It's eat or be eaten for IT firms

"Grow or die!" is a mantra chanted as loudly in the information technology services sector as in any other sphere of business.

But over the past couple of years, large telco and IT fish have gobbled up smaller fry with near-feverish regularity. Other sprats have decided to swim together to survive.

The recent merger between customer relationship management companies Complete Solutions and The Data Group is the latest example.

John Biggs founded Complete Solutions 10 years ago and says he carefully considered the impact of the merger on existing customers and staff before deciding to go ahead. In his case, the advantages of expanding were too compelling to resist.

"In the mid-market [where Complete Solutions does business] the need and the opportunities for IT are expanding," he says.

"The merger provides more stability and gives us greater confidence in going after both more sales and larger sales as we'll be able to service clients better. In our own way it's a smaller form of that aggregation that's taking place" in the wider IT arena.

The consolidation trend has taken its toll on industry groups such as the Information Technology Association. The whittling away of its membership was an issue cited during the formation last year of the industry-wide umbrella group, ICT-New Zealand.

ICT-NZ interim chairman Malcolm Fraser says the industry has followed a natural cycle of boom and consolidation but the convergence of telecommunications and IT has also encouraged telco companies to look into expanding their operations.

"It's a trend that will certainly continue," he says.

As a result of consolidation at the big-business end of the sector, Fraser says, the past year has seen "more existing associations or member groups engaging more positively around the conversation of how we can all do things together".

He says there is a realisation by local IT companies that they can win new international business through a collaborative "go-to-market approach" - an example being the success of the Health IT Cluster.

Greg Woolley, managing director of IT consultancy Certus, says telcos are keen on buying IT services businesses to develop new income as the return from their traditional business declines.

"Their traditional revenue streams - tolls, local calling and data service - the value of those is diminishing over time so the mantra they've got is to deliver network delivered services ... They're trying to move from the network up to the infrastructure layer," Woolley says.

"Rather than just stopping at the router they want to move into the [local area network] and onto the desktop and into the server room and start to manage and provide those services to customers as well."

He says the move is inevitable.

"I don't think they have any choice. The cost of data just keeps going down. Things like voice over [internet protocol] are going to destroy toll revenues. Unless they move into providing higher-value services they're going to struggle to survive."

The wave of IT sector consolidations is also a sign of the industry maturing, he says.

"If you look at mature industries - like telcos, airlines and banks - you tend to end up with a small number of large players and then you have some niche players out there as well who have a unique proposition or a unique set of skills ... that services a particular part of the market that the big guys don't address."

Complete Solutions' Biggs believes further consolidations will occur as part of the natural cycle of business and he says customers benefit.

"At all levels in business I think our customers are wanting to make sure that their suppliers are strong and viable."

He says his company's merger with The Data Group is a case in point.

"I think [customers] would welcome the merger in that it gives greater depth in the offering that we can provide. More staff, more resources and therefore they can sleep better at night knowing that their IT is under control."

Woolley says expansion by the big players will still leave niches for companies like his.

"You could get caught in no-man's-land if you're not careful. The big guys will be good at delivering desktop support and infrastructure, the sort of stuff that's rapidly moving into the commodity market. If you're not specialised and you're not big you're stuck in that nasty no-man's-land."

Certus has a staff of about 50 and is focused on providing specialist services to large IBM customers.

"We're certified across all five IBM software brands, so we have a specialisation in that area that the big guys like Gen-i, Datacom, Axon, Unisys don't have - they might have one or two" IBM certifications, he says.

He says niche IT operators can also grow by expanding internationally. Certus works in Malaysia, Singapore and Thailand "where there are big players in the market but there are still skill gaps".

Businesses that consume IT services are benefiting from the "commoditisation" factor because support costs are coming down.

"They're trying to turn it into a highly repeatable service offering rather than a $135 an hour for a desktop engineer to come in and try to figure out what the problem is," Woolley says.

Some businesses, however, do not like dealing with mega-providers, which is a difficulty the large players need to overcome, he says.

"That's the challenge when companies consolidate - their brand can become very diluted. [Customers can say] 'Not only do you provide the network and my PCs, now you're coming to talk to me about my business strategy'.

"That's quite a tough branding challenge to get around when you decide to become all things to all people."