Three's the lucky number

Sholto Macpherson

Amid imploding investment banks and vanishing hedge funds, the IT industry soldiers on.

At Data#3, you wouldn’t even know there was a global financial crisis.

The publicly listed company has had record year-on-year profits for the past four years, and the indications at the half-yearly AGM were that this year was going to be bigger than the last.

“While things in some circles are pretty dour, we are able to find a little bit of revenue out there,” said managing director, John Grant.

“We have a few things going to our advantage,” he said.

“We expanded geographically in the first half of this calendar year so that gave us more market coverage, and now we’ve got a bigger business competing in more markets, therefore we are driving more revenue.”

The other reason is that parts of Data#3’s business are progressing very strongly, explained Grant, particularly in three key areas that seem to be able to find and gain share in more difficult market conditions.

For instance, software licensing, which has become an increasingly significant part of the business over the past five years.

Licensing sells quality services to customers on a recurring basis, and Data#3 is normally on contract to manage the software as an asset.

“It’s a good business that doesn’t lose customers and so all we continue to do is build on previous contracts.”

Success in economic downturn
The financial downturn has encouraged many companies to look at saving money.

Data#3 has found success selling its enterprise solutions business which provides data centre infrastructure for companies interested in consolidation, virtualisation and business continuity.

Customers wanting to reduce costs are testing out virtualisation, which is also often sold as “Green IT” because it reduces energy usage and carbon footprint.

But the sustainability pitch on its own is less likely to get anywhere – people want to save money first and foremost.

“I think the focus for the foreseeable future is going to be around saving money, and if sustainable computing comes as a consequence of that, that’s fantastic,” said Grant.

“However, for new contracts that do happen, particularly by governments, I think there will be criteria in decision making around Green computing.”

Another popular penny-saving business is managed services, which Data#3 has been growing under contract over the past couple of years.

Selective outsourcing is particularly appealing right now as a way to cut costs.

Under pressure
It’s not all good news.

Data#3’s traditional products business has come under pressure as customers tighten their budgets and slow spending.

“There’s not the refreshes going on, rollover of existing leases, and so on,” said Grant.

He adds quickly that the business is not going backwards. This is mainly due to the reseller’s whole-of-government contract with Queensland, which has at least another two years to run.

Recruitment wind down
The arm suffering the most is recruitment and contracting.

“Customers have just stopped recruiting and contactors have been let go,” said Grant, who again points out that while there is no growth, strong existing contracts are already in place.

“The people with the best skills will still be hunted by organisations that want to build their capability. We don’t for one minute think that there isn’t a competitive environment for skills – we are [competitive], because we have some of the best skills in the country.”

The wind down in recruiting concludes a three-year boom – unfortunate timing for Data#3, which picked up 10 recruitment specialists with the Fingerprint Consulting Services acquisition last year.

And then there were the 50 cherrypicked from the beleaguered Commander Australia, which fired 600 people last year from its products and services business.

The Commander staff, all ex-Volante, underpinned Data#3’s expansion into Perth and Adelaide.

“We got some real professionals who have been in the industry for a long time and we were very lucky to get them. These people would not normally come onto the market.”

The new staff are fitting in well, said Grant, which he attributes to the diligent process by which they were hired.

“Everyone made their own decision to join us, and that is very different from an acquisition. It was only people who wanted to come.

“We went through lengthy and multiple interview processes. We treated every one of the 50 as a new hire.”

Another bonus was the shared business culture between Data#3 and Volante, former employer for all the ex-Commander hires.

Grant describes the culture as “a genuine care for the company that they work for and the customers they serve”.

Grant admits that taking on 50 staff as the economy turned sour was a gutsy move, but said he wasn’t worried.

“We had reason to be confident, because when Commander exited 600 people they also exited $200 million in revenue that someone had to do. So what came with that was a lot of customers, and we’ve been able to expand our customer base significantly as a result.

“And that’s good. I think the game at the moment is about getting more customers; really looking after the customers you’ve got; getting as much revenue as you can, albeit that you might forsake some margin, in order to be much stronger when the market condition changes. So we want to be strong at the end of it.”

Fine-tuning
It hasn’t all been high-fives at Data#3, however.

