Look On The Bright $ide

A slowdown in IT spending doesn't mean all services will be cut.

A predicted slowdown in IT spending has set off a mad dash among solutions providers to retool their services offerings, shifting resources away from such areas as Web-site design and into hot growth markets such as managed storage services.

Even after the feds surprise interest-rate cut last Wednesday, an unstable economy looms on the horizon. On the upside, most pundits predict the economy will grow—albeit very slowly—in the first half of 2001. A smaller faction of economists think were due for a full-blown recession, which, by definition, is two or more consecutive quarters of negative growth.

Faced with a cooling economy, many solutions providers fear they could be caught in the same kind of crunch that hit the Web-integrator market last year when the demand for creative services slumped. Most Web integrators are in the process of shifting their businesses to other more lucrative services markets, but this time theyre not alone.

Wallet Watcher In a recent survey of CIOs, respondents told Merrill Lynch that overall IT budget growth in the United States could slow down from 11 percent in 2000 to 5 percent this year. The survey suggested that while companies do not expect to slow their investments in Internet technologies, there could be a cutback in spending on services—especially consulting. That trend is driving solutions providers to rethink how they allocate resources.

"Were being forced to reallocate and constantly tweak our model," says Randy Schilling, president and CEO of integrator SoluTech. "Were asking questions like, Does it make sense to do infrastructure consulting in all 16 of our markets or to centralize those services? Its the same with hosting services."

Schilling and others say theres no shortage of work in areas like integrating legacy systems with the Net. SoluTech currently is working on a contract to provide the state of Kentucky with Internet access to drivers licenses. But the company also has centralized its creative design department because the demand is nowhere near what it was a year ago.

Also, cutbacks in IT spending are expected to affect key areas that were once hot. "The Fortune 1000s are trimming the fat off the e-commerce infrastructure and e-commerce applications. We are also seeing them being smarter about outsourcing," says Howard Rubin, executive VP at META Group.

Nothing Is Universal Still, not all corporations are cutting their IT budgets. Some are simply too far along with their deployments, while others see IT spending as a competitive edge. Giant retailer Lands End, for example, doesnt expect to cut its IT budget from last years level, which accounted for half of its capital spending budget.

Canadian utility BC Gas, likewise, has no plans to change its IT budget this year. "In terms of non-projects, such as infrastructure, the budget has stayed the same. And on a project basis, about the same, maybe 1 to 2 percent higher, but that is only nickel-and-dime stuff," says Duncan Vickers, the utilitys VP of information communications.

Vickers expects the company to drop a lot of its project work by the fall of 2002, but thats only because by that time it will have replaced all of its major systems. "Our [IT] budget is evolving. We had been focused on back-office systems and well change to a focus on the front office," he says.

Have the Right Services At the same time, theres no shortage of opportunities for other services. Integrator CTS, for example, is seeing 5 percent to 15 percent growth in its Solaris, Cisco Systems and Oracle business, and its Siebel business is growing in the high single digits to low teens. But its managed storage services business is growing 300 percent to 400 percent a year.

"We cant keep up," says CTS president Michael Malone. "Every person we find is billable at 100 percent within two months." The industry average of billable hours is about 70 percent to 80 percent.

Malone says that EMC, Hewlett-Packard, IBM and Sun are making a bundle installing storage solutions, but theyre not leaving anyone behind to run it.

That spells opportunity for solutions providers, but its unclear how long the storage boom will last. Just last week, Robertson Stephens analyst Dane Lewis downgraded EMCs stock. In a research report, Lewis predicted that the IT spending slowdown will be "dramatic enough to impact even storage and security vendors."

Meanwhile, some expect corporate IT spending to be more strategic than it was 18 months to two years ago, when dollars were being thrown at e-commerce and Internet strategies to fend off the incursions of budding dot-coms.

"Im not sure companies are going to cut their investments in the Internet-enabling software area," says Benny Lorenzo, general partner at Aspira Capital Management, an investment firm.

"Where they are cutting spending is in the Internet services area. Many customers no longer need Web-design or front-end work," Lorenzo says.

For solutions provider Mark Stellini, the specter of a slowdown is not on his radar. "We have a ton of projects in the works," says Stellini, president and CEO of Info Systems. "They are geared toward helping companies generate profit, creating an e-strategy or making companies more efficient."

Stellini, like many other traditional resellers that have shifted their business models to include higher-end products and services, sees his value in offering a portfolio that now includes managed storage-area networks and security services. "We are no longer doing desktop or network support. We worked hard to reposition ourselves and our customers are not cutting back," he says.

Dont Look Down Other solutions providers say they are not feeling the economic downdraft. "I feel the economy will turn around. I am cautiously optimistic," says Mark Romanowski, VP of services at integrator Jade Systems. "There is a clear market segmentation. We are seeing good business with the enterprise accounts and a slowing in the small and medium market. Companies are still buying software, and they are still buying services."

But which services and for how long are two question that many solutions providers are beginning to ask themselves. Maybe you should, too.