Jeff Delaney
Cover story

From soap opera to real TV

SA`s ICT regulator is under fire, but the new EC Act is going to call for Icasa to do some straight shooting of its own.

Dot coza boom revisited

Tipsters are predicting that of the surviving listed Internet companies in the US around a half will be profitable by the end of this year. B2C (business-to-consumer) revenues are rising and many traditional businesses are realising the benefits of B2B (business-to-business) e-commerce. All very encouraging, but does it hold water for South Africa?Long-time local IT commentator Duarte da Silva of the J&J Group is cautious, pointing out that many of the inhibitors that stifled Internet commercial success, particularly in the B2C space, in South Africa are still present – most importantly a lack of volume and access.He has a point. Accurate figures on Internet users in this country are hard to come by, but it would not be unreasonable to suggest they stand at around the three million mark – hardly enough to get pulses racing.“The successful examples have been retailers like Woolworths and Pick `n Pay and the banks that have identified the Internet as just another business channel,” Da Silva says. Companies transacting through the Internet in isolation, he believes, have little chance of success. Reversal of fortuneM-Web, South Africa`s largest Internet service provider (ISP) and dot com company, would probably disagree. As a listed entity, the company achieved headlines more for the amount of cash it burned each month than the services it offered. However, since it delisted from the JSE Securities Exchange in July 2001 and dived under the substantial cover of the Naspers Group, its fortunes appear to have turned.In its latest financial results (year-end March 2003), Naspers cites the Internet as its fastest growing business area, with revenues up 63 percent, and operating losses before amortisation almost halved to R244 million.Also, last month M-Web reported record traffic to its new portal in the month of July: 814 834 unique users. According to Russel Yeo, general manager of M-Web Studios, the record is a firm indication that the company`s new focus on providing a wide range of exclusive services, tools, products and “premium” content to members is successful. The Internet, and the M-Web brand in particular, Yeo says, are becoming “an integral part of South African people`s everyday lives”. The company has also made what appear to be successful inroads into the Far East.But Da Silva, for one, remains sceptical. “The main reason that M-Web is still around is because of ‘Big Daddy` [Naspers]. The company has yet to prove whether it is viable or not,” he says.It`s arguable whether ISPs qualify as pure dot coms or should rather be categorised as an offshoot of the telecoms industry. But Naspers` Internet offerings run far deeper than ISP services.On the retail side, subsidiary Nasboek`s e-commerce platform doubled its revenues to R32 million this year. The company is confident it will continue this trend going forward and says it is following a strict roadmap to profitability. benefited from the collapse of rival e-tailer The Shopping Matrix earlier this year; but, even if it reaches profitability, it is hard to see it ever becoming a significant earner for the media giant. A tale of small earnersMore about M-Web and Naspers later, but it appears the real story of stand-alone South African B2C e-commerce is a tale of small earners. Pick of the bunch could very well be NetFlorist, the sole dot com survivor within contact centre outsourcing company CCN Holdings (formerly the ISP NetActive).MD Ryan Bacher says the online flower retailer turns over around R10 million, with profits in the region of five percent of that princely sum. He believes the key reason NetFlorist has remained afloat is that it exists in a market that has no dominant player.“Secondly, there are a number of recognised consumer brands out there selling flowers and what we have succeeded in is building partnerships with them. These relationships give us access to our partners` customers and account for nearly half of our business,” he says.This partner programme has enabled NetFlorist to eliminate marketing and stock holding costs that have rung the death knell for so many dot coms, and reach profitability after just three years.“It`s not about above-the-line marketing: the returns are still too small. If we had relied on above-the-line, we wouldn`t have survived,” Bacher says. “Partnerships do not drain the income statement, although the challenge is you`re always going to be the smaller company. We play a role in our partners` businesses, but we`re a blip on their radar screens.“We`ve been building partnerships for around four years and while there`s often a bit of scepticism at first, our reputation is good and we`ve established a name for reliability. Currently 80 percent of our orders are made online and the balance through our call centre,” he saysNetFlorist is probably as close to a true e-tailer as you`re going to find in South Africa. It holds no stock, relying on florists throughout the country and, importantly, does not look to differentiate itself on pricing.“Our product lends itself to the `Net. Customers were accustomed to using the phone to order flowers and the shift to the Internet has been easy. If you`re looking to sell a big screen TV online, for instance, your only selling point is that it is cheaper. That`s a business model that just can`t work,” Bacher says.He estimates the current “flower sending” market at around R200 million a year and has no reason to assume NetFlorist cannot continue to achieve growth rates of between 60 and 100 percent in the medium term.Another success story is the online flight-booking agent While is not independent – it falls under the Comair Group – it`s worth looking at as it`s something of an anomaly: a dot com that claims to have been profitable from day one.At least that`s according to executive IT director Carl Scholtz, who was unable to give exact financial figures as JSE-listed Comair was in a closed period at the time of follows a mixed business model in that it does not rely on the Internet alone for distribution. Comments Scholtz: “We understand that transacting on the Internet is not everyone`s cup of tea so we have catered for a number of options.“While around 60 percent of our clients book and pay online, others make use of the option of paying for their flights at First National Bank branches around the country, while those who are not Internet-active can make use of our call centre.” Keep it simple – and is also active in B2B e-commerce in that it interacts with travel agents online. Agents can make use of a separate travel agent website that allows them to make bookings and keep tabs on their travel spend and commission earned.There`s no doubt that air travel lends itself to the online business – it is, according to Scholtz, the second largest market wordwide in terms of transactions. This said, the main reason for`s success is, unlike NetFlorist, probably its price competitiveness – flights can be up to 42 percent cheaper and the company recently added a further R50 discount on return tickets booked online.“We learnt quickly that customers disappear if they encounter any problems online, you simply have to offer the simplest and quickest deal around,” adds Scholtz.The learning process must have been intensified by the server-crashing response to a recent special offer, in which R400 return tickets between Johannesburg and Cape Town left the website unavailable for nearly a, Scholtz says, is working towards providing an “integrated travel experience”. The company currently offers both flight and car rental services and is investigating the possibilities of adding accommodation to its bundle of services.Da Silva has pinpointed Woolworths and Pick ‘n Pay as traditional retailers that have successfully employed the Internet as an extension of their existing business channels. However, according to Alison Vorster of Internet infrastructure provider Internet Solutions (IS), clothing retailer and consumer credit pioneer Edcon is a far more interesting example.Edcon, she says, was one of the original customers and first casualties of the dot com craze. The company invested a considerable amount in its online venture (almost R3 million in software alone) and severely burnt its fingers.How this situation has been turned around is, according to Vorster, an e-commerce success story that spans both the B2B and B2C spaces.“Edcon changed its strategy to one which identified areas within the organisation that could realise significant value from an e-commerce initiative and where success could be measured,” she says. The new model at Edcon focuses on operating expenditure and capital expenditure, ensuring investment in technology is both justified and yields a return.“Edcon immediately saw the economies of scale and value it could realise through the IS infrastructure model and migrated from its existing B2C vendor`s software to ours, hoping to be in time for last year`s Christmas rush. Delivering real value“We went live on time and, within the first week, significantly increased the ratio of customers returning to the site. This was a major turnaround. The company moved from a situation where neither it nor its customers were seeing any value to implementing a fully interactive, continuously enhancing site that`s delivering real value to customers,” Vorster says.Edcon, she adds, is now in the process of adapting its B2B processes to the IS model.