital assistants, and whether high street giant Dixons has stocked up on enough Sony PlayStation 2 games consoles.

Learning from mistakes
According to market research conducted by Hewson International for customer services specialist eGain, ecommerce will experience the usual tale of woe. Ryan Rosenberg, Europe, the Middle East and Africa marketing director at eGain, said: "The companies that were in ecommerce last year will have learned from their mistakes. But there will be a new generation of entrants to the market that will provide fresh stories of collapsing systems, lost orders and confused logistics."

So did the fallout from the year 2000 issue cause a freeze on spending in the IT departments of big corporations? And will this be permanent or will we witness a resurgence of business in this quarter that will accelerate through to the end of 2001?

Some IT managers argue that the panic in the run-up to the millennium caused the scales to fall from their eyes. One said: "We can now see the IT industry for what it really is: short-sighted [for a visionary industry, no one saw the year 2000 coming] and mercenary."

Another manager said: "It gave us a better idea of where the money was going and how it could be spent more wisely. If year 2000 taught us anything, it's that we spent too much money on PCs, for no great return. In future, we'll hold onto our PCs longer before we upgrade. We won't be coerced into constantly upgrading."

One argument is that spending slowed because IT now has a higher profile. "IT spending is now a boardroom issue and board members want to be in on buying decisions. But Y2K actually strengthened the hand of the IT manager because now people appreciate its importance after they saw the chaos that the millennium bug could have caused," explained Hampson.

But Paul Jordan, a consultant at Mayflex, claims this is nonsense. "Year 2000 caused a temporary suspension of all critical faculties among the people who hold the brief to approve IT purchases," he said. "You could get anything approved by the purchasing people if you said it was part of the year 2000-compliance project. There must have been a backlash because these days, if you try to sneak something through as part of the ecommerce initiative, it just won't carry the same weight."

Millennium meltdown?
There is no doubt that the millennium caused a downturn in the fortunes of many IT suppliers. Last month, High Wycombe-based Debug Holdings was the latest reseller to go into liquidation, cursing the millennium slowdown. But while Debug was at the bottom end of the reseller spectrum, it has been no healthier at the top either. Computacenter has seen its stock plummet and has been forced to lay off staff.

Phil Williams, director of corporate development at the company, attributes this to project work being delayed - a consequence of the scale of the new projects being planned by companies since the year 2000 issue forced them into taking stock of their IT inventory. When these projects - whether SAP, ecommerce or Windows 2000 upgrades - are complete, Computacenter's turnover and stock will rocket, he claims.

"There will be a lot of big rollouts at the end of this year. Corporations such as BT and Shell are at the end of their evaluation periods and about to kick off spending," he said, adding that people will begin to start buying PCs again.

As if to confirm this theory, there was a lot of activity on Computacenter stock in October. This could be an act of faith on the part of shareholders, who seem impressed by the arguments that the next quarter will be the beginning of a sustained period of growth.

This argument is endorsed by others with a huge stake in the Windows 2000 market. The millennium was the primer for a lot of project work, and soon there will be an explosion, believes Olivier Thierry, vice president of product management at inventory management company NetIQ.

"The companies that did the best audits around the millennium are the ones that will enjoy the benefits of a Windows upgrade," he said. "Before you attempt any sort of upgrade, you need to know what hardware and software you have out there, what operating systems you have and what your IT infrastructure can run."

Thierry admitted that much depends on how disciplined IT departments have been in keeping track of their inventory. A lot will have changed at some companies between now and last December. "One application service provider that I know has 5000 servers now, but it will have 50,000 by the end of the year. What configuration changes will have taken place by then? The manual work needed to keep up to date is incredible," he explained.

So does this mean there won't be a spending boom? Thierry believes the year 2000 audit is a solid foundation but needs to be built on before major upgrades are attempted. Too much time has passed since the millennium, when the last snapshot of the IT landscape was taken. "Companies really need to build on that by doing a full audit now," he said.

Of NetIQ's customer base of 500 clients around the world, 80 per cent of them are fully prepared to upgrade to Windows 2000, he claims, and this would not have been possible without year 2000.

Not everyone agrees that Windows and ecommerce projects are about to take off, and Computacenter shareholders may have to wait some time before they see a return on investment, if they ever do.

Claims of market explosions in IT seem to be lit with slow-burning fuses, a fair percentage of which fizzle out. Fireworks are more likely to be seen in mobile communications.

The mobile revolution
Louise Lawson, sales manager at distributor A2000, says that the current breakthroughs in wireless and GPRS (General Packet Radio Service) technologies have provided good growth in this sector. If anyone is going to enjoy the boom for the last quarter, it is the suppliers of mobile technologies.

