Software sector under pressure as downturn hits sales

Poorer-than-expected business software sales have forced analysts to
significantly revise their spending forecasts for 2009, while Microsoft has
urged the UK government to support smaller software companies or see them go out
of business.

Gartner now estimates that global spending on enterprise software will reach
$244bn (£164bn) in 2009, down from its earlier prediction of $253bn (£169bn) for
2009 made in September this year, though still up 6.6 per cent on the projected
total for 2008 (£154bn).

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Gartner’s research director for European enterprise software, Fabrizio
Biscotti, said 20 per cent of many firm’s entire IT budget is devoted to
discretionary software – new purchases rather than licensing and maintenance
contract renewals.

“Anything new [applications or upgrades] that people were thinking about
buying will suffer most in terms of new licences,” he said.

“Even on the non-discretionary side the big question is how to reduce
maintenance costs in 2009-2010, and people will clearly try to squeeze more
value out of what they have already.”

Spending on service-oriented architecture (SOA), in terms of training staff
and buying specific middleware products, is expected to be hit particularly hard
along with customer relationship management (CRM) products.

“The key question for budget holders is how much risk is involved in the
project,” said Biscotti. “On the other hand web conferencing and collaboration
is the exception to the rule because these applications help companies cut down
on the bill for non-essential travel.”

A report compiled by technology trade association Intellect and the British
Computer Society (BCS) confirms that the overall economic trend for the software
industry is downwards.

The study warns that continued shrinkage among smaller software companies
could irrevocably damage the whole of UK industry, because smaller companies are
more innovative, quicker to spot a gap in the market and faster to develop
products to fit them.

“Small software companies solve more diverse problems in healthcare, energy
management or whatever it might be, and there is a lot of innovation from
software entrepreneurs and startups,” said Lars Lindstedt, software economist
for Microsoft, which commissioned the research.

The Intellect/BCS report, Developing the Future, uses figures from the Office
of National Statistics (ONS) gathered in 2006 and published this year. As such
it does not include recent evidence for any recent slowdown in software sales
due to the credit crunch.

And while Linstedt said there is anecdotal evidence to suggest cutbacks are
happening, many software companies he has spoken to say they have actually
increased orders.

“Anything that helps companies cut costs are popular, especially around
information management and services – software that essentially helps companies
streamline processes and manage restructuring and organisational change due to
increased merger and acquisition activity,” he said.

Intellect, BCS and Microsoft have called for the UK government to stop
investing in extensive multi-year contracts with large systems integrators that
smaller software companies cannot afford to bid on. They feel that splitting
those contracts into smaller agreements and spreading them among smaller
software firms will be beneficial to the government and the software industry.

“It could use web services to smartly partition contracts and get them
delivered more quickly at lower cost. It requires more careful thought and
procurement, but would really help to stimulate the broader software industry,”
said Linstedt.

Biscotti could not rule out the possibility that Gartner will revise its
enterprise software spending estimation down further in three months’ time as
the recession worsens.

“Gartner has been very cautious in its numbers, but the economic situation is
changing by the day and we cannot tell how deep or how long this recession will
be,” he said.