The open systems manufacturers are taking over from those hooked on hardware.
Information technology companies that want to survive in the 1990s had better stop making computers. They may write software, provide technical consultancy, or put together systems for special markets, but those who value their long-term future should avoid manufacturing hardware. "It is the era of the computerless computer company," says Peter Rigby, high-flying chairman of Specialist Computer Holdings (SCH), one of the first UK companies to have latched on to the idea.
Ribgy understood long ago what others in the computer business are only just beginning to realise - that profits come from lucrative supplementary services such as software, maintenance and technical support. In 1975 he decided to abandon a promising career as top computer salesman with US computer giant Honeywell in favour of launching out on his own. With just £2,000 in the bank he hired "an awful office" and started a recruitment business, reasoning that this was the quickest way to generate cash. The strategy paid off. Soon Rigby was generating substantial profits, which he ploughed back into a series of new computer ventures in distribution, bureau services, peripherals supply and training. But he never became embroiled in manufacturing.
Computer companies have long known that it is dangerous to get hooked on hardware. For more than a decade, IT sales managers have emblazoned on their teams' brains the message that they are not selling computers but "cost-effective solutions to business problems". The boxes are irrelevant, it is the software that makes them useful. If IT companies can buy in the boxes more cheaply than they can manufacture them, they should do so. This is more true than ever, thanks to the industry's inexorable march towards standardisation and so-called "open systems". In the past, incompatibility between different suppliers' machines was one of the biggest problems for computer users. Now proprietary computer systems are being eclipsed by computers designed to common technical specifications and programmed with a lingua franca so that they can speak to each other.
For customers the benefits are manifest. Users can mix and match hardware and software, gaining systems that suit their own requirements, for a far cheaper price. Once installed, the superior communications skills of open systems make them ideal for exchanging information inside and outside an organisation. They can both help flatten organisational structures and empower workforces.
Fresh evidence of open systems' consumer appeal comes in a recent survey of boardroom attitudes to IT, carried out jointly by Management Today and Hewlett Packard. The researchers conducted interviews with 50 board-level managers from the public sector, financial services, wholesale, retail, telecoms and manufacturing industries.
Many managers expressed frustration at being unable to bring together fragmented data from different areas of their operation. Open systems were perceived as a way to improve information flow, make better decisions and oversee an entire organisation's functions.
Respondents welcomed the liberation from individual suppliers. As one manager put it: "You could play one company off against another and get the best buy. You would not be held over a barrel by any one company." Not only would prices come down, but users would be able to get what they wanted. If one supplier did not offer it, they could simply go elsewhere. "At the moment each department has 60% of what it wants - the rest is compromise," said one manager. As others noted, separate items of hardware or software could be integrated piecemeal; it would not be necessary to buy a new system in its entirety.
The survey identified departments most likely to benefit from open systems as those requiring frequent internal communication: engineering; marketing and sales; accounting and finance; legal and administration. When asked to comment on what types of organisation would gain most, respondents cited financial services, businesses with a broad range of products and those whose activities were spread over a number of different sites.
Managers had an almost entirely positive view of open systems, even when they had not previously come across the idea. But some respondents were worried about security. If data can be accessed and shared more easily, they felt there would be an increased chance of unauthorised access. Another concern was that making data available to more people in an organisation would boost the likelihood of abuse. There was a feeling that open systems could make the organisation more vulnerable - "like having all your eggs in one basket" as one manager described it. Another feared that failure of the system would result in the entire organisation grinding to a halt. Some of the managers feared that any organisation with an open systems approach would have access to another organisation's data so that their marketing sales and customer information could be stolen by competitors.
Cost was another cause for concern. "If I had to re-specify all my IT needs, it could cost a fortune," said one respondent. Some believed that maintenance and repairs would be more expensive because they would no longer be able to depend upon a contract with a single supplier. Other potential dangers raised included networks overloading, software being too technical for the average executive to master, and innovation and flexibility lost because of standardisation.
Users are not the only ones worried that standardisation will reduce the options. The big problem for manufacturers is how to distinguish their machines from every other open system on the market? The process of differentiating computers will create a whole new paradigm in the industry, says Shmuel Halevi, vice president of The Technology Research Group in Boston. "Open systems has become the rallying cry of the US computer industry. Manufacturers rush to build standard computers and hope against hope that price/performance leads of three to six months will provide competitive differentiation and consistent profits." But Halevi points out: "Beyond a certain point, no computer supplier can be qualitatively more 'open' than its rivals." Those companies that are determined to stay in the hardware game should shun open systems, he believes: "They are a prescription for corporate suicide, requiring an endless stream of new products, the development of which is marginally profitable at best because of abruptly short product lives." The suppliers that survived would be those that closed their systems as they added extras such as pen-based operating systems, natural language interfaces, and multimedia data storage.
US mail-order pioneer Michael Dell, made his fortune while still at school. He realised that it is not so much which PC you buy but how you buy it that matters. The success of the big IT-based management consultancies provide further proof that hardware manufacture is not a prerequisite to make money from computing.
SCH's Rigby grasped this idea at the beginning of the '80s when he became one of the first dealers for the IBM PC - an early manifestation of an open system. Avoiding the "box shifting" end of the business, he concentrated on so called "systems integration" - the process of fitting together a range of different computer products to create bespoke systems. "We were in the right place at the right time - stand-alone PCs were quick to take off," he recalls.
While open systems threaten to put many manufacturers out of business, they represent a huge opportunity for dealers, reckons Rigby. Although the machines are becoming commodities, users still require expert advice on how to buy and install them. "Running a dealership is all about managing the margin. Some manufacturers have very good products but that is all they have. Users can now consider their own strategies but they need to work with organisations such as ourselves to help decide exactly what system they need."
The computer industry has been extolling the virtues of open systems for almost a decade, but the message is clearly not getting through. In the MT survey, 31 of the 50 board-level managers questioned had never heard of open systems. "IT professionals are their own worst advocates because they make it sound complex," says Rigby. "At its best it is just a service - future IT managers will be good all-round business managers."
With many UK computer companies, however, manufacture is still a point of honour. It is time to change. Open systems offer access to a vast worldwide market for what the IT industry has always done best - writing software and customising systems for specialist users. A strong indigenous industry based on this approach would not just be good for the sector, it would benefit thousands of users too.
For reprints of this article, contact Anne Oakley (071) 413 4336.