New model, new day

The recession is applying a stress test to a new business model among the providers of information technology services.

So far, it seems to be holding up.

Ever since the business got its start more than two decades ago, most IT service and network solutions companies worked something like an emergency room rolling out when a client had an IT emergency or taking a contract to install new hardware and software systems.

Like most emergency-room visits, crisis calls to IT companies tend to be expensive, and they tend to come because clients have put off routine care of their computer networks.

In the past five years, however, IT services companies have moved to a new model in which they provide ongoing maintenance of networks for a fixed monthly fee.

"Instead of rolling our trucks and trying to fix a server, most of work we do now is managed solutions," says Steve Cerocke, president of IQ Technology Solutions in Reno.

But as cash-strapped clients look to cut costs, some of them are dropping the regular monthly expense of

a maintenance contract and returning to the emergency-call relationship with their IT firm, says Darren McBride, founder and owner of Sierra Computers Ltd. in Reno.

For some clients, the desire to reduce monthly expenses presents a set of new questions, McBride says.

They need to weigh the soft costs of a computer network outage lost productivity, damaged customer relations in combination with the expenses of a service call. And then they need to weigh the combined costs against the expense of an ongoing maintenance agreement.

And maintenance billings to some clients have declined, Cerocke says, as the clients reduce the size of their staffs and reduce the number of computers on their networks as a result.

The exodus and the cutbacks haven't been enough to cause IT service companies to rethink their strategies, but they've been a headache as the recession unfolds.

It's more difficult to schedule staff, for instance, when an IT business relies more on emergency calls for service and less on regularly visits for scheduled maintenance.

On the other hand, Cerocke says, IT Technology Solutions has picked up new clients during the economic downturn as small and mid-sized employers decide it makes sense to outsource the care of their networks rather than keep their own IT staff on the payroll.

A study by the Computing Technology Industry Association finds that more than half of small and medium-sized businesses nationwide expect to increase their spending on technology services this year.

"Small and mid-sized business have made significant investments in technology over the past dozen years.

They rely on technology for an increasing amount of their core business operations," says Todd Thibodeaux, the president and chief executive officer of the association headquartered at Oakbrook Terrace, Ill.

On the other hand, the 51 percent who expect to boost their spending on IT technology this year compares with 62 percent a year earlier.

Another challenge facing IT service providers in northern Nevada: Dozens of offices in fields such as construction, real estate and mortgage lending that once relied on IT firms to keep their networks humming now are out of business.

And some companies, Cerocke says, have delayed or killed major engineering projects big upgrades in software, installation of new hardware that otherwise might have generated billings for IQ Technology Solutions.

But a surprising number of those projects continue, he says, as companies that have financial resources look at the recession as a time to build their technological capacity and take away market share from weakened competitors.

"It has slowed down some, but it hasn't really affected us," Cerocke says.

The focus of northern Nevada IT services companies on outsourced maintenance contracts places them squarely in the corner of the industry that's projected to do best in the next couple of years.

Forrester Research Inc., an independent research company, projects that IT outsourcing services will grow by about 2.1 percent this year, improving to 6.8 percent in 2010.

The company says the outsourcing business slowed a bit during 2008 although it still posted growth

as clients waited to see if the recession would bring price cuts from IT service providers.

Other segments of the IT business, however, are in for a rocky time.

Forrester Research projects that spending on IT consulting and systems integration contracts will decline

by about 2 percent this year, although it forecasts a rebound to 7.4 percent in 2010.

Andrew Bartels, a principal analyst and vice president with Forrester, projects that the financial crisis will

result in continued declines in purchases of computer hardware by businesses and government agencies.

Hardware sales are projected by Forrester to drop 6.8 percent this year on top of a 4 percent decline during 2008.

Software purchases, however, will be buoyed by maintenance fees and ongoing subscription fees. Forrester projects that segment of the IT industry will be flat this year.