Worsening Economic Conditions Could Reduce Software Sales Revenues

First the good news. According to market researchers IDC, worldwide IT spending in the first quarter of 2005 largely kept pace with expectations as businesses continued to increase their technology budgets and initiate new projects. If you’ve been reading this newsletter for a while, you won’t be surprised to learn that the hot areas for new software sales were security, regulatory compliance, infrastructure management and business intelligence. The long-term picture for software sales also continues to look good. IDC expects worldwide IT market growth to slightly outpace GDP growth to achieve a compound annual growth rate (CAGR) of 6% between 2005 and 2009. Nice, eh?

Now for the bad news. Worsening economic conditions in Europe saw some large firms holding back on major IT purchases, with the result that the Western Europe IT market is now expected to grow by only 4% this year, as compared to 5% in the United States and a measly 1% in Japan. According to IDC, the slowdown in spending is the result of uncertainty about interest rates, oil prices and currency fluctuations, all of which are potential wild cards that could affect business confidence and investment and, consequently, software sales. Analysts believe this trend could spread to the United States, causing firms to purchase less software just when we thought things were getting better…(sigh).

To protect yourself from this downside potential, as a software sales professional you should shift your sales activities away from product segments with marginal growth potential and toward product segments with a high-growth potential. That way, even if the economy worsens your firm will still be able to make sales and even grow its business.

One of the most attractive segments of the software business today is software that is sold as a service rather than a product license. Sales of what most people call hosted applications – what IDC calls software as a service (SaaS) – reached $4.2 billion in 2004, an increase of 39% over 2003. IDC believes worldwide spending will continue to increase over the next five years at an astounding 21% (CAGR), reaching $10.7 billion in 2009. Buyers from small- and medium-size businesses and divisions of larger companies comprise the main audience for this type of software.

Another hot area for software sales is services and outsourcing. IDC projects that companies and governments will spend approximately $609 billion on external services in 2005. This represents a growth of 6.3% over 2004 – not as good as hosted apps, but still heftier than the rest of the industry! Spending on services will increase at a five-year CAGR of 7% to approximately $804 billion in 2009. IDC recommends the following actions for software firms who want to be successful in this area:

• Build broad-based business process expertise by encouraging sales reps to work on opportunities that are outside their usual area of expertise.
• Find innovative ways to bundle new technologies with your products and figure out how to deliver them to customers at a low cost.
• Position offshore outsourcing as part of a global sourcing capability.
• Retrain sales personnel so they have a more analytical knowledge of business and IT processes, as well as improvisational skills and the ability to think independently. (Of course, that pretty much describes the readership of this newsletter, right?)

The above is based on surveys and a report conducted by IDC, the world’s second largest high-tech analyst firm, headquartered in Framingham, MA. They can be reached at 508-988-7988 or through sales@idc.com.