InformationWeek

September 22, 1997

INFORMATION TECHNOLOGY:

Spend More, Make More

IT vendors' revenue and spending are way up and show no signs of slowing

IW 500 slug nformation technology companies, like other businesses, are investing in intranets and groupware, hooking up a greater number of remote users, and focusing more on service and support. The big difference: Compared with those in other industries, high-tech businesses are making-and spending-a lot more money.

According to a recent study by Coopers & Lybrand LLP, CEOs at fast-growing high-tech c ompanies predict corporate revenue will grow 36.2% by the middle of next year. In contrast, CEOs at fast-growing companies in other industries ex-pect revenue gains of 21.6%. The study compared expectations at 458 fast-growing product and services companies, about half of which were IT businesses.

Why are suppliers of computer hardware, software, and networking equipment making more money? They're in the right place at the right time. "These companies are responsible for the third wave. We went from being an agrarian society to the industrial age and now to the information age," says David Passmore, principal at Decisys Inc., a consulting firm in Sterling, Va. "The tools of all trades are based on information technology."

This broad dependence on technology is still relatively new. "Not too long ago, it was questioned whether technology enhanced the profitability of a company," says Patricia Wallington, CIO at Xerox Corp. in Stamford, Conn. "Now, companies use technology to know what their competiti on is doing, who their customers are, and how best to serve them. Now, every industry relies on the differentiators enabled by technology."

As IT companies make more money, they spend more, and often on products from their own industry. According to an InformationWeek survey of the IT companies in the IW 500, the average company spends 4.5% of revenue on IT, more than most other industries. The Coopers & Lybrand study shows that two-thirds of high-tech CEOs surveyed plan major capital investments over the next 12 months, and 70% of high-tech companies expect to increase their spending on IT.

Where are these high-tech companies putting their IT investments? Some of the biggest in the sector are putting it in new, industry-standard corporate infrastructures. For just over a year, IBM has been focusing on consolidating its worldwide corporate network into eight main control centers that will connect more than 200,000 employees by year's end.

The new infrastructure, which will provide Web access t o many corporate applications, replaces a series of 35 private networks as well as applications such as IBM's OfficeVision/VM office suite. "Just about all our processes-our financial warehousing capabilities, our worldwide sales volumes, even our employee 401(k) information-have been moved over," says Jerry Prothro, IBM's CIO. "We're looking to have one network computing environment that services the whole company."

Supporting the rapid growth in demand for networked services isn't easy, Prothro adds. "We've got a tremendously expanding access base inside and outside the U.S.," he says. "Yet you've got to have constant improvements and a declining cost curve."

IBM wants the network to support advanced services, such as video on demand. "It's giving us difficulty," Prothro admits. "We want to do E-mail, fax, voice, and video all transparently-that's nontrivial."

At the same time, IBM is trying to cut the number of different applications on the network. "Before, we had thousands of applications, " Prothro says. "We're now trying to limit it to about 250."

Notes In High Places
One of the primary applications is Notes groupware, from IBM's Lotus Development unit. IBM isn't the only company using that technology; many of the top high-tech companies, including Hewlett-Packard and Computer Sciences Corp., are running more of their businesses on Notes this year.

"Notes is our most prominent tool," says Werner Schaer, VP of telecommunications at CSC in El Segundo, Calif. "We use Notes and our intranets to disseminate information. This lets people in different parts of the world, for example, work together on proposals."

Like IBM, Xerox has replaced its entire corporate infrastructure. Previously based on proprietary technology, the infrastructure is now based completely on industry-standard technology such as TCP/IP, says Wallington. The network connects about 700 sites and 70,000 users worldwide.

Even before Xerox replaced its infrastructure, the company had already begun using the Internet and intranet technologies. "We have a fairly extensive intranet we put in three or four years ago," Wallington says. "Our Xerox Wide Web is available to all employees." The intranet has about 20,000 employee home pages. "It's a great way for people to communicate and find each other," she adds.

Intranet Pioneers
Sun Microsystems also has an extensive intranet with thousands of employee home pages. "Many of these companies are pioneers with intranet technologies," says Decisys' Passmore. High-tech companies need to support a growing number of remote workers. In fact, support for remote and mobile computing is an even bigger issue at technology companies than at many others.

Xerox's Wallington says 60% of the new machines Xerox buys are notebooks. "We give people the opportunity to work from anyplace," she says. "But even people with an office like the convenience of mobile technology."

Analyst Passmore speculates that high-tech companies are more open than others to rem ote computing because they're more comfortable with technology.

Star Search
Another big reason that so many high-tech companies are remote-user-friendly is the need to attract and keep skilled workers at a time of acute competition for scarce IT skills. "The technology industry is in a scarce phase now. It's hard to get talent in all the places you need it," says Wallington.

The Coopers & Lybrand study found that high-tech companies plan to hire new workers at a rate twice that of non-high-tech companies. More than two-thirds of high-tech CEOs cited a lack of skilled, trained workers as their No. 1 problem over the next 12 months; they plan to increase their work force by 19.5% over the next year. By comparison, non-high-tech companies plan to increase their staffs at about half that rate.

Many of these new hires will be directed to beefing up support. High-tech companies need to get closer to their customers-helping them exploit technology instead of just selling them boxes, expert s say. "We had been in a technology-push environment, but now we're in a market-pull environment," says Ron Maheu, chairman of Coopers & Lybrand's national high-tech group. "More and more high-tech companies need to meet customer needs and not just make a hotter box."

IBM's Prothro agrees. "Services come into play to a great degree. There's an ongoing need for service that goes beyond the initial buy and the initial install," he says. "You need to develop a customer-care relationship." Adds CSC's Schaer: "We're not trying to create the newest drug; our product is IT services."

Global Demands
For CSC, the need for increasing support-as well as the need for an enhanced intranet, standard applications, and better worldwide communications-is driven largely by the increasingly global nature of the high-tech business. "To serve global accounts, you have to run a global business," says Schaer.

The Coopers & Lybrand study shows the global trend, with 61% of high-tech companies surveyed having a presence in international markets, compared with only 30% of non-high-tech companies.

CSC's network spans 700 locations in 45 countries worldwide; it supports both internal users and companies that have outsourced operations to CSC. "The global aspect of our business is increasing dramatically; that's driving us to increase global connectivity," Schaer says.

For example, this year CSC has needed to communicate extensively with Australia, because the company was bidding on a large contract there. "The successful bidder in any situation will have a global solution," Schaer says.

Growing Urgency
As other industries rely more and more on technology, high-tech companies will have to deal with unprecedented growth-and the network, communications, application, and employee issues that go along with that growth. "A lot of IT firms are still growing 50% to 100% every year," Decisys' Passmore says. "These companies are under incredible pressure to grow their networks and put in the resources to manage the whole thing."

Coopers & Lybrand's Maheu agrees. "Compared to other industries, for these high-tech companies, the pace of change is so fast, the life cycles are so much shorter, everything is so much more intensive," he says. "Even the smallest issues have a much greater impact."

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