“The way our infrastructure model is structured means the more functionality you add, the more cost effective it becomes. The total cost of ownership for the B2C solution stood at around 50 percent of revenue, but once B2B was added this dropped to around a quarter.”The secret, according to Vorster, is to focus on the actual business processes and areas that add value. “At Edcon, in B2C the company has focused on improving the status of statements and payment procedures, the things that really affect the bottom line. The B2B side is very process driven – streamlining internal processes with suppliers for instance – and that`s where Edcon is seeing its return on investment,” she says.Victoria Vaksman, MD of software solutions company Tilos, agrees that a focus on business processes is the route to follow.“The take-up of e-business will be accelerated through the deployment by companies of three basic components that fulfil the base requirements of any organisation wishing to e-enable its existing processes. They are the corporate portal, integrated workflow and document management,” she says.“Together, these three components, along with a shared knowledge base, provide a solid foundation for e-business, allowing companies of any size to e-enable their processes and gain the clear benefits to be had from the new paradigm.“But,” Vaksman cautions, “their implementation must be accompanied by a holistic review of the business and change in core processes, or you`re simply putting lipstick on the pig.”One of the most hyped phenomena of B2B e-commerce has been e-marketplaces. Unfortunately they`ve also accounted for some of the most spectacular failures, both globally and in South Africa.Commerce One South Africa – Distributor Operations` MarketSite is perhaps the most well known locally due to its high profile customer and partner Sasol, which has, by all accounts, benefited greatly from taking the e-procurement route.More recently, M-Web launched CommerceZone and claims transaction volumes totalling over R9 billion in its two-year existence. CE Andreij Horn ascribes its success to the fact that customers on the buy and supply side are seeing real bottom-line returns each day.“Deriving value from procurement is not rocket science – it is not even new. But, integrating all the elements for a successful e-business exchange is much more complicated than could be imagined. By enabling even the most complex of our customers to feel the benefits of e-procurement within 12 weeks of implementation, they see a real return on investment in the same year of moving to a new system,” he says. Maturation processAt present, M-Web CommerceZone claims to process transactions worth more than R450 million per month (although it must be pointed out that many of its clients fall, like M-Web itself, within the Naspers stable).Horn believes the nature of B2B e-procurement has changed substantially during the last two years, maturing into an accepted practice used by leading organisations worldwide.A recent international poll indicated that almost 80 percent of respondent companies were using e-procurement to some extent – an increase of more than 50 percent over the previous year. However, 70 percent of the companies using e-procurement use it for less than 10 percent of their purchases, pointing to the fact that a large number of companies have failed to see real benefits.Horn, however, sees the biggest obstacles to e-procurement growth not as being IT-related, but as the result of flawed business cases associated with these projects. “M-Web CommerceZone combined our e-procurement offering with a strategic sourcing project for each client.“By adding a new client`s indirect procurement volumes to the billions we already manage on behalf of our existing clients, we can offer our clients an immediate reduction in procurement costs and a contract management service that ensures that the requirements of the new client are met,” he says.Tjaart Kruger, executive consultant for Strategic Solutions at Comparex Africa, adds that while the Marketsite solution has been a reasonable success, it must be remembered that, like most other marketplaces in South Africa, it is a horizontal marketplace serving indirect goods procurement.“Furnex has a hosted catalogue environment that allows independent [small] retailers to purchase household goods from larger suppliers, and Collaborative Exchange and Gateway Communications provide electronic forms management services to the automotive and FMCG markets. These are, however, very basic forms of managed environments and do not yet fulfil the dot com promise,” he says.“Technology is certainly improving, but business models will have to change if we are to see sustained business improvement based on a real value proposition in this space.” Beyond technologyKruger says despite the negativity of the past, the benefit of online business is mainly that it can enable a new level of value chain management that was never possible before.“Just as ERP enables the internal functional integration of a business, electronic business can integrate value chains across company borders and enable real value chain management.“The technology on its own, however, will not bring about the improvements. The business practices and processes have to be changed to exploit the power of the technology and this is the challenge for local companies,“ he says.One of the most disappointing Internet performers has been online publishing, which has suffered locally and globally from the unwillingness of users to pay for content and slow take-up by advertisers.Here, the major media houses like Independent Newspapers, Johncom and Naspers have enjoyed limited success by using the Internet as a medium to disseminate repackaged content from their existing traditional publications.Two small companies that do stand out, however, are MoneyWeb and (Brainstorm publisher) ITWeb. Both have survived torrid market conditions and negative sentiment and have firmly established themselves as the dominant players in their respective niches.MoneyWeb, the brainchild of financial journalist Alec Hogg, is listed, though not heavily traded, on the JSE. The site provides high quality, up-to-date financial and business news and commentary and is given further impetus by Hogg`s radio show on Classic FM (also a MoneyWeb project).While MoneyWeb reported a minor loss on revenues of around R15 million for the past financial year, this can credibly be explained by the tough conditions experienced by the media industry in general. The company has been proactive in identifying additional revenue streams, in print and television, and is ambitiously eyeing expansion into the rest of Africa. Not into temptationMoneyWeb has taken a mature approach to its top-level management structure, appointing a number of non-executive, independent directors and an operations specialist as CEO. (One wonders how many of the dot bombs would still be around today if they had had the sense to follow a similar route?)Specialist IT portal ITWeb was launched in 1996, apparently as the first online news service in the country, and has, so far, fended off feeble challenges to its dominant position in its chosen market.CEO Jovan Regasek, who, quite wisely as it turns out, resisted the lure of going public, says the company has been nominally profitable since inception and enjoyed revenue growth of 36 percent to more than R20 million last year. ITWeb earns the majority of its revenues through its so-called company “press offices” which are utilised by a large percentage of local IT companies to disseminate their news releases.Regasek believes the main reason for success has been ITWeb`s basic business premise, which differs from many of the failed content providers.“Their main thrust has been that ‘content is king` where, in reality, the amount of free information available on the `Net has turned content into a commodity. ITWeb, on the other hand, works at creating communities of interest, drawing readers in and then transacting with them.”The paucity of online advertising revenue has also, however, forced Regasek to explore other revenue possibilities, most notably through Brainstorm magazine.Both Regasek and Hogg have hailed the recent formation of the Online Publishers Association (OPA), an organisation whose main aims are to standardise online advertising metrics and educate advertisers about the advantages of Internet advertising. Don`t get too excited“All the major online players have joined,” says Regasek. “We hope it will serve as a vehicle to raise the profile of online publishing and restore trust in our industry.”The probability of a South African dot com renaissance rivalling that which is now being detected in the US remains slim.There will, no doubt, be a measurable increase in B2B activities – especially with adoption of standards such as web services. However, small volumes will probably continue to relegate B2C to its position as an add-on to the banks and the traditional retailers, and as the domain of a few, small independent niche players.But, never mind, there`s always the mobile telephone – and people are used to paying for that!

