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e-Xpertise in Industry Issue #19
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December 2003

In this issue...

Quote for Today

"Success is getting what you want. Happiness is wanting what you get." - Dave Gardner

Feature Article: As the Green Shoots Return

At last, life-giving purchase orders have begun to flow to IT vendors selling to industry. Next year, according to Merrill-Lynch's latest survey of 100 CIOs forecasts, IT budgets should be higher. The Gartner/Soundview survey, again with a mainly US CIO sample of attendees at their annual conference, shows flat spending. As we digest the detail from US vendors' third quarter results, we can see that cost cutting and flat revenues mean more companies are making money. More recently both Cisco and HP's revenues exceeded market expectations.

For the first time since 2001, Cambashi's own market models are forecasting real growth in EMEA, even in Euro currency terms. The basis for this is that, in 2004, we expect strong investment growth for all the major European economies, whereas in 2002 and 2003, it declined. See web page reference for the detailed data. In 2002 and 2003, only in Italy, where the "Tremonti" tax break distorted investment at the end of 2002, was there any positive news. Because of a leverage effect, described below, modest investment growth can translate into strong investment in appropriate IT projects. However, running historical data through our models suggests that there is about a year's time lag between investment returning and revenue flowing to applications vendors. It is 2005, not 2004 that is going to be the bumper year. Follow this link to see the graph of Investment growth on the Cambashi website if the graph below does not print.

Demand in the mid 2000's will be different to that in the dot.con boom. Back in the run up to Y2K the majority of demand was from larger companies. They updated business applications to cope with or to trigger business change. Managers forced top down decisions to standardize on a single ERP system for all business units. In the subsequent roll-out, users became tied up with business change issues. Other companies experimented with the web. A myriad of novel applications were created by a plethora of web design start ups.

In 2004, demand will be led by consumers and smaller businesses. They have clear ideas on what return they expect from their investment - personal and office productivity. As an example of this, the current upturn in PC unit sales is mainly from the small office, home office sector, renewing their computing infrastructure and upgrading to new versions of personal productivity tools such as Microsoft Office. We now see interest in new tools such as Adobe's product set, which enables users to use one set of data in multiple applications within a single process. For example, taking information from an accounting package like Sage, producing a Word report, then publishing it with Adobe in PDF, so that the recipient has restricted amendment rights.

IT budgets have both an investment allocation, to do things better, and an operational allocation, to keep the show on the road. When times are tough and businesses cut budgets, investment allocation tends to be reduced disproportionately. To back this up, Merrill-Lynch's survey contains estimates that show 60-70% of current IT budgets are spent on keeping the show on the road. They reported that the first priority of CIOs was to prevent infrastructure degrading.

When better times return we would expect the investment allocation of IT budgets to increase disproportionately. Merrill-Lynch's survey also suggests that the first call in larger companies on renewed investment will be for projects that make more efficient use of existing infrastructure. We hear a lot from vendors about server consolidation projects. However, users tell us that only when new application loads are likely to require additional power can they justify the rip out and replace consolidation projects. Infrastructure rationalization projects that don't deliver short term visible benefits to users are going to be very hard to sell.

Although infrastructure may be a CIO's priority, it does little to improve the business. Line of Business managers are more likely to push for new capabilities that support their business initiatives. These could, for instance, include applications investment to improve supply chain efficiency.

But IT investment is only one part of the overall investment. Most well run companies have a clear understanding of their business model. One metric is the amount they invest in business initiatives that change operational processes to improve profit margins. These business initiatives vary from opening a new sales office, to a new machine at a production bottleneck, to investment in a new IT application.

We don't expect that IT investments will be ring-fenced within the overall investment budget. Rather we expect investments to be made in line with business initiatives. Unilever has its "path to growth"; HP has its merger with Compaq; many companies are following lean manufacturing and six-sigma quality initiatives. Within these initiatives, a portion of the investment will be allocated to IT to enable it to succeed.

It is likely that the CIO's power in the decision making group will reduce. Even if investment returns strongly, we probably won't see investments in the latest software acronym. Nor are users looking for the next big thing.

As new investment in IT flows, the role of procurement is likely to change. Its general role is to ensure that all expenditure contributes towards agreed and properly authorized business initiatives. To date, IT procurement has been treated differently. In reality, it is no more complex than selecting the appropriate type of steel for a turbine blade. We expect that businesses will pay a lot more attention to how they decide what IT expenditure is necessary. This will extend to comparing these investments with alternative non-IT investments. For larger firms, the corporate governance of IT issues is in a state of flux. For smaller firms, management has to get to grips with tecno-talk.

All stakeholders in the IT industry: user IT departments; systems houses; software and hardware suppliers; and even investors must change to these new circumstances. There has already been a re-alignment within these industries to be more customer-centric. Vendors now have to define their positions in terms of how they help industry sectors and business initiatives. One example of this is the recent acquisition of Documentum by EMC, which can be seen as a verticalization of what was a horizontal commodity - storage.

