Strategic 100 overview

Strategic 100 overview

Consolidation, repositioning of strategies, the rise of new global brands and a growing focus on virtualisation are just some of the trends that emerged from the IT vendor community in the past year.

A preliminary glance at the IT vendor landscape over the past year would lead many to think it was much like the year before it, with consolidation the over-arching theme. Mergers and acquisitions again dominated headlines, as shown by the Lucent-Alcatel merger, Symantec's purchase of ImLogic, Oracle's takeover of Siebel, or Hewlett-Packard bringing asset management specialist Peregrine and storage management firm AppIQ into the corporate fold. These power plays were replicated further down the chain and across virtually all industry segments.

But regardless of how the buyers fare with their respective shopping bouts, end users are presented with some identical, and pressing, concerns. Freedom of choice and unfettered competition, particularly in the enterprise software space, seems farther away than ever. The firm you sign a six-year contract with today may be a distant memory tomorrow.

Upstarts and innovators, such as open source advocates Red Hat or hosted CRM vendor, may provide a brief respite but are sure to wilt away when faced with the bottomless pockets and burgeoning resources of their far larger counterparts.

There seems to be little choice but to sign on with the same providers as everyone else, hoping they won't see your organisation as just another number or surprise you with some new licensing fees.

Analysts confirm this prognosis. A recent AMR Research report states traditional enterprise resource planning (ERP) powerhouses such as Oracle and SAP have been taking ever bigger chunks of the CRM and supply chain management markets, traditionally the domain of specialist firms. Over the last four years, the share of revenues of major ERP vendors from their core systems has dropped from 87 to 75 per cent, while total turnover from CRM applications has doubled.

AMR president and CEO Tony Friscia hints given the current state of affairs, many best-of-breed vendors may soon find it very difficult to eke out a living, and could eventually face tempting takeover targets. "The availability of add-on modules from suite vendors prevents best-of-breed vendors from commanding premium prices as they did when they created these markets," he remarks.

Friscia is far from the only industry watcher who concludes more consolidation is inevitable. Jack Noble, managing director of core services at the European arm of Fujitsu Services, says in a recent report that by the next decade, the IT services and consulting market would be home to only five companies, IBM Global Services, EDS, Accenture and Fujitsu, as smaller firms would simply lack the financial backing to fund larger and larger outsourcing contracts.

"There are definitely limited choices in some spaces, and we do expect a lot of consolidation going forward," says Phil Hassey, IDC associate director, Asia-Pacific services.

"End users may be getting smarter, but consolidation is still going to happen," adds Rolf Jester, research vice-president at Gartner's Asia-Pacific IT services group.

But Hassey and Jester are quick to point out this doesn't necessarily mean users will be at a disadvantage by ongoing changes in the IT industry. In fact, several trends point towards the opposite.

The first is a shift, however slight, towards more flexible pricing models that have more to do with what an organisation uses than a contract or flat rate, that is, IT as an on-demand service, much like water or electricity., with its web-hosted CRM applications, is perhaps among the best known current proponents of this blueprint, but it has also been adopted by the likes of Microsoft, Sun Microsystems, EMC and HP.

"For large applications and office productivity suites, not much has changed yet, but just below the radar, there's quite a transformation," notes Jester.

"People who are selling business solutions that are single-process or directed at a vertical industry are entering the market quite naturally and delivering software as a service."

Jester adds that as more and more businesses become accustomed to hosted and pay-per-use arrangements "they will catch on, and fairly quickly", forcing many vendors, regardless of size, to adjust their pricing policies.

From provider to partner?

Another bit of (somewhat) good news for customers is more and more large vendors want to be a friend to their end users, or at least a consultant. Not content with an enterprise-wide deployment of their hardware or software offerings, companies like Dell, HP and Microsoft are increasingly positioning themselves to work with firms on some of their more intimate practices, such as finance and human resources, particularly on how these relate to a company's IT investments.

With this trend, vendors are beginning to speak more often in their clients' terms. Microsoft regional vice president Eduardo Rosini, for example, says the company's business value initiative is "about helping customers maximise the value achieved from their investments in IT", not paving the way for new purchases.

Derek Williams, regional executive vice president for Oracle, says "extending our customers' investments" and "enabling customers to get more value from the systems that they're already using" are among the firm's key strategies.

Analysts advice taking such pronouncements with a certain degree of scepticism. "All these vendors are aspiring to move up the food chain, and there's an evolving but very gradual shift to being a seller to a truly integrated provider or partner," says IDC's Hassey. "But the key test is what happens in a crisis situation. Are you still considered a partner then?"

"The hardware companies are getting more serious about services so you've got new kinds of players," adds Gartner's Jester. "But the buyer's got to be a bit careful that it doesn't go too far. Any partnerships have risks on both sides, and there are very few current instances where that's happening."