The penguin marches inexorably on

Described famously by Microsoft`s Steve Ballmer as a cancer, open source software is challenging strongly in the low to mid-tier server market and beginning to make its present felt, albeit lightly, on the desktop. Adoption at the high end still appears slow, however, as corporate users worry about issues concerning support, accountability and availability.Critically, however, open source has been recognised by the traditional hardware vendors, most notably and vociferously IBM, as well as by many influential application vendors.Local Linux solutions provider Obsidian Systems` Anton de Wet believes the influence of IBM throwing its considerable weight (and around $1 billion) behind open source in general, and Linux in particular, cannot be overstated in terms of its growing credibility as a workable alternative. He says big strides have been made in the high-end space in the US, but the uptake in the South African market is far slower.“Over the last couple of months we`ve seen some movement from the technologists at the bigger vendors, but the local market still lacks the evidence of a major implementation on large, mission critical systems. Once someone has taken the plunge we will see Linux take off in this sector.”Stephen Owens of enterprise solutions provider Epi-Use Systems agrees that Linux has the potential to make a huge impact on the high-end market.“IT managers feel more comfortable because Linux has established a very good track record in terms of stability and security. All the high-end server type applications have long been capable of running Linux,” he says. “Now that the major vendors are embracing it, it will become more mainstream.”Linux unlimitedInus Gouws, a consultant at Computer Associates (CA) Africa, is also convinced Linux has moved beyond its “cheaper option” status. “Linux is not limited at all. The only limit that Linux has is resources. Yes, it runs on lower specification hardware, but when you consider it has the capability of running on clustered environments, the whole picture changes.“The bigger the resource pool the more capable it becomes. You can now have a distributed environment with mainframe availability and reliability. This is very good news for the mainframe crowd as operating system and hardware changes also affect them.“Indeed,” adds Gouws, “some organisations leverage the power of Linux to run their high-end servers, again lowering the costs. These servers are usually clustered environments and have hardware specifications second to none, hosting applications that range from web servers to mission-critical medical information centres and online e-business transactional applications.”Thomas Black of the Shuttleworth Foundation believes the advance of Linux in the server market is not limited to low-powered boxes, but is best suited to high-cost utility servers. Linux has experienced most of its growth in Unix territory, he explains, because of the similarities between these operating systems.Battle for the desktop“Whereas Unix was previously restricted to expensive, high-end hardware, Linux introduced Unix-like power and functionality to low cost systems. Linux, in turn, has seen a steady migration from lesser hardware to high-end systems, allowing a single operating system to be run across the spectrum of available hardware, thereby placing less emphasis on the hardware itself,” Black says.“Linux facilitates clustering and grid computing for lower spec hardware to achieve the same results as a high-end mainframe, but at a lower cost.”Open source software`s future on the desktop is, perhaps, less clear but always the cause of heated debate – much of which is driven, rather unproductively, by anti-Microsoft sentiment.While it can be argued with some validity that open source desktop options offer much of the basic functionality of the ubiquitous range of Windows offerings, it is hard to imagine them posing a serious challenge to Microsoft`s dominance for some time.No new tricks to learnBlack believes there is still a long way to go before open source becomes competitive on the desktop, particularly in the home user environment. He points out, however, that there has been strong development over the past two years and that current options can be effectively rolled out in mass deployments that are centrally managed. This means companies can consider alternatives to Windows for their fleets of PCs – which will familiarise employees with open source.Obsidian`s De Wet agrees and, while he concedes that open source operating systems are not necessarily better than Windows as yet, is confident they will get there in the next couple of years. (That`s assuming Microsoft stands still, eh Anton? Just kidding.)IBM South Africa`s Aubrey Malabie is more confident: “With current versions of Linux, there is not even a paradigm shift for users moving from another desktop to a Linux variant. It`s not as if users have to re-learn skills or change the way they work.“There are differences, though, between what most users are used to today and what a Linux desktop offers. The biggest difference is that with a Linux desktop you scale up, and users can realistically expect more from their systems in comparison with what they use today,” he says.The question of licensing is important, but not as important as many open source disciples would have us believe. Research house Gartner estimates the licensing of software accounts for just eight percent of total cost of ownership.However, says Anton van der Berg of Linux proponent Bisart, for small companies faced with the spectre of having to update illegal software quickly, or face the wrath of the Business Software Alliance, it becomes an issue.“Our experience shows that if you look at the average small South African business, running around seven PCs, perhaps only three of these will be fully licensed. This is where Linux becomes an option,” he says.Adds Obsidian`s De Wet: “Any switch to Linux should be slow and measured. Licences usually come up for renewal in a three-year cycle, so companies that are up to date and wish to make the change for other reasons would be advised to use the time to plan ahead for the migration.“I would recommend beginning with OpenOffice as a pilot and then, if that is found to be acceptable, moving on to a full Linux implementation,” he says.Despite (or perhaps because of) the hype and publicity generated by open source software, a number of myths have arisen, both positive and negative, that require examination. The most widespread, not surprisingly, centres on the cost savings and has largely been perpetuated by the perception that open source software is free, as in gratis, as opposed to free as in free to adapt and distribute, and free from lock-in through proprietary standards.A bogus argumentWhile it is true that much of the open source software available is cheaper than proprietary alternatives, credible open source proponents have moved beyond citing this as a reason for adoption.Comments Epi-Use`s Owens: “Cheap is a bogus argument. Instead, the real benefits of open source – the ability to spread the adoption of open standards, the robustness and inherent inter-operability of the software, and the availability of hundreds of thousands of people in the market to test it – are attracting the interest of companies.”Shuttleworth Foundation`s Black agrees: “Price is getting less and less important. Now, more emphasis is being placed on the freedoms – not being locked into a particular product, the ability to be able to adapt software as your needs change.”One query often raised concerns the availability and quality of support for open source software. While it is true that companies using the truly free distributions will have to rely on the open source community for support, Gartner stresses this is not necessarily a bad thing.“Enterprises in some more-remote geographies point out that open source support can be better than what they`ve been paying vendors for. However, enterprises that require professional support for their client OS will need to pay for it. These costs may work out to be less than the cost of a Windows licence and support, but they need to be understood, and not assumed to be zero,” the research house says.Owens concedes it is probably fair to say there is not as much support for open source as there could be, but points out that in most countries there are a number of companies that offer support services.“Globally, the big vendors like IBM, Oracle and HP all offer Linux support as part of their overall offerings,” he adds.“When you start talking about the lesser-known open source products, then you can argue there`s less support. Conversely, the argument can be made that the technology is so open that you require less support.“If something goes wrong you have full access to the source code and the availability of the community that developed it. It does, however, remain one of the challenges to open source adoption, if only from a perception point of view,” Owens says.Another myth, common to users of desktop applications, is that extensive retraining is not necessary. Not so, says Obsidian`s De Wet, who adds that the misconception is also prevalent among Windows power users.So much for the myths, but what other, real, factors should proponents of open source software consider when they try to persuade companies to come on board?Mark Rotter, principal analyst for software, IT services, telecoms and networking at the BMI-TechKnowledge Group, believes it is essential they understand what their enterprise customers feel is important about software.Beyond bogusMost companies, he says, are firstly concerned with the financial benefits to be gained from implementing new software, be this in new income or improved cost and process efficiencies.Other factors to bear in mind include business benefits in terms of help with day-to-day business challenges, usability of the technology, and the introduction of predictability into environments plagued by human error.Rotter believes South African open source software vendors have not yet found a sound business model, but adds that the introduction of web services should see more rapid adoption, driven by Linux, over the next three years.And where`s the money to be made? In the short term, says Rotter, the main areas will be web content management, basic Linux implementations and support, and some consulting work.So, the penguin marches on, now with the support of many of the major vendors. Will it eventually become dominant? Probably, but that`s still quite a way off, particularly on the desktop. There are still a number of advantages that lie with proprietary software and, perhaps, it`s appropriate to give the final word to Microsoft SA`s Danny Naidoo.“Our software gives the customer several value benefits, such as our industry-leading R&D investment, market leadership, reliability, accountability and commitment to improving our service capabilities through an ever widening and improving partner base.” Government - the new disciple of open sourceIt is perhaps ironic in the light of the open source software movement`s “anti-establishment” roots that governments around the world, particularly in developing countries, are fast becoming fervent converts. The South African government is no exception.Open source and proprietary software have co-existed in government IT infrastructures for many years, but the new millennium has seen more and more countries adopting measured strategies that will free them from their reliance on commercial software vendors.At first glance, this can be explained by a desire to save costs and, in the developing world, foreign currency; but there are wider considerations. Research group Gartner has identified a number of issues behind this public sector flirtation with open source software:* A reaction to the cost implications of new, fixed-term software licence fees introduced by several large commercial software vendors;* Significant lobbying activities by commercial vendors that support open source software as a business strategy;* Anti-trust cases that have raised the profile of Microsoft as the software industry`s most dominant vendor;* The realisation by several governments that technology expenditures have not benefited local players, but rather foreign, mostly US-based, vendors;* Heavy investments in e-government have been made without ascertaining their sustainability over time;* Many governments are looking at open source software for the “perceived” savings and ease associated with its implementation, as well as its flexibility;* The widening of choice in “good enough”, supported, open source products.All this is true enough, but, argues Epi-Use`s Stephen Owens, governments of countries like South Africa, Peru and Brazil have taken the open source debate to a higher level. “Open source is viewed as a way to solve social and socio-economic problems and these countries have adopted a more philosophical approach.