Budgets up, prices down

Two distinct trneds that may be shaping technological implementation today: Internet and IT budgets are up slightly and vendors are falling over themselves to discount products and services.
Written by Robert Bryce, Contributor and  Randy Barrett, Contributor
Peeking through the Internet economy's storm clouds are two distinct rays of sunshine for I-managers: Internet and IT budgets are up slightly and vendors are falling over themselves to discount products and services.

Gartner last week released early results of its annual IT survey, which showed 56 percent of its 600-company sample are planning to spend more on IT this year than last. Twenty-three percent said they will keep their IT spending stable, and 21 percent are decreasing their budgets.

I-manager budgets appear to be mirroring the Gartner statistics, with many growing slightly, or holding steady. Interactive Week's March survey of 882 I-managers found they plan to increase their spending by an average of $2.4 million this year.

"These findings corroborate [our] opinion that the worst of the economic uncertainty is behind us," Gartner said in a statement.

That rosy projection isn't shared by vendors, which are still scrabbling for sales and smarting from lower revenue driven in part by price slashing. But what's bad for vendors is great for buyers.

Nick Hernandez, senior director for information technology of Wheels, a fleet leasing company in Des Plaines, Ill., said he's being offered lower prices on most of the facets of operation - from computer hardware to Internet access to professional services.

"I am seeing very creative pricing in all aspects of the industry," Hernandez said. He estimated that, collectively, he's currently saving about 10 percent on his Internet and tech needs over last year.

At Dura Automotive Systems, a parts supplier to major automakers, Tom Earll, director of global IT, said he has been inundated in recent weeks with calls, e-mails and faxes from equipment vendors and manufacturers offering discounts on their hardware. Compaq Computer, Hewlett-Packard and IBM are among the companies making overtures.

Although Dura has delayed much of its purchasing because of the slowdown, Earll said the company purchased a large server for its human resources department at the end of June.

"It was a $20,000 server. We got it for under $10,000," he said. "The vendor just wanted to move product and make their numbers before the quarter closed."

The buyers' market is a direct result of the tech economy meltdown. Hundreds of previously well-funded dot-coms have vanished, remaining companies are being more conservative on technology spending - even though many have money - and suppliers across the board have found themselves overstocked with either hardware or big staffs to provide professional services.

Last week, Intel announced that its second-quarter revenue of $6.3 billion was down 24 percent from the same period a year earlier. Income of $196 million was down 94 percent compared with the same period last year.

The day before the announcement, Intel announced a 37 percent reduction in the price of the Pentium III microprocessor for laptop and mobile uses, from $423 to $268 for the 900-megahertz version, and from $637 to $401 for the 1-gigahertz processor. Prices on other models were also cut, but not as drastically. The cuts are likely to find their way into existing generations of servers and desktops, as hardware vendors vie to keep customers spending budget dollars on their product lines.

During the economic downturn, both Compaq and Dell Computer have been fiercely competitive in selling Intel-based rack mount thin servers to enterprises, hosting services and ISPs.

The price competition has spread to smaller vendors as well.

"Servers that previously sold for $3,000 to $6,000 are now selling for $1,000 to $3,000," said Michael Swavely, president and chief operating officer of RLX Technologies.

RLX is a Houston startup that makes thin servers based on Transmeta's energy conserving Crusoe processor.

"A year ago, Internet startups bought the best of everything and didn't worry about the cost of operations. In today's market, customers are much more focused on operating efficiency and the ability to reduce costs, driving money to the bottom line," Swavely said.

The vicious competition is playing very nicely into the hands of I-managers who can now pick and choose products and demand better prices.

"It's been much easier to negotiate contracts," said Bob Reiner, State Farm Insurance's manager of enterprise Internet services. "The whole landscape has changed from a year ago, when it was hard to get someone's ear."

Consulting companies are playing easy to get, too. Four national consulting firms have approached Wheels with aggressive offers for software development services.

"They said, 'We've got people on the bench. You can have them free for a month,'" Hernandez said, but declined to name the firms. "They're also offering to hold billing until the first quarter of next year."

Nick Amin, senior vice president of global operations and technology of Cigna International, agreed: "Rates are lowering as a large number of staff in these companies are sitting on the bench waiting for systems development work."

I-managers also said they're getting regular sales calls from used-equipment vendors offering dirt-cheap deals.

Last week, auctioneers in Austin, Texas, liquidated the assets of five failed dot-coms, including eLaw and Agillion. Telephones were stacked in every available nook and cranny. Monitors, printers, chairs, desks, servers and a panoply of desktops and laptops - many of them still new and packed in their original boxes - lay about, waiting for bidders. More than 1,100 lots of equipment were sold during the chaotic, all-day auction.

Doug Coplin, owner of Asset Recovery Specialists, an Austin company that's profiting handsomely from dot-com detritus, said one of the main reasons why new equipment vendors are struggling could be seen in the piles of equipment at the auction.

"If you were Cisco, you'd be crying about how much stuff is available for sale," he said. "The market is flooded with used equipment. No one's going to buy something new if they can get something that's basically the same for a fifth of the price."

- Technology Editor Charles Babcock and Senior Writer Edward Cone contributed to this story.

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