Channel gazing 2009

With much of the world hurtling unavoidably into recession, IT players including analysts, vendors and resellers appear convinced that while IT departments are certainly tightening their belts, there are still ways of attracting spending, especially when it comes to getting more out of
existing technology.

The recent turmoil in global financial markets is set to cause a sharper slowdown in economic growth than previous forecasts, and analysts and vendor predictions are bunkering down for a worst-case scenario for global IT spending in 2008 and 2009.

According to analyst firm Gartner, under this scenario, worldwide IT market growth will drop from 8.9 percent to 7.3 percent in 2008 and from 5.8 percent to 2.3 percent in 2009.

However, because IT spending was healthy during the first two quarters of 2008, IT market growth for calendar year 2008 will be only moderately affected by even a significant slowdown in spending in the fourth quarter.

According to Gartner, while IT markets through August 2008 remained robust, the financial sector drama being played out is bruising for a negative impact in coming quarters.

In a worst-case scenario

The unfolding economic downturn could have a much more marked negative impact on corporate and consumer spending on IT in 2009.

Gartner’s worst-case analysis assumes that it will trigger a full recession in the US and Europe, and that government remediation attempts are insufficient. This recession will halt economic activity into 2009, leading to a slowdown in IT spending growth.

The credit crunch comes at a time when professional replacement activity is expected to be rising. Gartner said it expects discretionary IT spending to be cut or delayed.

For example, hardware replacement cycles would likely be extended, operating system and business applications software not upgraded, and many longer-term development projects put on hold. This worst-case scenario has more delayed replacements as companies hold off on IT budgets.

However, essential operational IT spending focused on business process efficiency and cost reduction will likely be preserved. Replacement activity cannot be delayed indefinitely, particularly for mobile PCs that are inherently less sturdy. And businesses will be reluctant to slash capital spending on critical infrastructure projects and strategic investments in technology migration.

Many businesses will still have the resources to invest in IT to retain customers and gain competitive advantage; wherever those resources exist, management recognises that a downturn represents a key opportunity to gain market share in their industry or geography.

More for less

Increasingly, CIOs are demanding more bang for their buck. They are asking vendors and their channels how to make more out of less and for more innovation in how to get the most out of their networks and applications.

Those areas suffering less include external services, which can have an element of discretionary spending to them, and software and telecom services both reflect run rate spending that is difficult to curtail.

Annual maintenance software fees must be paid and vendors have been unilaterally increasing prices.

Telecom services are also essential and dwarf the hardware component of the telecoms industry. Hardware purchases can often be deferred. This is particularly true of the PC industry, where both consumers and businesses can delay purchasing new equipment, or buy less expensive.

But it is not a case of one size fits all. Neil McMurchy, a Gartner research director, said in the Australian context the situation is likened to a phoney war. “We have assumptions of things going bad, but it is not necessarily as widespread a situation,” McMurchy said.

“For instance, while the major banks such as ANZ are getting rid of people, within the last month all the big four banks have announced they are steaming ahead with IT upgrades to their core banking systems. They are all engaged in replacement cycles and significant upgrades are still proceeding with
those investments.

“This is indicative of this market which is difficult for vendors and channels.”

According to McMurchy, demand is going to be ‘granular’ rather than broad segments doing poorly. Rather than experiencing total spending cuts, demand will be strong in some areas and weak in others. “Our advice for vendors is not to take broad brush approaches and be much more focused on segmentation, with companies large and small looking at segmentation as part of their investment strategy in technology.

“They have good balance sheets and cash and are looking at opportunities to reduce costs and identify areas with sustainable appreciations,” explained McMurchy.

Furthermore, McMurchy said there was still some life in IT budgets. He believes total IT spend is just 75 percent of IT budgets.

“It is just keeping lights on, but there is not a lot of fat that can be cut and IT departments have already taken a careful eye to IT costs over the past couple of years, leaving little to slash,” he said.

New projects and return on investment are under scrutiny much more than ever before. For instance discretionary large-scale desktop replacements are being reconsidered and the once compulsory software maintenance contracts are being reassessed.

“[For instance] software maintenance in some respects is compulsory and while in some areas we have stable software systems, CIOs are more reluctant to embark on an upgrade and instead suppliers are having to work harder to demonstrate value of those services,” said McMurchy.

Channel focus

McMurchy said channels have experienced an unprecedented good time over the past four or five years in Australia, with low barriers to entry, particularly at the reseller level.

Strong demand encouraged new entrants into the business, but McMurchy expects some sort of rationalising at the reseller level.

“Margins in desktops are below 10 percent and it is impossible to run a business on that. There is also an expected tightening of spending on IT services and the ‘do it themselves’ challenge for channels.”

But, there is opportunity for mergers such as in services and hardware, there are opportunities also to acquire skills at reasonable prices, explained McMurchy.

“Our advice to vendors is if you have a good channel strategy don’t throw it out the door. A good channel is a good channel so don’t panic and get rid of it and damage the channel for years.”

Operators have long memories in this environment. Vendors and channels set to succeed in this environment are those that can offer an alternative delivery module such as software-as-a-service (SaaS).

