To The Tech Giants Go The Spoils

Yes, overall demand is tepid. But buyers now want partnerships with big players

Investors nervously crossed their fingers as Hewlett-Packard Co. (HPQ ) prepared to announce its fourth-quarter earnings on Nov. 16. After all, the company had stumbled so badly three months earlier that CEO Carleton S. "Carly" Fiorina had summarily fired three top sales execs. Analysts had questioned HP's ability to deliver on Fiorina's strategy of providing a comprehensive array of tech products and services for corporations and consumers. So it was a relief when HP announced revenue growth of 8% year over year, to $21.4 billion, and a 27% jump in profits, to $1.1 billion. One key to its quick turnaround: strengthening demand from large corporations.

HP's results point to a puzzling disconnect: Most recent surveys of corporate tech buyers signal tepid demand at best. The latest update, a survey of 1,900 companies announced on Nov. 17 by market researcher META Group Inc. (METG ), showed that they expect their tech spending to rise just 3% this year -- half of META's original forecast. Yet, like HP, a slew of tech outfits have reported relatively strong revenue gains in their most recent quarters, including Dell (DELL ), with an 18% gain; IBM (IBM ), 9%; Microsoft (MSFT ), 12%; and network-gear maker Cisco Systems (CSCO ), 17%. Sure, they benefited from favorable currency exchange, but what's going on here?

There's a relatively simple explanation: a flight to quality. These top performers are the largest and most dependable companies in the industry. After the tech bust of 2001, corporations clamped down on tech spending and got much pickier about their suppliers. Out went the cutting-edge small fry, apart from such standout innovators as (CRM ) and Juniper Networks Inc. (JNPR ) In came large, dependable suppliers with broad product portfolios. What's happening now is an intensification of that trend. When corporations started spending more freely about a year ago, they focused on forging tight bonds with a handful of hefty players. "When you move from tactical cost-cutting to strategic deployments of new technology, you want to have long-term partnerships with your tech suppliers," says analyst Mark D. Stahlman of Caris & Co.


Adding to the confusion over demand was the tech sales slowdown over the summer amid rising concern over oil prices and geopolitical risk. Suppliers noted a reluctance by customers to make large buys, and they worried that demand could slide in the second half, especially since the fourth quarter of 2003 was so strong that comparisons would be likely to hurt. Yet demand held up pretty well, says Intel Corp. (INTC ) President Paul S. Otellini: "Everyone entered the second half very cautiously. But we're seeing normal seasonality."

Details from HP's quarterly report show what's happening. The company reported a 35% jump in its managed-services business -- the unit that runs tech operations and data centers for large corporate clients under multi-year contracts. HP's two-year relationship with the Philadelphia Stock Exchange, for example, shows the value of strategic pairings for customers. Using software from HP and Veritas Software Corp. (VRTS ), the exchange is finishing automating management of two dozen high-performance servers. "We view these as true partnerships," says Tony Catone, the exchange's director of systems architecture.

This migration to strategic relationships shows no sign of letting up. Of 100 tech purchasers surveyed in October by Merrill Lynch & Co. (MERR ), 75% said they prefer to buy integrated technology packages for their data centers rather than so-called best-of-breed products from a variety of suppliers. And nearly 60% said they would consider having one key supplier. The bad news for HP: Overwhelmingly, rival IBM is the first choice.

For next year, most analysts and tech leaders predict modest overall spending growth on the order of 5% to 6%. Other than wireless communications and security software, there aren't many new must-have applications. And you can expect the giants to continue to grab the lion's share of the business.

By Steve Hamm in New York

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