System integrators facing market decline

“To be seen as a reliable partner you have to have a history, demonstrate that the company is solid and will not disappear.”
By : Greg Goodale

   Poland’s small and medium-sized system integrators face a shrinking market this year, with fewer long-term contracts up for grabs and larger companies muscling in on smaller contracts from the state and private industry.

   After their dynamic growth in 1999 and 2000, system integrators are finding this year’s market stark. The state sector has cut spending, Poland’s telecommunications companies are starved of cash after paying $600 million for UMTS licenses last year and investor confidence is low. But as larger players continue to feed off existing long-term contracts, smaller firms are suffering. Their shortage of smaller orders is exacerbated by increasing competition from larger integrators looking down-market to maintain turnover.

   “There is a shortage of big contracts and projects so big companies are beginning to penetrate markets with contracts worth a few hundred thousand złoty,” said Krzysztof Gajór, chairman of Computer Communication Systems (CCS). “There is an increasing squeeze on smaller companies on the market.”

   According to Witold Œwištkowski, a board member of Andra, it would be possible to share customers on the market more evenly, but the problem hinges on the lack of big clients for the larger integrators. “Such small installations like the school Internet program are also subject to competition from the bigger players,” he said.

   This poses a threat to small and medium-sized integrators, which are less likely to strike deals such as Prokom’s contract with Zakład Ubezpieczeń Społecznych (ZUS), which prop up revenues during sour times. According to Gajór, 60% of CCS’ revenues comes from contracts of this type. “These are relatively safe,” Gajór said. “Market conditions like the present crisis do not usually affect contracts of this kind, although fewer new contracts are available.”

   According to Roman Szwed, chairman of system integrator ATM, the telecommunications sector was traditionally a source of long-term contracts until the high prices demanded by the government for UMTS licenses stripped them of investment capital. “Now these companies are just saving money, doing no investment, trying to get at least part of this money back,” Szwed said.

   The budget deficit has been crucial in reducing the number of orders in the past 12 months. According to Marta Kluk, marketing specialist at domestic IT and communications Consortia, which specializes in IT solutions for retail, the shortage has forced the firm out of the market. “We used to fulfill a lot of orders from the budget sector, but the budget deficit has meant our situation this year has not been the best,” Kluk said. “State institutions have heavily reduced their orders and there are fewer tenders.”

   As a result, Consortia, on the market since 1993, has ceased offering these services and maintains only existing service contracts. “Our department had too few people and to make it more effective would have required more investment,” Kluk said. “This would be difficult at a time when the company is already making significant losses.”

   According to Gajór, the recent elections have also compounded the fall in public orders due to the administration’s uncertainty over the next government’s budget decisions. “Ministries, state agencies and state-owned companies have ... suspended their investment decisions, and the next quarter or two will see no change,” Gajór said.

   The private sector has responded to this year’s gloomy market climate by cutting or postponing investment decisions. “Since IT investment is fairly flexible, companies find it easy to make cuts or postpone,” Gajór said. “Whereas last year our main client spent more than zł. 20 million ($4.7 million) on our products and services, this year they will only spend zł. 12 million ($2.8 million).”

   Jan Lech, marketing and sales director at Cross, said a fall in orders from industry has been the most obvious result of the cooling of the economy. “Industry is decidedly the worst off,” Lech said. “The economy has cooled too much.”

   According to Œwištkowski, the computerization of the banking sector, which fed the sector’s largest companies during the past two years, has rapidly fizzled out. “It is clear that the big money has run out in this area,” he said. “This is evident in the performance of Softbank, a company specializing in the banking sector that is in a rather grave situation.”

   The biggest challenge confronts younger firms. Since the major start-up boom on the IT market in 1999, these still represent a large proportion of the sector.

   “The less time a company has spent on the market the more problems it faces with obtaining such contracts,” Gajór said. “To be seen as a reliable partner you have to have a history, demonstrate that the company is solid and will not disappear.”

   But while this year’s market shakeup has seen the likes of Consortia abandon the system integration market, other medium-sized companies like Andra are bolstering their range of services in hopes of a medium-term payoff. “We are taking on more difficult projects so that once we have a contract we can do everything that a client wants,” Œwištkowski said. “I am optimistic because it looks like we will make it through this, while with reduced competition next year things should get better.”