The rose-tinted days of a year ago are a distant memory for most IT organizations. Back then, with the April 2000 technology market sell-off behind them and what appeared to be a return to stability after the Internet roller-coaster ride seemed to be finally over, most companies were prepared to tighten their belts a little as they faced the expected recovery head on.
What most organizations weren’t prepared for was the continued deflation of the tech market throughout 2001, punctuated with employee layoffs and business shutdowns. While the market meltdown of 2000 largely affected dot-com start-ups, the tech slump that began early in 2001 had an indiscriminate impact on everyone in the industry. And the worst was yet to come.
The Sept. 11 terrorist attacks in the United States and subsequent disruption of the U.S. postal service due to anthrax-related threats have not only revealed security vulnerabilities in North America, they are expected to further delay the economic recovery by several months.
In a research brief released on Oct. 24, Forrester Research Inc. predicted the tech slump will not end until the third quarter of 2002. Overall, the tech sector will experience 2.2 per cent growth in 2002, as end-user organizations keep a rein on spending and make use of technology they overbought in 2000, Forrester said. The economy will pick up momentum in 2003, but double-digit growth won’t resume until 2004, according to Forrester.
International Data Corp. (IDC) offered a similar prediction, with market research released Oct. 11 suggesting the economic turnaround will begin mid-2002. According to IDC, by Q3 2002, IT spending will increase between four per cent to six per cent in the United States, six per cent to seven per cent in Western Europe, and 10 per cent to 12 per cent in the Asia/Pacific region. Although Canadian IT growth numbers were not analysed in the report, IDC did predict the Canadian market will not fall as far as that of the United States.
In a separate October report, IDC Canada said the Canadian IT market is expected to grow 3.5 per cent in 2001 and five per cent next year. This contrasts greatly with the U.S. IT market, which is expected to experience negative growth in 2001 and only two per cent growth overall in 2002, the IDC Canada report said.
As economic conditions stabilize, end-user organizations will be faced with constricted IT budgets. No industry segment will probably feel the crunch more than the small- to medium-sized enterprise (SME) market, where IT resources are always limited, even at the best of times. IT managers of SMEs will need to find ways to cut costs, while maintaining existing systems and investing in their technology future.
To assist SMEs with their IT planning for next year, CxO spoke with industry experts about what technology areas and business strategies should be foremost in the minds of SMEs.
The next couple of years will see small- to medium-sized enterprises concentrate internal resources on their core competencies, or the competitive advantage they have in their specific industries, according to Jim Browning, research director and editor-in-chief at Gartner Inc. in Stamford, Conn.
“IT budgets in 2002 are still going to increase at a modest rate,” Browning said, adding recent Gartner research shows IT spending could grow between six per cent and 10 per cent next year. “But that’s about half of what the increase has been in recent years, where spending on IT basically went unchecked.”
As a result of the slowdown in the economy, SME IT managers are going to be pressured increasingly by upper management to justify their IT spending. “They’re going to have a difficult time getting funds for projects that don’t offer immediate payback through the first six months of 2002,” Browning said. “SME IT managers are going to have to learn a new skill here in being able to justify their IT spending, especially in 2002.”
One of the dangers of tightening IT budgets is the potential neglect of a company’s future technology strategy, Browning warned. As a general rule of thumb, an organization should not spend more than 80 per cent of its IT budget on the base-line maintenance of current systems, otherwise it runs the risk of underinvesting in its IT future, he advised.
“SMEs are mostly conservative in nature,” Browning said. “If they adopt a retrenchment mentality on new business opportunities and IT innovation, they risk losing significant market share or even failing as the economy rebounds.”
To offset the need for future technology investment, many SMEs will need to implement cost-saving measures first, he said, adding there are many hidden cost areas of a business where budget dollars can be reclaimed. He offered two examples: by retiring poorly utilized servers, a company could eliminate maintenance costs it may not even be aware it is paying; and by standardizing service plans for employees who use cellular phones and PDAs, the average organization could save from 20 to 30 hours of monthly service charges per employee.
Mark Quigley, research director at the Yankee Group Canada in Kanata, Ont., said companies should explore having a single point of contact for all of their telecom services, such as getting their local, long-distance, Internet, data and wireless services from the same provider.
“That way you can leverage a little bit of volume in your contracts, which will hopefully help to drive down price,” Quigley said. “And perhaps that will make you a little bit more important to your service provider, and you will have more leverage when it comes to negotiating contracts.”
Companies with branch offices may want to start exploring technologies such as voice over IP, which can generate cost savings by enabling voice traffic to run over IP-based data services, Quigley suggested. While smaller companies might be hesitant to implement leading-edge technologies during the current economic environment, Quigley said it is an opportune time because service providers are looking for new business opportunities themselves.
“In some respects, customers are in an enviable position because they are able to demand more and push their service providers a little more. In many cases, customers will receive a little more effort from their service provider, simply because they’re hungry, too,” Quigley said.
According to a survey conducted this summer by Toronto-based Evans Research Corp., hardware purchases are the main area where Canadian SMEs are expected to trim their IT budgets next year.
“Hardware spending will be weak and, specifically, planned peripheral purchases are lower than last year for every product category we looked at, which included all printer categories, multifunction devices, scanners and so on,” said Ivar Kangur, senior market analyst at Evans Research.