“In Peru, for instance, they`ve taken a constitutional standpoint on open source. They`re trying to ensure that information and data is available for the future and, therefore, believe they can`t be locked into proprietary software.“Also, this information has to be available to their citizens, who have to be able to access the data and be protected from any malicious intent. They have to have access to the source code to ensure there aren`t any ‘bugging devices` in their software. Out of this flows the demand for free software.”National interestGartner confirms that much of the proposed preferential legislation for open source software is fuelled by long-term strategic objectives, often expressed in terms of “national interest”.“Open source software is initially seen as a shortcut to technological independence in terms of satisfying internal technology needs with local skills and resources, while at the same time building a basis for future service and product exports,” the research house says.“For some of the emergent economies in Latin America or Africa, the ability to introduce IT more widely – in schools, businesses or the public sector – is limited, to a large extent, by up-front software costs. A preferential attitude toward open source software is justified in terms of narrowing the ‘digital divide`.”This certainly appears to be reflected in the South African government`s approach to open source. According to Minister of Public Service and Administration Geraldine Fraser-Moleketi, developing countries like South Africa spend billions on software licences. Billions of dollars in valuable foreign exchange that, she believes, could be used to build houses, roads, hospitals and schools.“Not only will we save taxpayers` money directly but, because government is the country`s largest IT user, its adoption of open source is expected to act as stimulus for adoption in other sectors.“Open source has the potential to improve the cost and speed of service delivery and thereby efficiency in the public service. It can also have a positive impact on quality. Existing open source software can be obtained at low expense and then redistributed widely without further payment for licences,” adds Fraser-Moleketsi.“This creates a potential for significant cost saving. Furthermore, because different vendors all have access to the source code, they can compete to sell their support services, exercising downward pressure on prices.”State Information Technology Agency (Sita) group CIO Mojalefa Moseki claims government has already made significant savings on licensing, software procurement, support and upgrades through the use of open source.Government, he adds, has also benefited from increased levels of security and improved response times. “Because the software is supported internally, software errors and support calls are responded to more quickly. We believe open source software is as good as, if not better than, commercially available software. In many cases, it is more stable and more reliable,” Moseki says.It is clear the expectation is that the absence of up-front licence fees and the availability of community-based support can lead to lower costs. However, Gartner warns that while open source software has some obvious acquisition cost advantages, adopters would be wise to investigate the longer-term total cost of ownership.“Additional outlays for maintenance and support may negate any licensing cost savings,” the research house says.Nhlanhla Mabaso of the CSIR`s Open Source Resource Centre believes proprietary vendors have unwittingly popularised open source software.“There`s certainly more to open source than licence fees: we have to focus on the total cost of investment. This must include the benefits of investing in the development of our people and our economy as opposed to a strict financial cost approach,” he says.Mabaso stresses that the South African government`s approach to open source is not prescriptive. Rather, he says, it is aimed at eliminating discrimination and levelling the playing fields.Prescription and Ignorance“There are usually two factors that limit choice – prescription and ignorance. In South Africa people were failing to exercise their right of choice because they were both ill informed and misinformed. You must remember it is often easier to opt for a well-established foreign vendor`s solution than expend the effort investigating less publicised yet viable alternatives,” he says.CSIR CEO Sibusiso Sibisi confirms that government should not be construed as campaigning against proprietary offerings. “Government needs to investigate open source software as an alternative. In some cases proprietary software may be preferred, and in other cases open source software.“Government also needs to encourage open source software development activities. It must not enter into a debate taking entrenched positions. But we do object strongly to people who offer proprietary solutions and criticise attempts to implement open source software solutions,” he says.Epi-Use`s Owens welcomes government`s ‘middle of the road` approach. “A government strategy like this stimulates the economic environment in that far more companies can now become players in the field. Black empowerment companies in particular stand to benefit greatly,” he says.There can be little doubt that government and the public sector is an ideal breeding ground for the expansion of open source software, but it must be remembered that the caveats that apply to its adoption in the private sector are equally relevant. An animal of a different kindUninitiated adopters of open source software, seeking to be free of the licensing burdens imposed by the proprietary vendors, confront an animal of an altogether different kind – the GNU GPL.Licences associated with conventional proprietary software are relatively easily explained – despite their length and complexity. They`re there to protect the developers` intellectual property, investment in R&D, market share and, to a lesser extent, ability to generate revenue.Licensing requirements of the open source movement, on the other hand, are driven by altogether more altruistic motives.In order to understand this, it`s worth taking a step back in history to 1984 when Richard Stallman, a researcher at the MIT AI Lab, started the GNU Project – the name being self-consciously self-referential, denoting “GNU`s Not Unix”.The thinking behind the GNU Project, and that of its umbrella body the Free Software Foundation, is simple – a belief that software source code is essential to advancing the discipline of computer science and, in order to encourage innovation rather than market domination, should be free.Stallman was not naïve enough, however, to dismiss the threat of companies snapping up the code for profit, and instituted the GNU General Public Licence (GPL) to prevent this.The GPL is designed to enshrine the freedom to distribute copies of free software, open up the source code to those who want it and allow the adaptation of the software, or the use of pieces of it in new free programs.It replaces the standard copyright agreement with what Stallman dubbed “copyleft”, an idealistic scheme that, while not prohibiting the sale of software, is aimed at preventing monopolism.Obsidian Systems` Anton de Wet explains: “The GPL can be described as a ‘viral licence` in that it ensures that everything you do has to be available to the community at large. It is one of the main reasons behind the rapid development of the open source movement.”The GPL is not the only licensing model covering open source software. According to research house Gartner, it is now generally recognised that a valid open source licence has to comply with the definition of Eric Raymond`s more utilitarian Open Source Initiative (OSI) (see in that it:* Allows free redistribution* Provides access to the source code* Allows modifications and the creation of “derived works”* Protects the integrity of the author`s source code* Does not discriminate against persons, groups or fields of endeavour* Applies automatically and without a signature* Does not “contaminate” other software.“In commercial licence agreements, the enterprise acquires only the right to use the software; it does not take intellectual property ownership from the software vendor. Likewise, with an open source licence, intellectual property ownership stays with the original holder,” Gartner says.The success of the GPL has made it the dominant open source licence model, but some – the Berkeley Software Distribution (BSD) licence for instance – are even more liberal.Under the BSD-type licence, users basically can do what they want with the code as long as they credit the original developer. Companies like web server specialist Apache believe this is the best type of licence for those looking to further extend an existing commercial project.Mix and matchUnder the BSD licence, a company can mix and match the software with its existing proprietary code, only releasing what it feels will further the development of its own goals.Gartner believes that enterprises must understand this crucial difference if they need to go beyond simply using open source software or making modifications for internal use.“This is particularly important for software vendors planning to extend open source products,” the research house says.Who you gonna call?Advocates of proprietary software are often quick to point out that an open source licence offers no protection in terms of warranties to the user. This is generally true and, in theory, makes it impossible for a company to sue for damages when the software breaks down.Gartner, however, points out that this should be seen in perspective. “Typically, the warranties in commercial software only guarantee that the software will ‘perform substantially in conformance with documentation`, with no express fitness for any purpose, and that ‘reasonable efforts` have been made to ensure it does not contain viruses.“These scant protections are also often limited to 90 days after receipt of the software. In many cases, the warranty has expired before the enterprises have even thought about deploying the software. Finally, the remedy, if warranty is breached, is usually limited to recovery of the licence fee.”(It`s worth noting that proprietary vendor indemnity against third party copyright claims and the like can generally be viewed in a similar light.)While the freeing up of source code to allow adaptation and free distribution of software remains anathema to many proprietary vendors, there appears to be some recognition of the value that can be derived from open source innovation.Sun Microsystems` Community Licence and Microsoft`s Shared Code fall into this ambit, but they cannot be described as open source licences. While they do allow some access to the source code, there is no free redistribution, use is restricted and no modifications or derived works are allowed.Gartner stresses, however, that this does not mean that they are better or worse than open source licences in general – just that they are not the same thing.The issues behind software copyrights, patents and licensing continue to be a source of heated debate between proprietary vendors and the open source community. Both sides` arguments carry valid points and potential customers of either would be well advised to study them and identify which better suits their individual needs.

