Vendors run the show, says Butler, but customers have the budget they need to survive
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The IT industry has delusions of grandeur if its members seriously believe that they can assist in making their customers businesses more profitable.

That was the scathing assessment of Martin Butler, founderand president of UK market analysis firm The Butler Group as part of his IT 2002 overview in London this week. Among Butler's other controversial assertions were the claim that only five companies really matter in terms of influencing the direction the industry takes and that customers views are hugely unimportant to most vendors.

"The IT industry really drives itself and customers just have to put up with it," said Butler. "Most companies have just ignored their customers, until suddently a few years ago along came CRM and there was a feeding frenzy around that. Now the vendors are getting ready to move on to the next thing."

Butler argues that IT implementations are often embarked upon with little thought as to the wider implicatoins they might have for the bottom line. "There has been a lot of investment in CRM and ERP with little or no return," he alleged. "Indeed in some cases the impact has been negative and the customer has actually ended up damaging their business. The result is that there is little or no appetite for large deals with vendors out there. That causes a problem for companies such as SAP or Oracle who need to change their business model in order to try to sustain their revenues."

He adds that end user companies have become too wrapped up in the comforting effect of spending money on technology. "ERP was the swansong of lean production," he said. "There is one food company which a few years ago made $4 billion a year, but which now makes $1 billion a year. But they are happy because they implemented SAP and so they believe that they are more efficient in the way they make that $1 billion."

His assessment is that there are only five companies which really matter and those five are responsbible for over 70 per cent of the profits generated in the IT industry. They are IBM, Microsoft, Oracle, Sun Microsystems and Hewlett Packard (HP). Of these, he has doubts over the pure-play technology strategy adopted by Sun, while he dismisses HP as "an accountant's dream, but a marketing man's nightmare". Other vendors are niche players in comparison, he said. "Really you don't see SAP or Siebel making a significant impact on what the Big Five are doing," he claimed. "The big guns are already loaded."

But the problem for all these companies is how to extract new money from their customers. The key to this will be to win percentage points away from the two thirds of IT budgets which are actually spent internally within organisations rather than with vendors - that's around $2.5 trillion. If a vendor can convert a few percentage points of that internal spend to an external spend, then the impact on its revenues would be highly significant. "Spending on applications software for example is miniscule compared to the amount spent on internal IT related matters," he noted. "If the applications vendors could get just one per cent of that spend for themselves, they would all notice the difference."

The way to do this to move from a world built around software to one based on services. The global software industry today is worth $141 billion; an industry where software was delivered as a service could be worth around $2000 billion plus. This is why web services are so important, argues Butler, as they will be one of the main drivers that will help turn the IT sector from a cottage industry to a components industry.

The way the big players will work in this new world will vary. At the infrastructure and key technologies level, cmopanies such as IBM, HP, Sun and Microsoft will make money. Above them will be the applications level companies, such as Oracle, SAP and PeopleSoft. And above them will be the services companies, such as Accenture, EDS and IBM again.

As far as standards go, Butler expects J2EE to remain predominant, but refuses to write Microsoft's .Net initiative off. "Sun has been slow to adapt to web services, whereas in contrast Microsoft has picked up on their importance very quickly. J2EE application servers have some problems with high transactional rates, but there is a well established installed base with lots of industry support. The problem with .Net is that it's only Microsoft. But the tecchies love novelty and this is novel. Sun is seen as boring and old, whereas .Net is new and exciting. That will help."


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