Nothing going on but the rent

If a man has a hammer, all he sees are nails. So, when Financial Director’s stable-mate Computing magazine recently asked the heads of the major IT vendors for their opinions of the IT industry in 2004, the general view was, somewhat expectedly, of recovery and increased sales.

Leslie Stretch, MD of Sun Systems, called 2004 “the most exciting year for our industry”. Ian Smith, MD of Oracle UK, was “very optimistic” and Bill Rodrigues, vice president of Dell UK, said “the outlook is good”.

Sadly, vendors do not share that optimism with the businesses that buy their IT. Investment analysts Morgan Stanley in the US established a roundtable of chief information officers to discuss what exactly is happening within business IT. The results from the latest discussion came as a bit of a surprise. “Our CIO roundtable panel was somewhat more bearish than we expected,” begins the Morgan Stanley report. “While some CIOs are expecting new project spending to grow this year, a good proportion pointed towards a potential slowdown.”

It seems CIOs have got smarter about the way they buy IT and now have stable investment cycles to replace desktop hardware and servers. The old argument that businesses are suddenly going to upgrade their kit this year because it is more than three years old just doesn’t wash. Businesses are not going to make expensive bulk purchases just because their desktop hard drives are grotty beige rather than sexy black, or because staff laptops weigh as much as the Oxford English Dictionary.

Anyway, as the report points out, it is very much a buyer’s market in the IT sector, with troubled vendors cutting prices to stimulate demand. The margins in IT hardware just aren’t that good anymore.

The prospects for the enterprise software market are not brilliant either. Old ‘must-have’ technologies such as customer relationship management (CRM) and enterprise resource planning (ERP) software are out of vogue, project implementations are being scaled back and most large businesses have already spent small fortunes on these systems, so why should they reinvest?

“Companies still do not see a big new category in which they must invest,” says Morgan Stanley. While vendors have traditionally always had new ‘killer applications’ in development to keep revenue streams high – after CRM and ERP came business intelligence, knowledge management and corporate performance management – the sector has been more concerned of late with industry consolidation, fighting hostile takeovers such as Oracle’s bid for PeopleSoft and generally staying alive than it has with launching new products or servicing customers.

So what is driving the little investment that is out there? First, there is data storage and increased investment in the mobile workforce. Other hot topics emerging include supply chain management tools such as radio frequency identification tags and more mainstream applications of grid computing – a way of getting all your PCs to work together to increase processing power.

There are signs that technologies that improve internal efficiencies in business will win out in the medium term. But in the short term, the views of CIOs suggest that software vendors are shooting themselves in the foot. In an effort to drive revenues in the absence of new killer applications, vendors are squeezing so tightly in the form of licensing revenues and enforced upgrades that there is little money left in the pot for additional investment.

Microsoft’s controversial software licensing scheme is a case in point, where customers are forced to upgrade to the latest version of Windows, with Microsoft withdrawing support for Windows 98 and 2000. Analyst Gartner says the software giant is “at risk of further alienating its customers with respect to its licensing terms and conditions”. Eventually, Microsoft plans to move to a subscription-based system, where companies pay a standard fee and receive all upgrades as a matter of course.

German ERP vendor SAP has also been toying with new ways of charging for software, such as on the throughput of systems rather than by seat.

As SAP customers’ businesses improve and handle more data, they will have to pay more. “We think customers may fight against this type of pricing over time,” says Morgan Stanley.

Vendors should be looking to provide new applications that add value rather than charging extra for old products. Businesses will renew IT when the time is right; they don’t need to be bullied into it.