"I have heard a lot of reasons for not investing in new IT equipment, but Y2K has not been one of them," she said. "If spending habits have changed as a result of Y2K, it is news to me. Most of our customers continue to invest in technology that will provide them with improved mobility and flexible working, as these can lead to cost savings."

"Like everything else, when companies are considering where to spend their IT budgets, they look for return on investment, and the latest mobile technologies can provide this payback," she added.

Lawson likened the mobile computing market today to an escalator going down: if you stand still for any length of time, you are actually moving backwards. Then again, some observers claim that today's GPRS networks are worth skipping in favour of tomorrow's high-speed Universal Mobile Telecommunications System.

"New technologies are springing up all the time, and each is more powerful and boasts more business benefits than the last," said Lawson. "What year 2000 should have taught people is that a continuous programme of examining, evaluating and investing in current IT systems is the best preparation for the future."

Poised for take-off
Mobile communications is one of a number of markets that have been predicted to boom for some time. Storage ecommerce infrastructures for businesses are also expected to do well. However, if the experts are right, this could be the last year that resellers make any margins from selling hardware and services to business.

Just about every analyst in the country believes that from now on, these will all be rented from ASPs. If they are right, the fourth quarter of next year will be very different, and it will be firms such as Esoft Global that will swallow companies' IT budgets.

When the whole industry seems to agree on something it is usually a sign that it is wrong. Analysts agreed that mainframes would be museum pieces by the end of the 1980s and that modems would not be available in the shops by the end of the 1990s. There was no call for them, they said, what with the success of reasonably priced ISDN. They also declared with confidence that Asynchronous Transfer Mode would be the medium of choice for all those video conferencing systems used for meetings.

Squeezing out traditional suppliers
If market analysts Forrester and IDC are right, the European ASP market will be worth between $10bn and $14bn next year, which does not leave much for traditional IT suppliers. Even the last untapped market for resellers - the SME sector - will get its IT from ASPs. So the experts say.

In an attempt to gauge how accurate these predictions are, we tried to find evidence of companies using ASPs to buy services. Nigel Judd, general marketing manager at distributor Computer 2000, says the idea that ASPs will steal the SME market is ludicrous. "Our focus is on the SMEs, which means we are less dependent on the corporate market. We also broadened our appeal this year," he said.

"We are expecting increases across the board in the fourth quarter, but in the SME market this is only a continuation of what we have already seen happening this year: a steady growth in SME sales and price stability. There is every reason to be optimistic about the final calendar quarter," he added.

If the provision of ecommerce services is no longer the domain of the reseller, then the logic behind the creation of Silver Bear Technologies (SBT) would be pretty shaky. In fact, this startup, created to capitalise on the need for tightly integrated ecommerce systems, is doing a roaring trade.

Mark Travis, delivery director at SBT, said: "There are a lot of 'whizzy' front ends and clever graphics that the service companies are able to do, but the really hard part is integrating the traditional systems - the billing and order processing - with the web front end."

Because integration is such an involved process, it's unlikely to be something that ASPs could make a profit from. Their business model is to create something they can easily sell many times over. Tinkering around with individual systems is not in their business model.

Growth of B2B
SBT only started in September, but it already has two major integration projects on its hands. Ecommerce integration is clearly the growth market for resellers to be in. But in the business-to-business (B2B) sector, there is even more rapid growth.

According to Nigel Montgomery, research director at analyst AMR Research, B2B could be the fastest growing sector of all in the fourth quarter.

"Trading exchanges will be where all the big money will be made. In the past six months, Ariba sold more than the whole trading exchange industry did last year," he said.

"A lot of big name exchanges, such as the Worldwide Retail Exchange and the Transora [consumer products exchange] are coming online," he added. "Everyone is joining not just because of the benefits, but because they cannot afford to be left out of the loop. It will be a good quarter for anyone involved with Ariba, CommerceOne, SAP and Oracle, for a start."

If you are not an ecommerce expert yet, there is a more traditional source of turnover. The opportunity is being created by the euro, which has been widely blamed for its depressing effect on UK industry.

"For the 'body shops' that worked on Year 2000, there has been an ideal project as a replacement: euro compliance," explained Montgomery. "Anyone who trades across Europe cannot process in the currency of their home nation and translate this into euros; it has to be done in euros from now on. This is creating massive amounts of work for the systems integrators in the next few months."

Conclusions:

• The fourth quarter is traditionally when IT spending is at its most feverish. So far this year, the IT budget spend of companies has refused to conform to traditional patterns.
• Many industry observers blame the year 2000 issue for changing attitudes to IT among corporations.
• IT project work such as Windows 2000 upgrades has not yet materialised.
• During this quarter and the next, enterprises are expected to begin the roll out of massive systems upgrades and ecommerce projects. That's what Computacenter is telling its shareholders.