Spotlight on contracting: Umbrella vs Limited Company
August 20th, 2019
Score a battle victory for SAP this week with its strong quarterly earnings and first gain in software license market share against rival Oracle in eighteen months. But it’s not who wins the battle, as the old saying goes, it’s who wins the war.
Which vendor is in a better strategic position? SAP says its innovation strategy is winning, tapping into a “structural change in the IT industry” whereby companies are spending less on commoditized hardware and more on software and innovation.
There’s plenty of truth in this analysis, but don’t expect to see a white flag from Oracle. Commoditized as hardware may be, it’s a core piece of Oracle’s end-to-end stack offering, which is aimed at helping customers to cut IT costs.
Which side will customers choose? That will play out in the earnings reports in the quarters and years to come. But IT buyers just might be looking for a third option as consolidation raises concerns about interoperability and price leverage.
The crux of the IT-spending shift that SAP highlighted this week is one in which more of your IT dollars are being spent on software and innovation and less on hardware and consulting. Where 85 cents per dollar used to be spent on hardware and consulting, that spending is shifting toward 60 cents per dollar, with fewer hardware refresh cycles and consulting projects freeing up money for software and innovation, William McDermott, co-chief executive officer of SAP, told financial analysts.
What’s the evidence of this trend? You need only look at the financials of the major hardware companies, which “haven’t reported the kind of numbers that we’ve reported,” McDermott said in an interview with InformationWeek.
True, Dell and HP revenues were flat in the last quarter. Part of the story was that Apple’s iPad took a big bite out of consumer PC sales, but growth in corporate sales was also less than robust. Among enterprise-focused vendors, hardware sales were down 6% at Oracle, while IBM had a 17.5% increase in the revenue of its Systems & Technology Group. (IBM clearly gained share from Oracle with its Power Server line, but its mainframe business also had a huge quarter.) By comparison, SAP’s software revenue grew 26%, bolstering McDermott’s software-outpacing-hardware analysis.
The IT spending shift is a very real long-term trend, according to Andrew Bartels, principal analyst at Forrester Research. Enterprise expenditures on hardware have grown 4% to 5% per year over the past decade, on average, while software has been growing 9% to 10% per year, Bartels says. The disparity keeps widening because Moore’s Law keeps driving hardware costs down, he says. And cloud computing and virtualization are accelerating the trend by cutting into hardware sales.
Ray Wang of Constellation Research also sees the shift, but it’s more like 70 cents of every IT dollar now spent on hardware and services, down from 80 cents in years past, he says. The trend is more about “less money going to keeping the lights on,” meaning maintaining and administering existing deployments, Wang says. Outsourcing and data center consolidation are key trends cutting into hardware sales, he notes.
Companies are replacing aging hardware, but they’re spending even more significantly on software, in part to avoid hiring more people, Wang says. That along with shadow IT spending on things like software-as-a-service and iPads has tech spending up 22% overall, he noted.
Will the pressures of the hardware business–relentless development cost rewarded by thin margins–ultimately be a drag on Oracle’s prospects? Let’s first consider SAP’s strategy.
Read at source: Information Week