ENGINEERING

STAMFORD, CT -- Economic restraint has led many organizations to put discretionary spending on hold, causing worldwide spending on new software to grow just 6 percent in the first half of 2001, according to Dataquest Inc., a unit of Gartner, Inc. (NYSE: IT and ITB). The industry's growth rate has slowed to less than one-half from last year when worldwide software spending increased 18 percent. Worldwide software spending for all of 2001 is projected to grow slightly less than 7 percent with new license revenue of approximately $77 billion. "The impact from the events on September 11 will extend and intensify the economic slowdown impacting the global software industry for the next 18 months," said Joanne Correia, vice president for Gartner Dataquest's Software Industry Research group. "The verticals that could have slower software purchases will include the airlines, travel, automobiles, insurance and new consumer PC segments. Software vendors may see an increase in new software spending and market hype in segments such as security, network storage and systems management and collaborative applications. Gartner Dataquest analysts said well-managed software vendors have reacted rapidly to falling orders and trimmed operating expenses to limit their use of cash reserves. But many vendors that were managing on small cash reserves do not appear to have reacted fast enough to trim their expense line faster than the drop in orders and revenue. "Not only has application spending slowed, but decisions on whom to buy from have clearly shifted in favor of the larger vendors with their broad one-stop-shop portfolios and deep financial pockets," said Tom Topolinski, principal analyst for Gartner Dataquest's Application Software Industry Research group. "Many small companies are vulnerable because they have no underlying maintenance or service revenue to provide at least some ongoing income when new license orders stop," said Correia. "There is a significant danger of these companies becoming cheap acquisition targets or disappearing totally from the market." The main challenge for large and small vendors will be to manage their expenses with enough agility to remain solvent and profitable. Gartner Dataquest analysts said earnings reports for the second quarter of 2001 performance might look as if it's a one-time bad quarter for software vendors, but it could be fatal not to treat it as a strong trend indicator. "Those vendors that have managed to build an order backlog into their business model -- against which they can draw future revenue -- will be more shielded from the immediate effects of this spending shortfall," Topolinski said. "Customer value propositions will need to be highly focused on lowering their risks, on short-term ROI results and allowing contractual flexibility. Discounts, delays and customer licensing terms will all become even more key factors in negotiations." For more information, visit www.gartner.com.