IT Infrastructure Companies Lead The Recovery

There's an old adage in IT that customers don't buy infrastructure--they buy applications, which drag along sales of servers, networking equipment, storage gear and other things. Funny thing about this IT economy, though: It's the infrastructure companies that are enjoying a big boom right now and seeing some of the quickest recoveries since things turned sour in 2000.

Consider Cisco. The company, whose Catalyst 3750 product was a finalist in our 2004 Technology Innovators Awards, recently announced sales for the first fiscal quarter of 2004 that beat analysts' expectations. Sales jumped 5.3 percent to $5.1 billion during the quarter ended Oct. 25, 2003. The news sent Cisco shares--along with the rest of the broad stock market--soaring.

Other infrastructure companies have seen even more dramatic results of late. Take Citrix. The Fort Lauderdale, Fla.-based developer of thin-client application access and deployment solutions saw sales in the September quarter jump a whopping 21 percent over the previous year to $144 million. The company closed a number of big infrastructure-related deals during the period, including one with Bankdata, a supplier of banking information technology in Denmark.

Just about everywhere you look, customers are beginning to increase their infrastructure spending. According to a recent Forrester report, more than one-third of customers expect to spend more money next year than this year in key infrastructure areas including networking equipment, servers and storage hardware. Infrastructure software, too, is expected to grow handsomely. According to Dataquest, customer spending on security software is expected to grow to $6.7 billion in 2005 from $5 billion this year. Likewise, spending on network systems and management software is expected to grow to $10.7 billion by 2005 from $9.9 billion this year.

Why the sudden surge in infrastructure spending at a time when there's widespread belief that customers are sitting on too much underutilized IT capacity? Several reasons, according to leading IT experts."Why infrastructure? Well, it ages rapidly, far faster than business logic," notes Ross Brown, vice president of worldwide sales, services and channel operations at Citrix. Even though there's a commonly held notion that customers are literally sitting on tons of unused processing, storage and networking power, the fact of the matter is they will need even more capacity as they move their IT models and architectures to more of a services model where applications are provisioned over a network instead of being stored locally on each and every machine.

Then there's a financial reason. Spending on infrastructure typically comes out of an end-user customer's capital budget, whereas projects such as the rewriting of applications typically put a drain on operating expenses. Because customers can amortize capital spending over time, they are more inclined to free up dollars for that type of IT spending.

No wonder solution providers say they expect to sell more products from Cisco, Hewlett-Packard, IBM, Intel and Microsoft in 2004. In our recent 2004 State of the Market survey, VARs rated several infrastructure companies at the top of their lists of vendors they plan on selling more of in 2004. Interestingly, though, struggling infrastructure companies, including Nortel, Novell and 3Com, did not fare well in our ranking of vendor expectations.

VAR TakeawayWhat all this means for solution providers is simple: Prepare to make a full assessment of your customers' IT architectures before moving forward with specific application-deployment plans. That's especially true of channel organizations that have distinguished themselves as specialists in certain fields. As more solution providers have come to learn, specialization has its limits, especially if it means you cannot positively impact a customer's IT infrastructure.

"It's why we maintain strong practices in both our IT infrastructure-solutions business and our applications business," says Andy Vabulas, CEO of I.B.I.S., which offers both Microsoft Business Software solutions as well as traditional Windows and Office offerings.Vabulas says he also puts customer satisfaction atop his company's priorities. Others are picking up on the same message. For example, last September DirectPointe, a Lindon, Utah-based provider of subscription-based computing solutions for small and midsize customers, bought the help-desk division of Center 7, a privately held provider of outsourced help-desk solutions. Among other things, the deal gives DirectPointe additional underlying infrastructure to better serve its clientele, which depends on DirectPointe's own IT infrastructure for its livelihoods.

Specifically, the deal allows DirectPointe to offer comprehensive 24x7 support to clients. Now DirectPointe will be able to offer first-line support with the ability to escalate support requests directly to the vendor. In addition to this deal, the company is also shoring up ties to key infrastructure companies, including many newcomers on the scene that address specific customer pain points. That includes Abridean, Altiris and Corewise.

"We're working hard to ensure that our company can offer complete, comprehensive IT solutions that aren't lacking," says DirectPointe executive vice president Dan Atkinson. "We have considered moving more into what some would consider classic IS services, meaning we'd touch more of the applications side of the business. But for us, focusing on the infrastructure side of things has turned out to be a good bet."