When Wild Oats was looking to automate some of its internal operations more than a year ago, it didn’t turn to a blue-chip provider such as Microsoft, but to Linux, an open-source computer operating system found free on the Web.
“A really sophisticated package was not required, so on open-source a lot of packages fit that spot,” said Jon Payne, vice president of information technology for Wild Oats, a Boulder-based organic food retailer.
With Wild Oats devoting only 1 percent to 2 percent of annual revenues to information technology, Payne had to consider the costs to install and maintain a sophisticated operating system for basic inventory and receiving. Linux fulfilled the needs and took less time to get up and running.
“Other folks are (under) that same kind of cost pressure,” Payne said.
As companies increasingly look to either keep costs down or bring innovation to their IT departments, some are turning to smaller companies that can customize products and services using new innovations and Web-based applications.
Dozens of Colorado companies are vying to win the hearts and hard drives of large enterprises, such as health care companies and banks. Their goal: to cut into hefty market shares enjoyed by incumbent tech heavyweights such as Sun Microsystems, Oracle, Hewlett-Packard, IBM and EMC.
The newer software and hardware companies say they’re more nimble and customer-oriented and able to compete on reliability, price, and in some cases, power efficiency.
“These issues are extremely acute,” said Mark Ward, chief executive of Copan Systems Inc., a Longmont-based storage company. “Every company has enormous pressure in IT, data needs to be stored for years to come. And they don’t have unlimited (budgets) to solve the problem.”
Recession caused change
IT managers had fat budgets and free reign over hardware and software buying decisions in the late 1990s and early 2000s. That’s changed following a recession in 2002, leading to a more pragmatic approach to spending, said Laurie F. Wurster, research director for Gartner Inc., a Stamford, Conn.-based technology research and consulting firm.
“Budgets are tight, and that’s going to continue as the war in Iraq continues and fuel prices remain high,” she said. “We expect spending to remain tight over the next two years into 2008.”
Open-source programs, such as the Linux operating system, are driving what many analysts and IT professionals call a “disruption” in the software industry.
The “one-size-fits-all” approach to technology no longer works for companies that need to satisfy government regulations and shareholders, said Ward.
Instead of turning to incumbents for proprietary software that generally comes as a pre-packaged program with installation and licensing fees, companies such as Wild Oats are considering freely distributed open-source software, or Web-based programs billed on a pay-per use system.
Last year, companies worldwide spent 32 percent of their IT budgets on proprietary software, Wurster said. That number is projected to drop to 25 percent in 2006, she said. Revenues from proprietary software totaled $172 billion in 2005.
Although open-source programs are readily found and shared for free over the Web, companies such as Broomfield-based OpenLogic have been able to monetize the code by integrating it into a business’ existing IT infrastructure and by offering technical support.
“This is a sea change that businesses are going through. Companies don’t buy software the way they used to,” said Steve Grandchamp, OpenLogic president and chief executive.
He estimates that there are about 108,000 open-source programs available. Many are being used by software developers at various companies worldwide.
“It’s a very grassroots way that software is starting to show up in companies,” Grandchamp said.
Focusing on a niche
But at the same time, enterprises are not completely abandoning their pre-existing software programs in favor of new innovations. The move is tepid, with small outfits needing to prove themselves.
“They’re meeting an unmet need with a solution that augments technology they get from bigger companies. You usually don’t see a wholesale replacement from an older, larger player,” said Dan Twing, vice president of Enterprise Management Associates, a Boulder consulting firm.
“They’re going to try it in a department. That could change after they’ve had some experience to trust it. Open-source isn’t going to take over the established player overnight.”
And the big boys are fighting back. Sun Microsystems’ chief executive Jonathan Schwartz said during a conference call Thursday that corporate technology buyers fall within two categories: “Those who see IT as a place for innovation … and those who see it as a cost center to be eliminated.”
“We’re laser-focused on the former,” he said. “We believe we are well on track to a successful future.”
For the small player, the key is to pick a market niche and focus on it, said Copan’s Ward. His company is solely dedicated to developing storage servers for archiving and protecting data, and markets only to Fortune 1,000 companies.
Founded in 2002, the 120-person company has 100 clients, including Sprint Nextel, Credit Suisse First Boston and Time Warner.
“We’re only servicing a granular part of the market, versus solving world hunger. It’s a big struggle to keep that focus at a big company,” said Ward, also a former EMC executive.
“Large companies are very interested in doing business with us, but are doing it in a staged fashion. As they need additional capacity they buy us. As soon as we place our technology in their data centers we’re sitting right next to IBM and EMC.”
The Associated Press contributed to this report.
Staff writer Kimberly S. Johnson can be reached at 303-954-1088 or kjohnson@denverpost.com.