Wait nearly over for MGX`s masochists

MGX`s executive chairman Peter Flack remains firmly optimistic despite a number of recent setbacks, not the least of which was the release of diabolical financial results for the half-year ended in December 2002. (For the record, MGX reported an attributable loss for the period of R457 million on turnover of close on R690 million.)While Flack, a respected turnaround specialist brought on board late last year, concedes the results are “shocking”, he points out that they reflect the state of the company in December (and “for quite some time before that”), and are therefore not unexpected.MGX submitted its final proposals on dealing with its massive R550 million debt to a consortium of its bankers, including CitiBank, BOE, RMB, SCMB and Investec, in mid-May and Flack believes the strict remedial measures undertaken at the company should swing the balance in its favour.Others are not so confident. Flack`s reputation notwithstanding, they question whether the banks will be willing to accept the risk of throwing good money after bad into an IT market that has yet to emerge from the doldrums.Comments Flack: “We owe the banks hundreds of millions of rands and, if I was in their position and thought I could recoup this money through liquidating the company, MGX wouldn`t be here right now. The fact is the banks won`t get their money that way and, indeed, stand to lose a substantial amount.“On the other hand, if we are right, and are successful in turning the company around, everyone will get paid and there will be something for shareholders as well. That`s the gamble.”It`s a gamble of quite some magnitude that makes it worthwhile analysing just how Flack intends to create the proverbial phoenix from the ashes of MGX in what would be one of the most astonishing turnarounds in South African corporate history. Rotten to the coreFlack insists the problems have never lain with the underlying subsidiary companies, but rather with what he terms “a mess” at the centre of the organisation – coupled with the huge debts incurred by the well publicised and “disastrous” acquisitions of Computer Configurations Holdings (CCH) and EC-Hold.“If you can ring fence that debt, or convert it to equity, or have a rights offer, the problem is solved. There`s nothing wrong with the underlying businesses, they just don`t make enough money to finance an interest bill of R8 million a month.”So what went wrong at the centre? Flack says that in all his years of experience he has never come across a company the size of MGX that was so lacking in the procedures and processes needed to run it properly.“It was difficult for us to understand how people could manage with so little information,” he says. (The less charitable might add that the results speak for themselves.)What information there was, was so poorly presented that Flack says the turnaround team had difficulty in identifying the company`s subsidiaries and had to boost its financial team considerably to even begin to understand what went before.“Before you can move forward you have to establish exactly what there is in a company and that`s been very difficult because of what we feel, rightly or wrongly, has been a culture of divide and rule at MGX – one of deceit, if not downright dishonesty,” he says.This culture apparently had permeated throughout the organisation, resulting in minimal answers to questions and much obfuscation.“I sometimes wonder it this was not attributable to fear on the part of the more junior people. Dishonesty often arises from acts of omission rather than those of commission.“So, for a long time, we had to deal with surprise after surprise, including the well-reported R9 million pension shortfall. Why, one has to ask, did it take five months for this to come to light? This is not the only ugly thing to emerge, but we`re a victim of the old cliché that when you`re in a swamp surrounded by crocodiles, first concentrate on the crocodiles.“That`s what we`re doing now, but when we succeed in getting the company into a steadier shape, probably by around this time next year, there will certainly be further investigations,” says Flack.His task has not been made easier by having to deal with five banks, each of which has different levels of debt, security and exposure. This said, it was quite an achievement by the parties involved to launch the R100 million life boat announced at the beginning of the year.“We put that package together at the same time we were trying to get to grips with the company and are currently in the process of trying to run with strategic planning and execution while negotiating the refinancing package. It`s not easy,” is Flack`s rueful comment. The sum of the partsThe approach to the actual turnaround of the business has been simple: the downsizing of the group into three core businesses – Metrofile (a document management and storage company), Graphics Data (a similar European-based operation) and Software Futures (a software development company) – and attempting to sell off the remainder, as well as some property assets, to help service some of the debt.The latter includes its Business Continuity Solutions (valued at around R85 million), Enterprise Solutions (valued at around R30 million) and Storage Solutions (we`ll leave that aside for the moment) arms. Flack hopes to realise some R148 million from the disposals, an amount he accepts is far below the levels required to make any significant inroads into the debt.So far, success in this endeavour has been mixed, to put it kindly. Enterprise Solutions has been sold for R19 million and heads of agreement are in place for the sale of Business Continuity Solutions, although it is unlikely that MGX will realise its own valuation.Plans for a management buyout of Storage Solutions hit a serious stumbling block last month following a report by Business Day that US storage equipment vendor StorageTek had cancelled the exclusivity of its distribution agreement with MGX and that several key staff members had defected to rival MB Technologies – allegedly for huge sign-on bonuses and grossly inflated salary packages.Flack immediately attacked MB Technologies CEO Leo Baxter for engaging in predatory business practises and pointed out that MB Technologies had put in a bid for the business just a week before. Flack`s ire aside, the loss of the StorageTek exclusivity, coupled with unconfirmed reports that the vendor is considering withdrawing its licensing from Storage Solutions altogether, is a major blow to any chances of MGX receiving significant value from the sale of its weakened subsidiary.A further irritation for Flack is the ongoing dispute over a longstanding Securities Regulation Panel (SRP) ruling regarding a payout to the minority shareholders of the aforementioned EC-Hold.“This has dragged on for close on four years now and we really don`t know how close to a settlement we are. Shortly after we took over operations we approached the SRP and said we disagreed with the previous management in that we held that minorities should be paid – the question, however, remains: which minorities?”MGX maintains that those shareholders that held the stock at the time of the original ruling and still hold it are eligible for payment, while the SRP maintains that all shareholders who held the stock at the time, regardless of whether they have sold it in the interim, should be recompensed. The situation is, in Flack`s words, “bizarre” and is unlikely to be resolved in the near future.An interesting recent sidebar to the EC-Hold question has been the sale of its software development subsidiary, Magic SA, to three individuals from previous management. The amount here (believed to be around R2 million) is inconsequential, but the individuals involved deserve a mention.The first two, EC-Hold`s Tsvi Appel and Amir Lubashevsky, are no surprise, but the identity of the third have raised some eyebrows. Former MGX CEO Chris Hills is the one to pop out of the Magic hat.Flack has, however, scotched market speculation that Hills might be making a comeback at MGX. “He accepted his severance package some weeks ago and, in any event, it is highly unlikely that either the board or the banks would countenance his return,” he saysWe`ve focused heavily on the negatives so far, but there are some positives. Firstly, of the three companies expected to make up the core of the new MGX, two (Metrofile and Graphics Data) are profitable, while Flack contends that Software Futures is close to break-even point. Promises, promisesThen there`s the potential of a black empowerment injection through Vulisango Holdings, a grouping that Flack maintains has an excellent reputation. “I have a long history of dealing with Vulisango and our relationship is based on trust. When dealing with Vulisango it`s a question of them being the door rather than being the conduit through it,” he says.It`s all very promising, but of no avail if the financing package does not come through. Flack confirms that clarity should be forthcoming this month and that, if the green light is given, actual implementation should be completed by mid-September.“Customers and suppliers will then be able to confirm, for the first time, that MGX has survived and we will have to go through the next round of strategic planning and budgeting, followed by a thorough clean-out.“Then will be the time to look at appointing a new board and finalising our strategy to build the new company into a concern turning over between R900 million and R1 billion, with profits after interest and tax of around the R100 million mark,” he says.The timeline Flack has set himself for this is between two and three years and, if successful, he could certainly play a role in reversing what has become the all too familiar scenario of hitting the liquidation button when local companies run into trouble. It`s going to take some doing though.On the question, admittedly somewhat tongue in cheek, of whether he would advise existing shareholders to hang on to their equity Flack concludes: “I think if you`re still a shareholder, you`re a masochist of biblical proportions, but seeing as you`ve suffered all this pain – and you`re not a widow or an orphan, you might as well hang on to them now.”Philosophical words, indeed.

