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SWOT: The home court advantage

SWOT: The home court advantage

One by one we've watched them pack their bags and leave the Australian market, their management heading for equally troubled waters at home in the US. Sapient, Oven Digital, MarchFirst, Rare Medium and Xpedior, to name a few, were subsidiaries branching out internationally - and finding market demand sinking.

In the wake of their collapse,

hundreds of talented techies hit the market where demand has always outstripped supply, proving an attractive source of new resources for competitors still afloat.

Most survivors are developers and integrators that have been working in the Australian market for years. Their sole means of survival has been to fit business to market demand. Now with many of their competitors folded, they see new opportunities daily.

Failure or lack of commitment?

Industry pundits highlight a number of possible reasons for the mass exit of US resources from the domestic Internet services industry. Most agree the companies had over-optimistic expectations of the size of the Australian market, and when conditions on the US market deteriorated, carrying risky international subsidiaries was no longer an option.

Aldous Mitchell, managing director of Melbourne-based Web developer InterServ, believes the trend is due to home-grown companies having long standing relationships and better networking in the market. "We have five years of experience and have dealt with several hundred companies - this is not something a US company can emulate here in a matter of months," he says. "You can't just smash a bottle of champagne, open an office in the main street and expect businesses to know you and trust you straight away."

Mitchell also suggests the US branch offices were very opportunistic, high-risk operations. "When things got tough in the States, the first things they cut were the high-risk ventures so they could concentrate on keeping their US operations afloat."

Another possibility is that the overheads of US management hurt the Australian operations' bottom lines. According to Tim Birdsall, business director for Internet services company Presence Online, administrative and other overhead costs incurred in the US strongly affected their Australian subsidiary's pricing. Cost structures elevated the price to be only affordable at the premium end of the market.

But during an economic downturn, paying premium rates for a gamble on e-business was not on the shopping list of most Australian companies. "I think [the failed subsidiaries] were able to represent themselves as experienced in the American market, that was something they did well," says Birdsall. "On the other hand, we have been able to generate longer relationships with our customers. That strong customer base has been enough of a cushion to carry us through what without a doubt has been a downturn in the last six months."

Stephen Langsford, executive

director of SMS-owned Method, believes many of the US subsidiaries were not that interested in serving the Australian market in the first place. They were instead attempting to take advantage of Australia's low cost of labour and apply these skills to US projects. But as the market softened in the US, the whole operational purpose was lost. "As soon as the pipeline began closing down from the US," he says, "there was no competitive rationale for operating in Australia."

One of the main difficulties of the tech wreck was that some of the US integrators' largest customers, the dot coms, disappeared off the face of the planet. When these companies folded or scaled down, many new economy developers were faced with the arduous task of pitching to old economy companies that looked for a very different kind of credibility.

Langsford says this reliance on start-ups for revenues happened because the corporate market eyed the US subsidiaries with caution. "The start-ups were the quick and easy wins. Without enough relationships to attack the corporates, the start-ups were where they focused."

Trouble on the home front

It was not only the US subsidiaries that were affected by the dot-com crash. On countless occasions, local integrators were fighting their own battles.

The most obvious failure was Zivo. Once Australia's premier Web development asset, the Zivo trademarks, customer databases and Web site were sold off to Sofcom (Software Communi-cation Group) in December 2000 as part of a fire-sale brought about by the financial failure of its parent investment company, Liberty One. Nevertheless, ex-Zivo employees will tell you the company could have survived the market downturn on its own, if not for the questionable management of its parent company.

Internet Integrator XT3 looked headed for a similar fate in February 2001 when it made 29 staff redundant and threatened suing its Hong Kong-based parent company, Chinadotcom, in order to secure promised funding. But XT3's fortunes are turning around, according to general manager Bill Robinson, who says the situation was "amicably resolved" and XT3 management has no outstanding issues with its parent company.

Chinadotcom subsidiary Ion Global now owns close to 100 per cent of the integrator, which has been re-branded Ion Global Australia. Robinson says business has been picking up strongly in the last two months and clients are again confidently committing to e-business projects.

Robinson says the exit of Sapient and MarchFirst, among others, was less a matter of failure in the Australian market than not having enough commitment to the local market. "When things get tough, you cut the periphery off first," he says. "This is our market. Asia is Ion Global's market."

In May, Com Tech also cut 30 staff from its Web division, Com Tech Online, in order to meet revenues and costs. But like XT3, the business still appears to have a healthy future. Business unit manager David Bowie says the fact Com Tech's parent Dimension Data recently acquired US Internet services firm Proxicom suggests it still has a large commitment in the Web integration space.

The good news

The good news is that most surviving Web integrators feel confident the leads are in the pipeline and the future is bright. "I wouldn't be surprised if there was more consolidation, but the signs are there that we've turned the corner," says Presence Online's Birdsall. "There are certainly more blips on the radar at the moment. After everyone has battened down the hatches on spending because of the economic uncertainty, they'll find some spare dollars in their budget and will become more bullish."

Method's Langsford agrees there will be yet more consolidation, and more repositioning. "I think many Web development companies will end up with a smaller cottage industry status because, in reality, they are little more than glorified digital graphic designers. There is a clear position for the solid application developers and integrators drawing from real technical expertise. But only a few can dominate."

One bonus from the US integrators' exit is the opportunity to attract skilled, experienced staff - and even take over unfinished projects. InterServ picked up 12 ex-Zivo staff in the wake of the Liberty One collapse, and is now in discussions with the administrators of two other failed US subsidiaries. Similarly, Langsford is looking for contract workers from a fallen US branch office in WA.

Birdsall is negotiating with several senior sales staff from fallen integrators, but believes the software industry has seen the most benefit from the availability of technical staff. "The people we've talked to so far seem a little gun-shy about staying in Web integration services," he says.

Lessons learned

Mitchell believes the survival of home-grown Web integration services companies indicates that organic growth, conservative spending, and above all relying on a solid reputation is the key to business success.

In a rapidly evolving industry and competitive job market, Birdsall says the successful integrator must address managing people's career paths and growth expectations. Also it cannot afford to be precious about bringing partners into projects, while balancing alliances without threatening its competitive position. Finally, the integrator needs to focus squarely on delivery. "It's a small industry," he says, "so people will hear about your success."

Langsford succinctly summarises the local situation: "At the end of the day, business development is about business relationships. Without these relationships, [the failed US subsidiaries] were behind the eight ball in the first place."


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