ITCandor has just finalised a survey of the UK and Irish business IT markets for Origina – a services company specializing in providing third-party maintenance for IBM software headquartered in Dublin. I spoke with the sponsor’s Managing Director Tomas O’Leary for his reaction and how he is building his business.
UK and Ireland research report findings
The report is based on a small sample of Irish and UK IT purchasers and ITCandor’s own sizing work. The key findings are:
- €186B was spent by businesses on IT in 2013 – 48% of it on internal staff.
- IT Industry’s mega trends are over-hyped, but understood by our users – advanced virtualization has the strongest adoption.
- €19.1B was spent on software products, €5.0B on maintenance – vendor contracts are moving from perpetual to enablement/subscription models.
- Suppliers try to increase competitiveness and client stickiness simultaneously.
- Purchasers use teamwork to focus on practical solutions and user requirements.
- A new focus on optimizing software investments in 2014, especially as spending remains restricted
The squeezed IT budget
The report discovered that external spending was around €97 billion in each of the last 3 years. Tomas noted that there’s a lot of pressure on IT Managers to do new things like Cloud and Virtualization and that they typically have to find the money from the existing budget. In turn they’re thinking deeply about their current spending and where to make savings. He wants to lower the 80:20 ratio between keeping the lights on and addressing new business – not by forcing transformation as the major systems vendors suggest, but by providing a third party alternative for software maintenance.The squeezed IT budget
Are Mega Trends over-hyped?
We discovered that customers understand the latest industry mega trends – but aren’t embracing many. In fact one respondent thinks Cloud Computing is just a form of centralization and another detests the phrase ‘The Internet of Things’. Tomas agrees that industry themes are often over-hyped, adding ‘It’s a bad thing, the industry often over-sells concepts before they’re mature’.
He isn’t worried that increasing virtualization and movements to subscription rather than perpetual licensing will lower his company’s opportunities. The majority of Enterprise IT budgets are for older rather than newer solutions. Users want to get more value quickly, which can be a business as well as a technology decision.
A new opportunity in software maintenance
We discovered that beyond the cost of the software businesses spend 26% extra on its maintenance. Third parties account for only 1% of these revenues as opposed to 30% in hardware maintenance according to Tomas – so it really is a pioneer.
His company works exclusively on IBM software, although there are parallel activities in the Oracle and Microsoft areas, ‘a number of companies offer support for Windows XP for instance as it goes out of official support’.
He finds that users often don’t want to make changes to their software stack, ‘It’s a tapestry of threads - one small change and you might have to re-jig the whole thing’. Despite often paying high prices for maintaining non-strategic code, few users consider hiring a third party to maintain it, assuming it’s disallowed in IBM’s contracts and licenses. Origina understands those areas in which customers can make a different decision.
A third choice if you think you’re paying too much
Having read its financial reports Tomas believes IBM has ‘an unsustainable’ profit margin of 92% in software maintenance.
Users who believe they’re paying too much typically have only 2 choices – stay as they are or move to Cloud services. Origina offers a third way – keep the software licenses, but do the maintenance differently. In fact there’s a fourth, because occasionally IBM drops its prices when they learn that Origina is talking to a customer.
It has employed a number of ex-IBMers who were let go as it moved its support to the Far East -‘we’re investing as it divests’. It also offers a stimulating work environment – its Dublin office includes Atari, Pac Man and other gaming consoles. Tomas sees the IBM software area as a key one for the younger generation – ‘this is going to be a strong business for 10 to 15 years, so we need new employees’. This is reminiscent of IBM own educational initiatives and Masters of the Mainframe contest.
Some Conclusions – practical savings on a big ticket item
It can be tough going for a company pioneering a new style of business, but Tomas is proud of its achievements. It has an advantage in being an SMB and in offering practical cost reductions. It already has over 40 customers including Banks and Government departments and is building its business in London following its success in Ireland.
Our survey discovered the practical nature of managing data centers and while big vendors offer grand strategies it’s great to see a smaller services company helping to free up some of the budget. It’s offering practical savings through an innovative approach. As Tomas says, ‘software maintenance is only one piece of the jig-saw, but people spend an awful lot of money on it’.