Cost-cutting alone can't deliver growth

The mid-year set of financial results from the major IT suppliers show that the industry is following the cost-cutting example set by its customers.

Companies such as IBM, SAP, Microsoft and PeopleSoft reported strong profits last week, but much of the good news was delivered on the back of flat revenues and declining licence sales.

The message is clear: IT vendors have been working hard, improving internal processes and squeezing costs wherever they can - in much the same the way as the user community has dealt with the slump over the twelve months.

But cost reductions alone won't provide a sustained growth strategy, which explains the recent surge in mergers and acquisitions in the IT market.

On Monday, Business Objects announced that it is spending $820m to buy rival Crystal Decisions, strengthening its position in the business intelligence sector.

Computer Sciences is in discussions about a bid for several businesses in IT services group SchlumbergerSema.

And the summer blockbuster has been the three-way fight between Oracle, PeopleSoft and JD Edwards.

Peoplesoft is doing its best to resist hostile takeover efforts from Oracle, and last week said it has received sufficient shareholder support to complete the acquisition of JD Edwards. Its quarterly results were better than expected.

'PeopleSoft's results are quite abnormal, it's almost as if the management tried to turn them into a referendum on the legitimacy of the Oracle bid,' said Frost & Sullivan enterprise applications analyst Andrew Ball.

But this hasn't stopped Oracle from stepping up its efforts to woo potential customers about its intentions.

'Peoplesoft is claiming that its results are so good it justifies its management strategy of rejecting Oracle's embrace. But I think they're slightly overdone, as its licence fees are down on a year ago,' said Ball.

But most vendors licensing sales are down on last year.

'They're all very much on a downward trend. They're all focused on operational excellence and running their own businesses as efficiently as possible,' he said.

Vendors are trying to convince customers that they can help to cut costs.

'Companies like SAP are saying that sales will come as a result of lowering the total cost of their customers' IT budgets,' said Ball.

But some sectors of the market are growing.

RSA Security says the desire for large firms to improve links between systems across their supply chain is generating significant business.