IT shakedown

Johannesburg - The IT industry has taken a new shape in the wake of the economic downturn, with an emergent environment in which some companies have returned to strong growth while others have fallen apart completely.

Dimension Data, for example, has picked up tremendously with healthy margins and decent profit. Datatec has also shown strong recovery in the second half of 2009. On the other hand, Faritec suspended its shares and now faces liquidation.

Supply and demand

The downturn weakened the IT industry but it was only after a return to positive economics that the full effects were felt. Datatec CEO Jens Montanana puts this down to a strong market bringing forces to bear on weakened companies.

"The dynamics of such an economic cycle imply that large companies benefit earlier in the recovery thanks to their greater capitalisation," he said.

"The best deals arrive when things get better, but then smaller companies don't have the credit and other resources they need to make it. They come through the recession washed out with everything stretched. And then, when growth comes, no one wants to deal with them. Also, orders come in and they aren't able to supply on demand," said Montanana.

"This is when we see the casualties happen and you wonder how the hell some of them made it through the downturn in the first place."

Montanana said the best approach for a company during a downturn is to hoard resources on the way down and then spend on the way up.

Industry analyst at Frost & Sullivan Spiwe Chireka adds that stretched refresh cycles have added to the demand currently experienced in the market, where it seems only the larger players are able to deliver.

"We were expecting that around the middle of 2010 buying cycles would rise again," she said.

"But with technology you have no choice but to periodically upgrade or replace what you have in order to remain effective, and this usually happens in 18-month cycles," said Chireka.

"Since the end of 2008, IT spend has been cut down and companies sat on what they had. Then, from a Datatec and DiData perspective, we've seen a lift in the second half of last year already," she said.

"The whole issue of global diversification is also key. It paid off for the likes of Datatec and Didata that while America and other markets were in the doldrums, their saving grace came from Asia-Pacific, Africa and other markets," said Chireka.

The change factor

But it was not just the broader economic environment to blame for changes in the IT industry. Other forces were at play before the downturn that have changed and continue to change the way the industry functions. Even before the crash, customers were demanding better efficiency from their technology investments and beginning to look at IT outsourcing and services-based solutions.

It was becoming evident around 2007 already that reselling physical IT products is a bad business, and that companies without a strong focus on services were in for a rough ride.

"The hardware guys don't look good," said Chireka.

"Even when product sales were at an all-time high, margins were lower than with managed services and the like. Product sales offer linear growth and aren't sustainable over time. Services keep a business engaged with its customers and the cycles for services are far shorter than the long hardware cycles," she said.

IT services companies are seeing a huge boost as we ramp out of the downturn. Spescom, for one, posted a trading statement last week pre-empting an earnings gain of 40% to 50%.

With a business like Spescom which is geared to business process outsourcing, typically in the call centre industry, the recovery is further bolstered by growing international demand for South African-based services.

According to Keryn House, CEO at industry association Business Process enabling South Africa (BPeSA) Gauteng: "The downturn has been felt by our local call centres, as contracts are delayed or downsized while belts are tightened. However, we have seen increased international interest in South Africa which bodes well for our future in BPO, especially in back office processes."

House says that as the economy starts accelerating again, demand for outsourced seats will increase.

 - Fin24.com