The slump in the share prices of IT suppliers has forced them to
announce substantial job cuts worldwide. David Brown reports on the
chances of users negotiating cheaper prices
IT suppliers caught by a global slowdown in demand are generating
little sympathy among corporate IT buyers who have funded the years
of handsome profits.
Many IT directors hope the suppliers' difficulties will enable them
to call the shots during negotiations and insist that suppliers
reduce their margins. But it appears that most suppliers are
refusing to be panicked into offering the expected discounts.
David Roberts, chief executive of user group The Infrastructure
Forum, said, "The current situation is good news for the corporate
IT user community because it means there is an opportunity to
acquire products and services at advantageous prices.
In return, suppliers will probably be looking for longer contracts
than usual as their strategy will be to manage their relations over
a longer time, and some of services may have non-essential elements
taken out."
But price cuts - if they exist - are difficult to calculate as
suppliers are expert at disguising them as reduced support costs,
longer licences and volume selling, and neither side wants to
reveal details of their deals to rivals.
And although price cuts are welcomed by corporate IT departments
there is concern at the possible impact of the reductions in
workforces announced by suppliers as they battle to defend their
share prices.
There would be serious concern if the axe began to fall on support
and development.
"There has been a shift within large corporations to dependence on
external IT resources," said Roberts. "If suppliers start reducing
their support and development there could be significant problems
because it can impinge on the ability of a large corporation to
maintain business operations.
"It is not possible for a large organisation to simply swap supply
partners as they are usually integrated in the business process."
Simon Mingay, vice-president of IT management research at Gartner,
believes that the suppliers have so far not resorted to stimulating
demand by cutting prices because UK capital spending has reduced
only slightly.
"There is always room for negotiations and the balance of power is
moving in favour of the purchaser but this is not translating into
substantial price reductions," he said.
Reduced demand has seen the costs of some software, particularly in
customer relationship management, fall by up to 15%. He also
believes that service suppliers are likely to increasingly target
the higher margins offered by packages and bought-in solutions and
system integration.
But bargain hunters should sometimes be wary of cut-price deals,
said Mingay. "Up-front charges may look attractive but get the
corporate lawyers look carefully at the second- and third-year
costs."
Dell has been one of the few technology companies to highlight an
aggressive price-cutting strategy. As a result of reducing prices
by 35% globally it has seen sales increase by more than a third in
the first quarter of this year compared with the same period in
2000.
Although the policy of buying market share with red ink has boosted
Dell's stock price it has, so far, been resisted by rivals.
PC rival Compaq said it would follow Dell. "We won't chase market
share just for the sake of it as our margins are important because
that is what drives our share price. It is a question of balancing
sales and margins," said a Compaq spokeswoman.
"At the high-end server business price becomes less important as
the key issues are reliability and scalability. Lower down we are
looking at the market and at the competition and there may be price
reductions, but it is hard to be specific," she added.
Compaq insists that the 7,000 reduction in its workforce will come
from reorganising its supply chain, manufacturing operations and
marketing and sales. There are no plans to reduce its UK support
centre base in Glasgow, and research and development remains
crucial for future growth.
Networking equipment company Cisco Systemsa has been the
highest-profile casualty of the slowdown but is reticent on
revealing its strategy. A mountain of CEO briefings and PR babble
has done little to enlighten its customers as to how the 8,500 job
losses will affect the services they use and the future of the
company's pricing strategy.
Fung-Yee Tang, a senior IT markets analyst with IDC, said corporate
IT buyers should not believe that suppliers are on their knees and
are desperate for business at any cost. Growth rates may have
slowed but the IT market is still well ahead of other areas of the
economy.
"Pricing issues in IT are constantly changing as the market
changes," said Tang. "It has always been the case that new products
only stay at the top rate for two or three months before the
discounting starts."
For IT directors looking to advise their boards on when the market
will be right to make their next major purchase - the answer is
that there probably isn't a right time. With massive depreciation
for hardware and increasingly frequent demands for software
updates, Tang believes that UK businesses will manage the market
risk by striking packages with suppliers for services, software and
equipment.
"We are not going to see a slump in demand and vendors are not
going to slash their prices," she said. "If directors want
long-term solutions to their business needs in a market which is
changing every month then it makes sense to let someone else take
that risk and go for a safe packed deal."
This issue is likely to be a key area for debate with leading
suppliers organised by The Infrastructure Forum on 22 May during
its annual conference
www.tif.co.ukIT's share price fortune yo-yo
Fortunes of IT suppliers have fallen sharply with jobs losses,
profit warnings and inventory write-offs across the industry.
The highest profile casualty has been Cisco Systems, the world's
largest networking equipment company, which has admitted that sales
in the current quarter would be down about a third from the
previous quarter.
"We never built models for a decrease of this magnitude. The
downturn has been more rapid and larger than expected," said John
Chambers, the company's president and chief executive.
In response, it is cutting almost a fifth of its workforce and has
taken a $2.5bn charge to cover the cost of excess inventories.
Cisco may be the biggest casualty, but it is by no means unique.
Shipments across the global PC industry grew just 3.5% in the first
three months of this year, compared with 15% for the same period
last year and 10% for the final quarter of 2000, according to the
market research group Gartner Dataquest.
Hewlett-Packard has announced it will cut up to 3,000 management
positions and has confirmed a $150m charge for writing off
inventory.
Compaq has already taken a one-time charge of $249m to write off
excess inventory and will take a similar $300m charge during this
quarter. The company also expects to reduce its workforce by 7,000
over the next five weeks.
Dell is cutting prices across its product lines and has made the
first round of job cuts in its 16-year history.
Hand-held computer manufacturer Palm has announced it will lay off
15% of its workforce as it expects to make a loss this quarter on
sales almost half that originally expected by analysts.
Nortel Networks is cutting 15,000 staff from its workforce by the
middle of the year and systems integrator Computer Sciences has
warned that demand had suffered an unexpected and severe downturn.