McMurchy and others suggest that investment in this area should reap rewards in technology such as Cloud Computing or anything that lessens necessity for outlay of large amounts of money in a time where cash is critical and access is tight.

“Areas such as virtualisation and server consolidation provide strong large applications and upgrades to CRN and ERP are being looked at very carefully,” he said.

Put risk aside

While IT organisations may now be considering technologies for implementation in 2009 and normally emerging technology trends such as Web 2.0, Cloud Computing would be nominated as reaching maturity for the coming year.

However, Guy Cranswick, advisor for IBRS, said the 2009 focus will be on productivity increases, as well as cost savings and investments that must deliver. “Consequently, technologies or applications such as web-oriented architectures, social software and social networking will stop,” said Cranswick.

“These may not come back until 2010 depending on the depth of the slowdown.”

He said when the economy takes a hit, IT departments tend to avoid ‘risky’ or unproven technologies.

“Cloud Computing, enterprise mashups, Web 2.0 and collaborative applications will be put into the ‘too risky’ basket. In 2009, IT managers and their finance colleagues will defer non-value-adding standards and concentrate on the core business,” he said.

Additionally, Cranswick believes the problem for some technologies is a weak business case and lack of track record, such as Unified Communications (UC).

Virtualisation & Green opportunities IBRS foresees two IT winners in the new landscape. Firstly, it said, virtualisation will grow strongly next year.

It delivers proven payback as it avoids and delays hardware purchases. The second reason for its growth in tough times is that virtualisation enables IT to align infrastructure SLA to business demands more efficiently.

The economic downturn, coupled with the rise of Intel Virtualisation, will accelerate the transition from proprietary UNIX/RISC server to commodity Intel server for large workloads, thus hastening Sun Microsystems’ decline.

Secondly, Green IT may flourish as it can be applied tactically to save power on desktops, right through to larger structural changes within organisations. While IT security may not be a high-profile issue in 2009, it will not be ignored either.

IBRS said particular attention would be given to security technologies which can help deliver value despite reduced staff. Tools that help with provisioning users, as well as password resets, will rise in importance.

One other and very large non-technology consideration will be how to manage the reduced expectations in organisations that have experienced many years of growth.

With cutbacks, tight resources and staff losses, senior managers will have to manage people better and possibly help them through a new career experience.

While the deepening global crisis has sharpened focus for enterprise IT investment, there are some significant silver linings, according to Matt Kolon, chief technology officer for APAC at Juniper.

“Value can be broken down to two parts. One is in saving capital expenditure (Capex) but the other is in enabling new parts of applications for the enterprise and providing the CIO with the wear-with-all to help compete with new services,” Kolon said.

“Customers are asking us how to make their networks more efficient rather than build a second project and how to make more with less. Looking at all the new applications and predictions for next year, they are along the lines of saving money and the impact on operational expense.

“It just means that even in a downturn, companies find innovation pressure doesn’t go away, but they are having to do more with less and have to make room in a budget that is flat or negative. What we are seeing is CIOs having to innovate and reduce their budgets. But we are also seeing a splitting out of resources to be used in different ways such as data consolidation and savings in the network through, for instance, virtualising data centre networks. In a nutshell it is that we are doing more with less.”

Kolon said that network and data centre consolidation has already reached fever pitch. He said organisations have been focusing on this as a key way to reduce operating expenditure and 2009 will see a shift in focus to look across the entire organisation to truly address complexity.

“There is a perception that server virtualisation is ahead in this regard, but we’re already seeing a number of customers look at the cost and space savings available with this technology. The challenge is getting the server teams and network teams together to break down some of the communication and education barriers to help businesses really streamline their data centres.

“2009 will be the year that the network is next to get the virtualisation treatment,” said Kolon.

Also high on the 2009 list is Green networking.

“Whilst it’s been on the agenda for some time, 2009 is likely to see quantifiable metrics for efficiency and power consumption become a core element to RFPs. To date it’s been a nice aim to have with vague, unquantifiable goals. There are now testing standards that allow more rigorous demands to be placed around the Green credentials for networking equipment.”

Furthermore, according to Kolon, IT departments will be looking to maximise networks and server resources, making them work more effectively.

“Proper management of the network operating system is a key way to achieve this and as such it is likely to emerge as a more important part of the buying decision in 2009. Companies are looking to leverage a lot more multiplay applications which will lead to an increasing mix of video, voice and data flowing over networks.

“In 2009, the mechanism to achieve this level of intelligence, through advanced application-aware networking, is likely to emerge as a key focus area
for businesses.”

Opportunities are rife

Michael Costigan, marketing director for Avnet Technology Solutions, said while the market has taken a major downturn, until now it had been going well.

“We had been travelling very well in particular with a lot of solutions driven by virtualisation solutions from our business and this has been the major technology driver,” said Costigan.

He believes where IT projects have been put on hold, IT mangers are still looking at refreshing desktops and they are still moving at a run rate trending to end of calendar year.

“For instance, ANZ recently conducted a report on organisations which has shown competition in the marketplace and the smart use of IT systems are set to leverage companies in difficult times.”