Turnaround… or bust

“A moment on the lips, a lifetime on the hips.” Such is the lament of many a weight-watcher, but the adage is equally applicable to many, if not most, of South Africa`s listed IT groups. As sweet as their acquisitions may have tasted during the late nineties boom, their buying binges have left them with excess fat and an unsatisfied hunger for sustainable profits.Over the past three months, IT groups have swamped the investment community with profit warnings that indicate that the sector is some way off a recovery, even after several years of upheaval, consolidation and restructuring. Among the most notable are trading updates from companies profiled in the pages that follow – AST Group, Global Technology (Glotec), MGX Group and Faritec.The technology industry has evidently not yet paid in full for the excesses of the good times when IT companies chased revenue growth and market share at the expense of long-term profitability and balance sheet strength. There`s still too much competition and excess capacity in the market and not enough corporate discipline, a fatal mix in such a poor business climate.As much as the over-traded local IT industry is crying out for consolidation, most of the groups profiled here are in no shape to buy out other companies, embark on ambitious mergers or to be acquired themselves.Indeed, most of these companies are in varying stages of the process of divesting themselves of their own non-core and poorly performing assets. AST, MGX and Glotec are too big for any but the sector`s true giants (comparatively speaking) to even contemplate swallowing in their entirety.The giants in question, Comparex and Dimension Data, have enough troubles from their own boom-time acquisition sprees to be interested in taking one of these problem children into the fold. One wildcard is the Altron Group, which could afford to buy practically any company in the sector should it wish to.The two smaller companies, Faritec and Vesta, are further down the line in their turnaround strategies and could form attractive acquisition targets. Faritec has a strong balance sheet and is in good health after adopting a conservative approach to growth in the last financial year. Consolidation will start to happen this year, but only a small scale.One likely ingredient for any corporate action will be black empowerment. Those empowerment groups with money, good contacts in the government and experienced leadership will have their pick out of a range of businesses, fresh from a fitness regime, but still cheap.Exploding the services mythThe woes at AST and Glotec explode a myth that practically everyone has subscribed to: that ICT services make a lucrative, high-margin business that will prove to be the long-term salvation of the industry. The reality is that offering services is messy and complex, because it is all about managing people.It is desirable, of course, to build a stream of annuity income from services contracts, but these deals often require some upfront investment before they become profitable. Services businesses are also difficult to scale according to the needs of the market. Companies generally end up with either too few people to handle the work in their order books, or with too many expensive consultants and techies sitting around with idle hands.Trying to grow a sustainable and profitable services business on an accelerated timeframe is rather like two women trying to have a baby in four and a half months – as Pat Moffett, Glotec`s marketing director, colourfully describes it.Perhaps the most important challenge that each of these companies face lies in restoring the market`s confidence in their ability to deliver good returns. As the survivors of an extended shakeout, they are among the better companies to list in the 1997 to 1999 technology boom. It would be uncharitable to be too harsh on these battered companies, since the mistakes they made were common at the time and unlike many they are still around to fix them.Most of them have some sound underlying assets and good market share in their core businesses. They now have to prove that they can leverage these to produce the hard cash flow and dividend returns that investors look for in a bear market. When the centre cannot holdby Lance HarrisMGX`s new chief took the wraps off his tough plans to restore order at the troubled group in a progress update at the end of January. But he concedes that his steps may not be enough to save the group from liquidation.After a two month review of operations at MGX Group, Peter Flack, the company`s new executive chairman and interim CEO, had little good news to offer shareholders in a progress update.At best, Flack – who was appointed late last year to drive the group`s turnaround – will be able to turn the group into a more profitable but much smaller business. At worst, the group could still be wound up to pay off its creditors.The group`s problems had originated at its centre, where it had suffered from some serious reputational setbacks as well as a general lack of leadership, direction and control, says Flack. “All the underlying subsidiaries are cashflow-positive, but at the centre we found a lack of basic disciplines”, he says.Steps have been taken to tighten the lax accounting practices and financial reporting systems that MGX used in the past.The group has started negotiations that could result in the sale of its Business Continuity and Enterprise Solutions divisions. These two businesses are largely made up of interests that MGX gained along with its acquisition of CCH. The CCH deal was meant to move MGX into the IT mainstream as a major player, but has instead proved to be its undoing.Digital and physical content management business Metrofile will now form the bedrock of the restructured MGX. This business has a stable track record and an enviable list of long-term services contracts with public and private sector clients.“Ideally, we want to build a group that has a good mix of high-growth businesses and mature ones that produce a steady stream of annuity income,” says Flack.The most formidable problem that MGX faces is a R550 million debt pile, largely a legacy of its acquisition of CCH in 2000. The group will probably not be able to pay the debt in full from the proceeds of the planned disposals, says Flack, and will still battle to service its debt burden out of cash flow from the streamlined group.If that proves to be the case by June this year, MGX may have to consider a rights issue, or the disposal of more or even all of its remaining assets.The group has also suffered a serious knock to its reputation after a series of corporate governance snafus under its previous management, including former CEO, Chris Hills and former executive chairman, Ronnie Price.These included an acrimonious public split with empowerment partner Motswedi and a long-running battle with the Securities Regulation Panel after the panel ruled that MGX and Ronnie Price`s family trust had worked in concert to buy EC-Hold shares rather than making an offer to minorities.Restoring some faith in the group`s name among investors and analysts will be particularly important if MGX does decide to go to the market looking for more money later in the year.Flack has taken a more accommodating – some may say pragmatic – stand on the EC-Hold debacle than did his predecessors. They were determined to defend the SRP`s ruling in court. He says that MGX has approached the SRP to try and find a more amenable way of solving the dispute. “We are waiting to hear from them how we should settle, when and for how much,” he says.MGX has also announced that it has entered into negotiations to a sell a stake in three of its subsidiaries to black empowerment investors, which may help to make amends for the Motswedi situation.MGX`s results for the six months ended December 2002 are expected in the last week of March. The group has already cautioned shareholders that they are expected to be “significantly worse” than the numbers for the same period of the previous year.The group says this can be blamed on a difficult trading environment, once-off restructuring and retrenchment expenses, increased financing costs due to higher debt and interest rate levels, and operational disruption caused by the aborted sale of MGX`s wholly owned subsidiary Software Futures to Paracon Holdings.Strategic and action plans as well as budgets for a reconstituted MGX are due to be submitted to the board in June, by which time Flack hopes to have completed negotiations for the sale of certain assets and resolved the EC-Hold issue.By the time Brainstorm went to press on the day Flack issued his progress update, the group`s share price had plummeted from around R2.50 the previous day to R1.50.MGX faces either a dramatic turnaround, or going bust. And investors clearly aren`t too confident. Regrets, we`ve had a fewby Lance HarrisGlobal Technology has taken desperate steps to correct the excesses of the boom times.Global Technology has the dubious distinction of being the worst performing share on the IT sector of the JSE Securities Exchange during 2002, plummeting from 95 cents at the beginning of the year to 10 cents by the end. The group is now moving swiftly to restore investor confidence after a year of deep losses.For the six months ended 30 June 2002, Glotec, which is active in financial services and business intelligence software, development and related services, reported a net loss of R7.7 million on turnover of almost R220 million, compared to a net profit of R92.9 million for the same period in the previous year. A recent trading update informs shareholders that the group also expects to record a loss for the full year ended 31 December 2002.Higher interest repayments, disappointing performance from Swiss associate company Temenos and foreign exchange losses after the strengthening of the rand all conspired to turn 2002 into a rough year for the group, says Glotec`s marketing director, Pat Moffett.