In 2010, when we look back on the millennium IT recession, the boom and bust will probably appear as a minor blip. The lasting change will be the way that users budget for and purchase IT. In retrospect, we will identify the casualties as those vendors who failed to adapt to this new phase of the IT industry, rather than vendors starved by a shortage of demand.

Mike Evans

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Hot Topic: Enterprise Applications review 2003

During December most people take stock of the past year and look forward to the next year. The news media runs through the events of the year; sports shows do the same. Even though the final results are not yet in, let's review 2003 for Enterprise Applications and look forward to what we might expect in 2004.

For the calendar year 2003, the worldwide market as a whole will see revenues about the same level as 2002 - i.e. zero growth. But if you remove SAP, the market will decline by about 9%. In Europe, the market (measured in euros) will decline by about 3.5%. This compares with a fall of around 3% for 2002. However, excluding SAP, the European market will have fallen by around 2.5%, a massive improvement on the 16% fall in 2002.

Cambashi's short term model projects forward using analyst consensus estimates, while the medium term model uses econometric data for its forecasts. The short term forecast is that Q4 2003 will be cautiously optimistic for the Enterprise Applications market. The market in EMEA as a whole will be about the same level as Q4 2002, but removing SAP from the figures would give a 9% growth (see figure 1 on the Cambashi website). It is also worth remembering that the change in exchange rates between the dollar and the euro means that the downturn in the market in Europe has lasted much longer than it would appear if the figures were viewed in dollars (see figure 2 on the Cambashi website).

The year started with uncertainty over Iraq and the announcement of reduced revenues by some of the major companies in the sector. It has ended with continued uncertainty over Oracle's proposed deal for PeopleSoft and a number of other takeover deals and mergers. For Q4 2003, vendors have set revenue expectations that can and will be met. However, this still means that 2003 revenues will be lower than 2002 revenues in many cases, but since costs have also been cut, losses have been stemmed even on reduced revenues. This does mean there will have been a further decline in the overall market, but the outlook is a lot rosier than it was this time last year. The bulk of 2003 has been a hard slog for most vendors as companies have become more careful with their money, and IT investments vie with other capital expenditure for a decreasing pot of investment cash.

On the face of it, things may look bleak. However, like a mid-winter garden, although the trees are bare and plants look dead, the tips of the daffodil bulbs are just starting to poke through. All signs point towards 2003 as the bottom of the curve - the flurry of acquisitions from SSA, PeopleSoft, GEAC and others suggests that many of the industry's business leaders believe the market has reached the bottom and that it is a good time to buy. Econometric data from PwC suggests positive growth in both GDP and Investment for the major European economies in 2004, after minimal GDP growth and Investment decline in the Euro zone for 2003.

The good news is that 2004 looks much more positive and 2005 potentially a great year. Based on our medium term econometric model, we are predicting a small level of growth for the Enterprise Applications market in 2004. Companies will still be careful with their investments, but they will spend money to support their key business initiatives.

Dan Roberts

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Book/Cassette Review: First things first; by Stephen R. Covey and A. Roger Merrill.

Read by Stephen R. Covey. Simon and Schuster Audio (Cassette), £9.99 initial purchase and £2.99 to swap at the tape exchange in Welcome Break service areas.

I find that I have less and less time to invest in reading business and self development material. It’s almost impossible to keep up with the dozens of emails I receive, numerous market updates and, of course, the industry and general press. Ring a bell? I think that I may have found a solution, well for me at least. The nice people at Welcome Break, a motorway rest area chain found in the UK, have a system where you can purchase one audio book on cassette and trade it for a new one as often as you like (at a small cost of course). My hours spent in a car can now be used for something useful – entertainment, education or self development.

Recently, on one of my frequent visits to our offices Cambridge, I listened to ‘First things First’. In summary this book identifies and develops a ‘novel’ theme for personal development by encouraging the management of priorities rather than time. To be quite clear, I found the message to be valid – we do need to spend more time prioritising tasks as opposed to fire fighting commitments in ever decreasing timeslots. What I found frustrating was that the content could have been delivered in less than half the time. Perhaps it was because I listened to the book in one session – maybe I should have played it over 2 or 3 journeys? On the positive side, the basic concept, although not radical, is worth considering. I believe, however, that there is a place for both strategies – managing priorities and improving execution efficiency. Although I found myself straining to remain interested and attentive, I thought that the authors made good and frequent use of examples and similes. This at least maintained some level of interest on my part, but not enough to recommend this as a read. If it could be abbreviated into a 20 page (or 20 minute audio) deliverable, it would be well worth the time.

Allan Behrens

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Noticeboard

COFES

The Congress on the Future of Engineering Software will be held from April 1 - 4, 2004, in Scottsdale, Arizona. John Koza, a consulting professor at Stanford University, is to lead the keynote speakers. He is the inventor of genetic programming – a method that allows automatic development of software to solve specific problems.

A full list of industry events can be found at IT industry events on the Cambashi website

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