The Hindu Business Line : Customer's cash calls the shots

The world economy is into a spell of IT-deflation where customers want more IT for less cost. The dynamics of the IT and telecom markets are being reshaped dramatically. eWorld tracks developments against this backdrop.

THE economic slowdown in the US and Europe is leading a radical transformation of the information technology and telecom industry. Over the past three years, the world economy has unobtrusively slipped into a period of IT-deflation, in which customers are demanding more IT at a lesser cost. IT-deflation, per se, may not have been such a bad outcome, but it is the changing pattern of IT spending which is ringing the alarm bells for the industry.

First of all, corporate IT budgets and spending patterns are going through a painful transition of sorts.

Computer hardware, be it the server or storage markets, or other high-end technology markets have matured considerably and are getting commoditised at a rapid pace.

This realisation has dawned from studies by leading research outfits that show that the link between IT investments and shareholder value is not so straightforward. Companies that have invested heavily in IT to improve their efficiency and productivity have not found that getting automatically translated into shareholder gains. Even the claims of productivity gains in different sectors have come under intense scrutiny.

Two, the balance of power in the IT (and telecom industry) is slowly, but steadily, shifting from the vendors to the customers.

The competitive pressures that had forced customers to splurge on IT during the go-go years in the nineties are gone forever.

The bubble years were fuelled primarily by the unquestioning and dismissive `You Don't Get IT' mentality.

This led to such huge overinvestment in IT hardware, software and telecom equipment, that figuring out ways to make these different investments talk and yield returns has been the primary preoccupation of customers across the globe.

Finally, software as a service is leading the way in the overall industry transformation and will probably remain among the few segments in the IT space which will grow at above-average industry growth rates.

Over the past couple of years, customers in different sectors have transformed their business model in which CEOs (Chief Executive Officers) and COOs (Chief Operating Officers) play an increasingly decisive part in decision-making.

In doing so, most IT outsourcing decisions by US/European companies are being taken by integrating the requirements of the vertical business team with technology teams. IT dollars are being spent far more prudently than in the past, with suitable Return on Investment (ROI) and other metrics being applied for IT spending.

Seen in this backdrop, recent developments in the IT and telecom arena seem to make eminent business sense.

They are all driven by a strong focus on software services and a growing thrust towards the convergence of the `IT and communication' markets.

Take for instance, Sun Microsystems recent decision to bury its hatchet with Microsoft.

In a 10-year historic pact, Sun and Microsoft have decided to allow their respective Windows and Solaris Unix Operating Systems and .NET and Java development platforms to talk to each other seamlessly.

Such a `marriage of convenience' would have been inconceivable prior to the slowdown era.

As Scott McNealy, the CEO of Sun, has been a long-time Microsoft basher, this partnership pact has turned out to be an even greater surprise for the IT community. Clearly, this coming together of archrivals has been dictated by the need to array against the common enemy, Linux, and the open source movement.

Or for that matter, consider the unrelenting efforts of Oracle to take over PeopleSoft.

The consolidation efforts have been fuelled by the desperate attempt of Oracle to enter the business-software market, which is currently the preserve of SAP. With over 50 per cent of the market share, SAP has taken the lead in establishing itself as a major force in using software to automate business functions ranging from manufacturing to marketing operations.

For Oracle, which is witnessing a slowdown in the growth of its core database business, a foothold in the burgeoning business-software market is imperative for future growth.

The scene in the telecom market is no different.

In February, the Finland- based Nokia decided to buy out the equity stake in Psion Plc of Britain, the second largest shareholder in Symbian, to control the platform of the next generation high-end mobile phone market, called smartphones.

If it succeeds, Nokia, which already holds a 32.2 per cent equity stake, will enhance its combined equity stake to 63.3 per cent.

But this acquisition is presently being challenged by Ericsson, the Swedish telecom equipment maker. Through this acquisition, Nokia is planning to make a foray into a `converged' IT and telecom market of the future.

These trends go to show that the dynamics of the IT and telecom markets are being reshaped dramatically, calling for newer strategies and business models to handle them. Or are we entering into a different IT world altogether?

To be Continued...

maverick@thehindu.co.in

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