“We got caught with our pants down when a number of things happened in relatively quick succession,” admits Moffett. “We probably didn`t react quickly enough – there are lot of excesses and inefficiencies that one doesn`t notice in a business as long as the good times last.”In mitigation, Moffett points out that 80 percent of Glotec`s costs lie in its people because it is a software development and services group that depends on its intellectual capital. “We couldn`t hack costs willy-nilly because we could have ended up cutting away at our lifeblood,” he says.Nonetheless, the group has put all of its expenses under close scrutiny and hopes to save R30 million in costs in the next financial year. Glotec has reduced its headcount to 600 from 700 a year and a half ago, streamlined processes and focused on customer satisfaction with the aim of making every site referenceable. It has also increased its focus on selling its locally developed insurance and banking software, particularly into international markets.Headaches have emerged at Glotec`s Australian subsidiary, which is listed on the Australian stock exchange and accounts for around 15 percent of the group`s profit and turnover.Although Glotec management has tried to downplay the troubles in the region, the Australian business is also expected to report a loss for 2002 because of its failure to secure a major tender. The company will tighten its control over the business and restructure it to avoid a repeat performance.Glotec is also exploring the possibility of buying out the minorities that hold a 30 percent stake in the business, although Ray Leonard, Glotec`s executive chairman and CEO, stresses that no decisions have been taken yet.In Temenos we trustWhile Glotec has taken steps to correct the problems in the operations under its direct control, its future is closely linked with that of its associate company, Temenos.Not only does Glotec own a 15 percent stake in the Swiss-listed group, it is also a major reseller of Temenos` suite of financial services software into Africa and Australasia. For the first half of 2002, the contribution of Temenos to Glotec`s profits was only one twentieth (R692 000) of the R15.8 million figure for the same period the year before.Temenos listed on the Swiss bourse in July 2001 at CHF23 (Swiss francs) and saw its share price hover at around CHF15 for a while before plunging down to CHF1. At the listing price, Glotec`s stake in Temenos was worth around R1.2 billion, but it is now valued at somewhere close to the R120 million Glotec paid for it at the current share price around CHF2.40.Given Glotec`s high gearing, one would imagine that it would make sense to sell Temenos shares to strengthen the balance sheet rather than embarking on another rights issue, as planned. In addition, some investors have long been anxious to see Glotec unlock value from Temenos, and their flight from the share when it became clear that this would not happen anytime soon has contributed to the weakness of the counter.But Glotec plans instead to hold onto its stake in Temenos in the hope that its value will eventually rise, says Moffett. The group`s patience with Temenos may yet be rewarded since the software company is in better health than its financials for last year indicate.Although Temenos` financial performance was less than stellar for most of 2002, the company was one of the star performers in the global banking software arena in the late nineties. Globus, the flagship Temenos product, was rated as the world`s top selling in its class for the fourth consecutive year by the International Banking Systems Review, and Temenos indicated in a January trading update that it took a stream of new orders for the fourth quarter of 2002.Even without this improvement, the cost cutting and restructuring should put Glotec back in the black for 2003.“I`m glad that 2002 is behind us. It was a disastrous year for IT, but for all that, the company is in better shape than it has ever been,” says Leonard. The pipeline for 2003 looks strong, with hopes that many of the deals that were postponed last year should come through, he adds. Glotec`s share price was stuck at around 16 cents at the time of writing, indicating that investors still need to be convinced by the group`s story.“If we were following a script, if what we had done had been done before, it would have been much easier. Instead, we`ve been doing it our way – us and Old Blue Eyes,” says Moffett. There`s one importance difference, though: despite regrets, of which it has a few, Glotec is not yet ready to face the final curtain. Vesta chooses survival over hypeby Jeff DelaneyConsolidation, rationalisation and a return to key business principles are turning the tide at embattled software developer, service provider and e-learning company Vesta Technology Holdings.Vesta`s CEO Frederick Morrison has watched the micro cap`s share price plunge from 30 cents a year ago to a paltry two cents as we go to press.The company is a fairly typical casualty of the dot com period. It built up capacity, banking on the future of e-commerce, e-enablement and e-business, and saw this investment go down the tubes (to use Morrison`s words).A few injudicious acquisitions, including the Fund Mator group of companies, did little to help the cause.The trick now is to recover this cash, which is difficult when the original basis no longer exists.Vesta`s dismal performance is not unique in the local and international IT sector, however, and the company appears to have been relatively prompt in taking remedial action.“The last couple of years have been tough in the market and many companies have been through the pressure cooker,” concedes Morrison ruefully. “What we have realised is that you cannot change the underlying principles of good business. Hits and eyeballs don`t translate into cash and that`s something the ‘dot bomb` period brought home.”Vesta, he adds, is fortunate in that it was founded before the boom period, cutting its teeth in a buyer`s market, enduring longer sales cycles and focusing on the need to build lasting relationships with customers. All this went out the window as the IT bubble inflated and companies profited on a wave of unrealistic hype and expectation.“In a way, perhaps, Vesta did not capitalise as much on the hype of the period as we could have, but there was always the nagging feeling that something was missing. That`s with the benefit of hindsight and, in saying that, there`s little doubt that a lot of people sacrificed their business integrity for quick profit at the time. In my experience, the dot com era saw IT ethics sink to their lowest ever,” Morrison says.The reversal of the market had far reaching implications for the sector as a whole, and survival as opposed to mega growth became the overriding concern of most companies.“By the end of 2001, we realised we had to make some tough decisions – take a close look at our company and restructure. We also realised that in the prevailing market it was impossible to do anything to counter a falling share price. There is just no way a micro cap is able to change world sentiment.”Tough medicineVesta`s solution was severe. The company cut back on staff from a peak of 120 to around 60-odd today, but Morrison believes it achieved the optimum swing that will allow it to avoid further rationalisation going forward.“In addition, we took a conservative look at our figures and our projections. Ad hoc sales were discounted completely, the idea being to ensure that contractual business at least equalled the running costs of the company. We have achieved this through returning to our traditional business model of focusing on margins as opposed to revenue.”That said, Morrison is wary of making growth projections, stressing that Vesta is still in a consolidation phase.“We release our interims at the end of February, which will give us an indication of how successful the turnaround has been and I`m optimistic they will show us moving from the loss making situation of last year. I`ll be happy if we can show a positive balance by year end,” he says.The last year has seen a rash of de-listings of small caps, and Morrison is ambivalent about Vesta`s future as a listed entity.Open options“I don`t believe any company in our sector, from the Didatas to the small caps like ourselves, is generating shareholder return at present. The reality remains: how can you fight negative world sentiment and institutional disinterest? The fact is that our listing is not core to our survival as a company.