Despite the hardware market slowdown, hardware purchases will still represent about 48 per cent of SMEs’ IT spending in 2002, Kangur added. Software and services will account for 29 per cent and 23 per cent, respectively, of projected IT spending next year.
When asked if there would be an overall increase or decrease in their total IT spending in 2002, 77 per cent of the SMEs surveyed said they do not plan any changes in their spending, while 19 per cent plan to increase spending and only four per cent anticipate a decrease. This means there will be an overall net increase in IT spending in the Canadian SME market, for the second year in a row, Kangur said.
Capitalizing on e-commerce market opportunities should be a major focus for SMEs going forward, Kangur said. About three-quarters of SMEs in Canada have Web sites up and running, but most of these companies derive five per cent or less of their total revenues from on-line sales, he said.
In its SME market report, Evans Research measured survey respondents’ overall satisfaction level with their e-commerce efforts for the last two years. In 2000, 22 per cent of SMEs were dissatisfied with their e-commerce endeavours. This year, 40 per cent are dissatisfied.
“There’s a big opportunity for vendors in Canada who offer e-commerce infrastructure services to tap this market, and to give SMEs a bit of a nudge and say, ‘Look you guys, you’re lagging your U.S. counterparts, and you’re not satisfied with your e-commerce efforts. Why don’t you do something about it?'” Kangur said.
Gartner’s Browning said he expects the Internet – Web services in particular – will be a hot area for SMEs in 2002. About 15 per cent of SMEs will interface with some basic Web service next year, either as part of one of their own e-business projects or a supply chain partner’s enterprise project, Browning said. “They’re going to be pressured by their supply chain to do this,” he added.
Carol Ptak, executive of the global small and medium business solutions segment at IBM Corp., said the supply chain will be a key area of focus for IBM’s customers. She suggested the current attacks on the U.S. Postal Service involving anthrax-laced mail may increase the need in North America for electronic communications and collaborative technologies.
“You’re going to see more folks looking at electronic collaboration, because of the recognition that document delivery is going to be disrupted,” Ptak said.
The security concerns raised by recent world events will also drive the need for better data security and redundancy in organizations, according to Alister Sutherland, director of software research at IDC Canada in Toronto. Off-site storage of data marts is going to be a critical issue in future, he said.
Sutherland said small businesses have been very lackadaisical about data security in the past. To ensure their competitiveness in the market, SMEs need to make sure their data is secure and stored in more than one place – maybe even more than two places – and that there are real-time updates and conflict resolution between versions of the data or fields in the database, Sutherland said.
Customer relationship management (CRM) strategies may undergo a change in 2002, as companies begin to focus more on retaining existing customers as opposed to acquiring new customers, Sutherland said.
“We’ve moved into an era where generating net new revenue is becoming considerably more challenging, and the focus will move to gaining more profitability out of existing client bases. The best, most effective way to do that is through a comprehensive CRM strategy that is focused on activities that will enable that for companies,” he said.
Another prediction offered by Gartner’s Browning was that SMEs will allocate more of their networking budgets to wireless voice and data solutions. As companies become more decentralized, they need to tie mobile workers and remote offices into their infrastructure, he explained.
WHO DO YOU TRUST?
Regardless of the IT purchasing decisions SMEs will make next year, choosing technology partners that provide the right fit with an organization’s business strategy is key, experts said.
Many vendors who were early entrants in the SME market simply offered scaled-down versions of their large enterprise solutions or beefed-up versions of consumer offerings, and tried to pass them off as appropriate for SME customers, Browning said. Many SMEs found these solutions lacked vertical functionality and ease of implementation, he said.
“Some vendors try to put out a one-size-fits-all offering,” Browning said. “Vendors need to recognize there are various segments within the SME community – from size to vertical industry perspective – and they are looking for customized, integrated solutions.”
Browning warned SMEs against simply adopting the same technologies and vendors’ products and services used by large enterprises. In fact, recent Gartner research indicates that SMEs who deal exclusively with large enterprise-focused vendors could pay up to twice as much for their products and services, in terms of total cost of ownership, than if they were to standardize on solutions from SME-focused vendors, Browning said.
He added SMEs should never select products or services based on price alone. “Price is important to them, but they need to place a significant weight on the total cost of ownership,” he said.
SMEs will need to rely on trusted advisors – either internal IT professionals or outside consultants – who can help them initiate sound technology plans in order to take the next step in their business strategy. Increasingly, this IT advice will come from the reseller channel and other professional services organizations, according to Browning.
“By 2005, the small to mid-sized business market is going to account for more than 50 per cent of the total professional services market in the United States. That’s a big number,” he said.
A key area of concern for SMEs is post-sales support, Browning said. After technology implementations are put into place, resource-scarce SMEs require continued support to manage and maintain systems. Finding a technology partner equipped to meet their post-implementation needs is of critical importance, Browning said.
Above all, in choosing a product or service, SMEs should push vendors or technology partners to explain clearly how their business is going to be improved by the purchase.
“I’ve talked to a lot of SMEs where a vendor will come in and just sell them on a technology solution, but the SME walks away without understanding how it’s going to help their business,” Browning said.
“It’s prudent for SMEs to make sure they get out of the vendor how this technology is going to have business benefits for them,” he added.
Linda Stuart is a Toronto-based freelance writer who specializes in e-business and IT management issues.