More IT profit warnings issued

It's been another week for profit warnings from hardware, software and services companies in the industry

Ian Mitchell

City Briefing

It's been another week for profit warnings from hardware, software and services companies in the industry, the latest coming from Unisys, the former mainframe manufacturer and now services company.

It warned that revenues would be more than 50% below market expectations, and its share price fell by over a third in response. The Unisys warning comes on the heels of those from Computacenter, Computer Sciences, Logica and Parity.

The reasons for the slow recovery in spending are many and varied and there are almost as many theories as there are warnings. I have previously outlined the most plausible in this column.

The most compelling in my view is that companies which put projects on hold before the millennium lockdown have had to fundamentally rethink them in the light of the explosion of offerings which aim to revolutionise internal systems to cope with the e-business revolution.

Naturally, this leads to delays in implementation. Another plausible reason expressed to me this week is that IT directors are experiencing a backlash from boards in light of what they consider to be the vast sums wasted on preparing for y2k. This has led to them deciding to intervene more directly in IT strategy and undertaken reviews of planned projects before deciding whether to proceed.

Whatever the reason it seems clear that we are currently in a period of fundamental shift away from the products and accompanying services that have been popular in the industry for a number of years and into more flexible offerings. For example, ASP services will, in time, replace many of the more humdrum services provided by internal IT departments and XML will help in the drive to make e-commerce systems much more "plug and play".

The idea is to give users of IT the ability to adapt their systems to cope with the rapidly increasing business environment, without which large companies will remain vulnerable to competition from smaller, more nimble rivals.

The biggest losers out of these changes will be those companies selling large and unwieldy software products with lengthy implementation times, hardware which fails to compete on performance and the ability to upgrade and services companies which are not investing in repositioning their skills.

The sector that seems most readily to exemplify this is enterprise resource planning (ERP), where we've seen Baan suffer badly, JD Edwards announce it is to concentrate on enterprise application integration and SAP bet heavily on the success of its portal. Just last week FI Group's otherwise impressive results were overshadowed by worries about the profitability of recently acquired Druid, which specialises in SAP implementations and associated development.

Meanwhile, a survey of European chief executives has found that only 13% are extremely satisfied with their ERP system with a further 17% somewhat satisfied.

In the services sector, some of the new e-business consultants are enjoying considerable success at the expense of the more traditional services providers. The feeling among customers, they report, is that it requires new thinking to be able to implement e-business systems. However, it would be unwise to write off the experience of the systems integrators in dealing with business systems and integrating the old with the new while dealing with the vagaries of their clients.

Over the longer term, my money would be on the established players reskilling with the necessary e-business skills before the new kids on the block can translate their undoubted understanding of the technology into delivering successful projects.

Ian Mitchell is an ITanalyst with stockbroker Beeson Gregory. His opinions should not be construed as investment advice.

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