The company also said goodbye to a number of staff in 2008.

Grant said this is nothing more than a regular fine-tuning of the mix in resources, skills and people, and dismisses news reports about high numbers of redundancies as over the top.

“We’ve already taken action to take out roles in the business that in the current environment are not appropriate. We have hired people into new roles, and we’ve let people go from old roles because they weren’t appropriate. But we’ve been doing that forever.”

One of the headline wins in 2008 was Data#3’s contract with Defence, which will form the basis of a whole-of-government contract for the federal government.

Grant said the contract was strategic rather than highly profitable; Data#3 already had individual enterprise agreements with a number of federal agencies, and to win the tender the reseller slashed margins.

However, the contract has a range of options above the base relationship that extend into lucrative areas such as software asset management, a Data#3 specialty which Grant said is instrumental to winning software licensing contracts.

The reseller sets up a software asset register online so the customer can have access, and carries out regular audits.

Grant boasts that it’s a better solution than any other in Australia matched only by the licensing sales team which he also claims is the best in the business.

“There is absolutely no doubt about that, because we have acquired and trained them over time. It is the knowledge our people have of the complex software contractual issues that apply, not only in Microsoft but across all vendors – VMWare, Symantec, Computer Associates and IBM Lotus.”

Licensing under a cloud
Licensing software is becoming increasingly specialised.

A Microsoft customer can enter into four types of contracts depending upon the number of products, the terms and conditions, the degree of support and maintenance, and the period of time they want to do it for.

“There’s a lot of intellectual capital and IP in that,” said Grant.

But those in the software licensing business are watching a dark cloud come over the horizon – Cloud Computing, to be exact.

Established software vendors are gradually moving down the path trailblazed by online software giants such as Google and Salesforce.com, which rent online applications directly to companies and individuals.

The closer relationship between vendor and customer will inevitably squeeze out the reseller, although there will always be room for independent, professional advice.

How are big resellers such as Data#3, which now rely on software licensing for a significant chunk of their revenue and business growth, responding to the threat of Cloud Computing?

“From our point of view as a reseller, if the cloud came tomorrow and all of a sudden no customer was running on-premises systems, we would be in big trouble. But that’s not going to happen,” said Grant.

The promise of Cloud Computing is that it will make it much easier and cheaper to run software applications, as the vendor takes responsibility for providing the infrastructure (such as bandwidth, storage and backup), automatically updates applications and bills on a per-user basis.

Apart from the software licensing aspect, a lot of a reseller’s business is setting up companies with the ability to have all those services – storage, backup, application servers – in house. Ideally, Cloud Computing outsources these services to the vendor.

Away with the clouds
Cloud Computing is already in use but is strongest in niche applications.

For example, a programmer can test code by renting storage and memory on a website for three hours, then log off.

The best example of subscription applications is Salesforce.com, which started providing customer relationship management software six years ago and is now one of the best software companies in CRM.

But Salesforce.com’s success is in part due to the nature of the software it sells; it is easier and less problematic to outsource the storage of your CRM data than say accounting or logistics.

“If you go to the very small and small enterprise, running a 30-40 person business in manufacturing, say, the promise of being able to deliver a full application suite over the web is enticing because they don’t have the money or the expertise to manage the infrastructure and applications in house.

“If you then get to larger organisations and governments using enterprise systems which have real, live data, integration and legacy issues and multiple applications, the ability to deliver that over a cloud is a long, long way away, in my view,” said Grant.

The two sticking points with Cloud Computing are that someone else stores a company’s confidential data, which has privacy and security implications; and a company loses its ability to function if it loses its Internet connection or
if the vendor runs into unexpected downtime, such as if a software or hardware upgrade in its data centre goes awry, for example.

Despite this, there is no shortage of big-name vendors lining up to give Cloud Computing a go.

From Telstra T suite to Microsoft Online, no-one wants to miss the boat on what could be the next evolution of software development, distribution and delivery.

Grant admits that Cloud Computing is an inevitability, but he said he isn’t too worried, or at least not yet.

“There will be a migration to the cloud of certain systems over time, but, on all the industry statistical evidence we can get hold of, there will be continuing growth in on-premises systems.”