Will the suppliers' slowdown put users back in the driving seat?

The slump in the share prices of IT suppliers has forced them to announce substantial job cuts worldwide. David Brown reports on...

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


IT'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.

Read more on IT legislation and regulation