The downturn is not likely to have its effect until well into next year, but it’s inevitable as many companies in Australia are subsidiaries of US companies. According to Costigan, the mid-market continues to perform well and has even grown in the past couple of months.

“Australia’s mid-market will invest in technology as well,” he said.

“We are seeing strong demand from companies with 100 to 1000 users with technical refreshes or updating their software or billing systems.”

Likewise, Costigan said the economic woes could translate into opportunities.

“The climate is ripe for the rise of security issues and we are selling security solutions to consumers who want to secure those operations on the back of a lot of paranoia arising from the tough economic conditions,” he said.

“We are starting to see a rise of Web 2.0 and social networking and social media to sell and market products. The rise of virtual communities has gone from passive to interactive. And for Avnet this is something we are looking to tap into.

“Virtualisation and industry standardisations will dominate the market with software, security and networking adjunct to many organisations striving to achieve compliance with security issues and organisations having to store documents for certain lengths of time,” said Costigan.

Cam Wayland, director at Channel Dynamics, said while businesses are all cautious as a result of the global figures and outlook, he was yet to detect a significant change. “We haven’t seen any significant change in this quarter,” said Wayland.

“But while we are remaining cautious it is business as usual. While we don’t know what will happen next year, vendors and distributors are saying that among the better performing organisations they are tracking reasonably well.

“However, December is the main financial year end and new funds would have to be allocated potentially next year which might show that in the first half it could be a different story,” he said.

Wayland said that budgets at top end of town had already been set at the 30 June financial year end, with a lot of funds for projects already allocated, but next year is possibly the harbinger of an unwanted change.

“Consumer or business sentiment will flow through to IT spending and there are a lot of people talking about the slowdown, but it isn’t as significant yet as vendors in the US where it is a very real slowdown,” Wayland said.

“In our own business for next year we are making sure that we are out talking to people and I am optimistic that while there will be a slowdown in the Australian economy it will not be as bad in the US. We expect continued growth in the area of software as a service, Cloud Computing and Green IT, which means doing more with less and becoming more productive.

“In times of uncertainty a business that keeps its eyes wide open can take advantage of opportunities and grow market share.” He said overall there would be considerable change, even due to the falling dollar and IT budgets will be cut back.

“We are however, encouraging our customers to invest in the channel and to take advantage of the situation. They shouldn’t cut back, but should work smarter with the channel.”

According to Adam Edmondson, general manager of Indirect Sales for Australia and New Zealand at SAP, while the Antipodes are performing significantly better than counterparts in countries such as US, the worst is yet to come.

“Even though Australia is not as badly affected compared to Europe and the US, we are already in a slowing economy.

“The Reserve Bank is not predicting a recession at this stage, but even so, few sectors are unaffected by general economic uncertainty. The advice of business consultants is to focus on the things you can control in your business, monitor liquidity and cash flow closely, and reduce operating expenses.”

However, according to Edmondson there are opportunities to turn adversity into opportunities.

“You should keep your eyes open to the opportunities provided by an economic slowdown. Smart companies continue to invest in IT systems that improve business efficiency and effectiveness. Slowdowns don’t last forever, so it’s important that businesses are in a strong position to take advantage of conditions when the economy starts improving.

According to recent research by business consultants Bain & Co, there are more opportunities for companies to move from the middle of the pack in their industry to the front in an economic slowdown than at any other time of the business cycle, explained Edmondson.

He said there were significant opportunities for channel partners in the year ahead.

“This is a great opportunity to demonstrate value. Firstly it is a great opportunity to strengthen their own business but zeroing in on business efficiency and effectiveness and secondly, an incredible opportunity to demonstrate value to customers who are experiencing tougher operating conditions.”

Edmondson said channel partners should focus on tailoring outcomes for customers that meet new pain points in the current environment.

“During a slowdown, SME focus tends to turn to efficiency – minimising costs and finetuning operations – rather than market share and growth. Small tweaks can make a big difference to profitability.”

Visibility into business operations, cash flow and liquidity are crucial for best-run businesses.

“This will enable smaller companies to take advantage of tools enabling agility and timely decision making, we have special arrangements for licenses on our mid-market product, SAP Business-All-In-One and additional products for great business insight, such as SAP Business Objects Xcelsius and Business Objects Crystal Reports.”

Scott Morris, responsible for direct channels in Australia and New Zealand at Net App, said the most significant aspect to consider in attempting to forecast the year ahead remains total cost of ownership.

He said no matter what the economic circumstance, you need to reduce those costs to remain competitive and to drive down the cost and gain more bang for your buck.

“You remember the oils ain’t oils campaign, well it is not just the sticker price that is important. I am a storage vendor providing the judgement on how little storage I can provide to give a TCO (total cost of ownership).

“The true TCO of a developing architecture is that it comes off the back of shared storage framework and aggregating best practices to make more efficient implementation, driving costs out of organisations along with people, process and technology,” he said.

Furthermore, the new technologies around virtualisation focused on saving in the cost of servers and storage are now coming into their own with flexible volumes being built on the fly without taking down other zero footprint developments and baseline data, he said.