i OS Vendors Take Different Approaches to Poor Economy

As the economic tsunami ripples across the globe, companies in almost every industry are hunkering down in an attempt to survive. In many industries, IT budgets are getting slashed to basic maintenance levels, and big projects are cancelled or put on hold. Despite the doom and gloom and the undeniable impact the economy is having on millions of people’s lives, business in the System i market continues to move forward as vendors try to adapt to the situation–in particular, the need for financing.

Privately held VAI is better suited than many application vendors to weather the current storm. While the company is in the ERP business–practically a dirty word these days–the success and growth of the past few years, along with the fact that VAI has a growing international reseller channel, committed ISV partners, and satisfied customers, means that the recession will probably just slow down VAI’s growth, but not stifle it completely.

With that said, the New York software company is still feeling the pinch of the worldwide economic slowdown. “I do see some delay in making some of the decisions. They’re a little more cautious,” says VAI sales director Dan Bivona. “But the pipeline is still strong.”

Companies are still investing in VAI’s software because they view technology as a dependable way to reduce operating costs, Bivona says. “On the other side of the coin,” he continues, “if anything’s going to slow us down, it’s going to be the financing side of it.”

In mid-December, IBM‘s financing arm changed its lending standard, Bivona says. Under the new terms, any deal involving third-party vendors–such as VAI and hundreds of others that rely on IBM Global Financing to fund IT deals–would have to abide by a new 50/50 split. That is, the ISV or non-IBM component of the deal could not exceed the IBM component of the deal.

With the incredible price/performance of the new System i and Power Systems servers and the relative affordability of hardware these days, that has put a hamper on many ISVs that relied on IBM to finance deals. For VAI and others, they have had to seek outside financing to keep deals from falling through.

Financing has also become more of an issue for Jobscope, a South Carolina developer of make-to-order software for manufacturers that runs on the System i server. “It’s slow. It’s very slow, and people have a thousand reasons not to make a purchase right now,” says Hank Sanders, Jobscope’s president. “But we are still focusing on the pipeline and getting creative about the ways we can help them in financing some of these opportunities.”

Jobscope is relying on its relatively small size and its ability to make quick decisions to survive the slowdown. In the small and mid size business (SMB) sector, there are still shops that are relying on paper or basic PC programs to run their businesses. Some of these green-field sites will computerize for the first time in an attempt to cut costs during the downturn, and they could give a boost to Jobscope along the way. “They’re at a time right now where they almost have to invest,” Sanders says. “They’re looking to save money by investing in IT.”

Listening to customers’ product feedback and eliminating financing as a hurdle to closing deals are other key aspects of Jobscope’s survival strategy. “We have the ability through a couple of partners to finance a project, including all up front cost. Not just the software, but hardware, services, support, and travel,” Sanders says.

Up the road in Cleveland, Ohio, things are pretty dire. “The manufacturing-distribution in the Great Lakes area, where I’m at, is very, very light, because a lot of it’s tied to auto,” says Jim Kandrac, president of United Computer Group, a VAI reseller and the parent company of DR and HA services provider Vault400.

“Things are tight out there. If they don’t need to do it, they’re not doing it,” Kandrac says. “We’ve never, that I can recall, been in a situation where it’s been like this. Because of the whole mortgage melt down, people’s ability to get credit has certainly been affected.”

As the automotive industry has screeched to a standstill, Kandrac has shifted UCG’s reseller business to other industries. A little research revealed to Kandrac that there are more than 150 companies in Ohio that are tied to food or food distribution. “Guess what? Everybody’s still got to eat,” he says.

One area of IT that seems to be doing well is disaster recovery and the SMB portion of the high availability market. Kandrac reports that Vault400 is doing a brisk business. In fact, the company is in the process of rolling out a new collection of Tiered Recovery offerings for its System i and Windows vaulting business. Vault400 is also now in the business of providing managed HA services (see “Vault400 Debuts Tiered DR and Managed HA Services” elsewhere in this newsletter).

One of Vault400’s competitors, SafeData of Warwick, Rhode Island, also reports that the poor economy is having a direct impact on the increase in demand for DR vaulting and services. The company says business increased by 125 percent last year (see “Poor Economy Driving DR Business, SafeData Says” elsewhere in this newsletter).

System i high availability vendor Maximum Availability is trying to make it easier to buy high availability software by allowing customers to purchase subscriptions to the software, in chunks as small as three months (see “MaxAva Gets Inventive With Subscription Model for HA” in yesterday’s issue of The Four Hundred).

The need to protect vital corporate data can be more pressing during times of economic uncertainty, says Simon O’Sullivan, senior vice president with MaxAva. “If you’ve got five guys in your IT department, and you’ve had to let two of them go, then maybe you’re not going to have the ability to recover in a disaster, so maybe you need to look at something like this,” O’Sullivan says.

There’s no doubt that it’s become more difficult to close five-, six-, or seven-digit deals for “strategic” IT projects in this economic climate. For some vendors that sell smaller, more “tactical” tools that aim to solve well-defined problems, the economy is just pleasant background noise.

Such is the case for Global Software, the North Carolina developer of spreadsheet automation tools. “It’s like shooting ducks in a barrel,” Spencer Kupferman, vice president of corporate affairs for Global Software, says about attracting customers from a major i OS ERP vendor. “They have a lot of customers yearning for some kind of functionality with Excel.”

While people don’t have the money right now to spend millions of dollars on ERP systems, they are still investing in add-on products, he says. “People are saying, ‘Look, I’ve got this ERP system, I’m not real happy with it. But I can’t afford to replace it. Can you help me make it better?'” Kupferman says. “And we say ‘Sure!'”

In the end analysis, the System i market is somewhat insulated from the economic storm. The customers that rely on the IBM Power Systems (System i, iSeries, eServer i5) tend to be companies with well-grounded business plans. As opposed to many high-flying investment houses and their fancy Unix systems that have come crashing down, AS/400 shops tend to be satisfied making things and moving them to market. Barring a worsening of the current situation around the world, this industrial base will likely flourish again, creating hundreds of thousands jobs across the entire ecosystem.

“The AS/400 is a lot more stable than our economy, I can tell you that,” Kupferman says. “It doesn’t evaporate like ice on a hot day in New York City. It takes a long time for this stuff to change. In the AS/400’s case, it just keeps going.”

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