2004 In the IT Channel: Rewriting the Rules All Over Again

The IT market will be bifurcated in 2004 as end users drive down IT operating costs to free up capital, and as they address key business issues that have been put on hold for the past two years. The winners will be IT companies that can prove to business executives that their solutions have bottom-line value, promote growth and support necessary initiatives, such as security, or drive down basic IT operating costs.

Enterprise-application vendors will prosper if they can move their business models beyond traditional up-front licensing fees to variable/use cost models, pushing away from the IT budget and into the operating budget. The same applies to infrastructure software and outsourceable services, such as network management. And a lot of the on-demand marketing blitz by the hardware suppliers is really about creative financing that moves more IT investment off the end user's balance sheet and into cost of sales. The ability to add on and "lay off" IT hardware and software costs as business conditions change is a megatrend of the decade.

As end-user companies in 2004 feel more comfortable that their businesses have begun to move forward, they will focus on high-value solutions that have immediate benefits in areas such as improving supply-chain operations and customer acquisition. Any solution that provides value on a longer-term basis or supports more nebulous infrastructure needs will not be considered in 2004.

The net on overall IT-market conditions is that they will move forward in 2004--but under a fundamentally changed set of rules. IT has moved from being perceived as the driver to being seen as the enabler. IT investments that cannot meet the business financial hurdles or aren't perceived as absolutely necessary won't happen in 2004. Basic IT operating infrastructure costs will continue to be under attack as end-user companies question the business value of every IT dollar they spend. Ask yourself: How are your IT suppliers aligned to help you succeed in 2004?

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Adding Business Value
The net for VARs to be successful is that they need to be in either the IT cost-reduction equation or add demonstrable business value to an end user's business. This means that if they sell IT-infrastructure solutions, they had better know how and be able to prove that those solutions reduce IT operating costs.

The old way to prove business value was a return-on-investment (ROI) model, and last year's hot idea was total cost of ownership (TCO). This year's best approach is to model time to business value (TBV). TBV moves beyond IT cost rollups in ROI and TCO to get at the concept of how IT adds business value to, for example, an order-to-invoice business process. It's a methodology that gets to customer retention, worker productivity, supply-chain optimization and other concepts that end-user business executives understand in depth--but that may be beyond the grasp of technologists.

VARs that operate as traditional distribution channels will be under extreme pricing and profit pressures, as there is still an overabundance of VARs relative to real market demand. If they sell business applications, being a good implementer will not be enough, as basic implementation skills are considered a commodity for most widely distributed business applications. They must know how to help business executives understand and identify business opportunities and get the expected results. Industry and business-process knowledge will be the differentiator, not product knowledge. And going offshore is not the right model going forward.

Compounding the problem, of course, is rampant deflation in most hardware products, many software products and some training products, such as basic computer-skills training. Combined with an overabundance of VARs, there is little ability to control price levels.

All of which brings me to politics. This year will see low interest rates and a lot of government spending, and the stock market is likely to follow its upward trend--until the election. The scenario entering 2005 is for inflation to rear its ugly head in some areas. Unfortunately, IT reselling is not one of those areas, as I see pricing pressures carrying over into next year. But the old adage is that all politics is local, and so is reselling. Old-fashioned customer satisfaction on a local level is a concept worth remembering.

Top Channel Challenges For 2004

Peter Kastner is executive vice president of technology research at Aberdeen Research. He can be reached at [email protected].