Ultimately, Jester says, the best indication the future for the IT buyer looks bright is that organisations can count on an ever-savvier pool of IS executives to go to bat for them in any vendor negotiation.

"CIOs are really getting more astute commercially," he states. "More and more often, they're business people applying normal business practices to purchasing decisions."

Besides, says Hassey, having only a few vendors left to choose from could have its advantages.

"Multi-vendor architectures tend to increase costs," he notes. "Also, if you're not dealing with just one or two vendors, you don't have one head to kick when something goes wrong. From what I've seen, a lot of companies will try to leap out of being one or two-vendor shops, but many end up coming back."

Another trend in this year's report is a spotlight on companies from China that are out to join the list of global players. Lenovo takes the lead with its US$1.7 billion purchase of IBM's PC business. There is Baidu, included in this year's Rising Stars, which is often referred to as the "Google of China" and is the fourth most visited site on the web.

Another success story from China is Huawei Technologies, a networking equipment maker that now earns most of its money outside its native market.

In addition to winning CDMA contracts in New Zealand, the Netherlands, Portugal and the United Arab Emirates, the firm pushed its way into the top tier of value-added telecommunications services providers globally, scooping up share at the expense of more prominent rival Cisco Systems in the router market and taking on Nortel and Alcatel in the voice over packet equipment and DSL segments.

Noticeably, this year's report features a number of companies operating in the virtualisation space. This comes as no surprise for Sam Higgins, senior analyst for Forrester in Australia and New Zealand.

He says a recent Forrester survey among infrastructure decision-makers reveals while awareness of virtualisation is higher in North America, the percentage of respondents from New Zealand and Australia already using the technology is higher (39 per cent compared to North America's 29 per cent). Moreover, 63 per cent of these ANZ companies say their use of server virtualisation will increase in the next 12 months.

Meet the future

Today's leading companies are not necessarily the most inventive. Restrictive pricing policies, aversion to risks and conservative overheads, aimed at protecting market share and returning value to shareholders, forbid innovation within large establishments.

"Big companies are interested in big deals, not in small ideas," says Steve Bittinger, research director of Gartner in Asia and Australia.

For decades, the job of experimenting with new ideas has rested on the shoulders of upstarts, which have little to lose and much to gain by challenging conventions and defying established practices with new approaches to business problems. Start-ups by virtue of their smallness also have the benefit of viewing business needs from the bottom up instead of from 3000 feet.

Take the open source movement. It's led by hordes of volunteer programmers, not market leaders. Proponents tore down the whole idea of paying for basic software functions and instead promoted charging for value-added services, bringing the cost of software closer to the value it delivers.

It's only natural to find some open-source application makers in this year's Rising Star list like MySQL, XenSource and Compiere.

Unlike rival EMC, XenSource gives away its hypervisor program, which allows companies to run multiple operating systems simultaneously on a piece of hardware. The start-up charges only for support services and feature-rich management software that allows administrators to dynamically allocate servers to different applications depending on demand.

Several start-ups featured in the Rising Stars category are increasingly playing a key role in re-invigorating mature companies by providing them with new revenue streams.

"As business cycles continue to speed up, it gets harder for companies to stay around for a long time unless they are flexible enough to move from one growth market to another," Gartner's Bittinger says.

The key is in making the right corporate acquisitions, as companies like Cisco Systems, BEA and Dell have clearly demonstrated. "They let start-ups take the risk. It's cheaper to do that than to fund your own R&D. The whole industry is moving that way."

It won't be too surprising to hear more acquisitions in the coming months as companies continue to redefine themselves and their services to stay on top of their game.

New spending patterns

In terms of money to spend on computing systems, there is more around than there has been in the last three years but that still doesn't mean there's a lot, cautions Gartner's managing vice-president, Matthew Boon. For the manufacturers of computing products and services, this is being countered by the extremely competitive nature of the industry.

The market today is more competitive than it has ever been, which is contributing to the illusion that things are easy for buyers.

Meanwhile, tough economic times have made chief executives more ruthless in their pursuit of evidence about the specific financial benefits of IS projects. "Technology expenditure is no longer seen as the nuisance it once was, it's far too strategic for that now," says Boon, although he admits many organisations still view IT as a cost centre and will take several years to fully realise its role as a competitive force. This is not something vendors are likely to be crazy about since discounts are easier to argue than return.

Having said that, IT vendors themselves are starting to take a long-term view of operations and get back to basic business fundamentals. Hewlett Packard's new, no-nonsense boss, Mark Hurd, is the best example of this. Understated and focused, he is very much a back-to-business chief executive looking at what the company needs for the long run.

Finally, there is no denying the world continues to shrink. Vendors are well into their first test run utilising a global workforce and there will be a lot of learning and tweaking going forward to react to the impact on their own operations as well as that of their customers.

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