“Also, de-listing purely as a means of avoiding public scrutiny cannot be a good thing. But the JSE is not returning value at the moment, and, if that is your only criteria, then being listed is worthless. We`re keeping our options open.”What is not an option, stresses Morrison, is a management buy-out concentrating on retaining the best and discarding the rest. Management, he says, is stable and committed to the turnaround. “I believe the shake-out the market has undergone is a good thing. There is no doubt the industry was both overvalued and overtraded. There`s no such thing as funny money any more. The key is hard work that translates into real returns.Vesta has endured and appears to have survived its shake-up, and while Morrison concedes it could have been done a couple of years earlier, it`s now over.Has the company really turned the corner? Given the vagaries of the market, that`s anyone`s guess. Only the numbers will tell. A twist of sobrietyby Lance HarrisIt`s a familiar tale: company hits cash crunch after growing too quickly and greedily for its own good. But AST`s new management team hopes it can provide a happy ending for the group`s saga of corporate excess.The AST Group`s share has long been priced for outright disaster, despite repeated assurances from its management that everything was under control. During 2002, the counter went into free-fall, from R2.30 at the outset of year to less than 30 cents by the beginning of December. Only then did the group finally admit that it was in trouble.In a profit warning issued then, AST informed shareholders that the group expects to record an attributable loss for the six months ended December 31 2002 and fingers once-off restructuring charges, a tight competitive environment and high interest costs as the reasons for its difficulties.Although the IT services firm issued a trading update in October to tell the market that it was suffering because of poor market conditions, it underestimated how deep its troubles were and how expensive it would be to correct them.Non-executive directors at AST and at Kumba Resources (which is a major shareholder in the group) instigated a set of sweeping changes to the company`s strategy and operations, starting with an overhaul of its board of directors that was announced in early December.Jan van Zyl stepped down as CEO, apparently in a negotiated resignation – although he was said at the time of his departure to have been struggling with a personal injury. John Miller, AST`s sales director, took the reins of the group as CEO, and executive chairman Gerrie de Klerk`s position was moved to a non-executive position.Miller, a 62 year-old veteran of ICL and Unisys, says that the market can expect to see a more conservative approach from AST than it was accustomed to in the past. He promises that his focus will remain on increasing margins and profitability rather than on chasing revenues – which stood at a formidable R2.2 billion for the financial year ended June 2002.Miller`s sober approach is a stark contrast to that of De Klerk, the gregarious eternal optimist who engineered the group`s rise from a tiny software reseller into an IT services giant. Although De Klerk succeeded in his goal of growing AST into one of South Africa`s largest ICT services groups, his strategy took a heavy toll on the balance sheet, which reflects high debt levels.AST has two immediate priorities: strengthening its balance sheet and improving its liquidity. To those ends, the group has announced a set of far-reaching initiatives and strategies, ranging from simplification and restructuring of its operations through to a business improvement programme designed to hike margins and increase efficiency.AST has acquired numerous companies over the past few years, straying from its core focus and introducing complexity into its structure, says Miller. The group also didn`t act quickly enough to integrate these businesses and reduce the overheads that they brought with them. “You don`t need as many HR directors and FDs and MDs as we took on with our acquisitions,” Miller says.Around 90 percent of AST`s business is fundamentally healthy and continues to generate cash each month in line with expectations, he adds. The group has a solid base of annuity revenues from outsourcing contracts and joint ventures with the likes of ABSA. Recently, it secured a two-year extension of its outsourcing contract with flagship customer Iscor – a deal that is currently worth more than R240 million a year.“The good bits need to remain very focused on what they are doing. The bits that are performing badly or that are non-core will be disposed of over time,” says Miller.Shedding skinMiller declines to name the operations that AST plans to get rid of, but says that the process will involve the sale of certain businesses and the closure of others.In some cases, AST has started negotiations with potential buyers and has offers on the table. Miller hopes that the group will benefit from a cash injection from some of those planned transactions.Costs and efficiencies at the core businesses are also under the microscope because cost inflation is running ahead of price increases in the current operating environment.AST has already laid off some 250 staffers, and plans to retrench a further 150, or possibly more, in the coming months. AST has wielded its axe in every department, sparing only those divisions that produce billable work.AST has not given up on its plans to bring a black economic empowerment partner on board to strengthen its position in the public sector market and hopefully inject some capital into the business. Miller says that AST has identified some potential partners who have money on hand, although it has yet to receive a cheque.The group says that it is solvent despite its current woes and expects the full year to show a profit before amortisation of goodwill for past acquisitions. The new management is realistic enough to note that its drive to improve margins and contain costs will be a slow process that will only bear fruit in financial 2004.At the time of writing, AST`s share price hovered at around 25 cents. Investors, too, seem to believe that the road to the turnaround will be a long one for AST. Back against the ropesby Lance HarrisFaritec Holdings has shown that it can claw its way out of a tight corner. Now it needs to convince the market that it is on track for long-term sustainable growth of both profits and revenues.Faritec Holdings impressed the IT industry with a dramatic turnaround during financial 2002, but a combination of investments in new businesses and tough market conditions are expected to take their toll on the bottom-line in the first half of the new financial year.In a trading update in November, the group informed shareholders that it expects its results for the six months ended December 2002 to be below those for the same period in 2001. The main culprit for the disappointing performance is the group`s Enterprise Solutions subsidiary, which suffered from slow hardware sales during the second half of calendar 2002 as South African companies continued to hold back on infrastructure investment.This product-oriented business, largely made up of IBM server and storage sales, currently accounts for more than half of Faritec`s revenues. However, Faritec is also emerging as a significant IT services player with an outsourcing business worth more than R100 million a year.Like many of its peers, the group sees services as its long-term future.CEO Simon Tomlinson tells Brainstorm that a decision last year to decentralise Faritec`s operations and create three autonomous subsidiaries has positioned the group to grow its services businesses more aggressively.The three new companies are Faritec Enterprise Solutions, Faritec Inter-Company Processes (a B2B e-commerce initiative) and Faritec Strategic IT Services.The new structure is just about bedded down and will hopefully stimulate growth by giving each business more flexibility in setting strategy and pursuing opportunities.“In the past, we had a small base of decision-makers. Now, we have three subsidiaries with their own boards of directors and control over their budgets, HR, IT and marketing,” Tomlinson says.Surprisingly, the reorganisation has brought costs down slightly rather than increasing them. Faritec now runs a lean head-office structure with only five full-time employees, including an HR director who will most likely take up a post at one of the subsidiaries.Faritec`s big focus for the coming months is on growing its high-value services business with the goal of lifting its operating margin from the 6.3 percent of the last financial year to 10 percent or more in three years time. As part of that strategy, Faritec has invested heavily in creating new business intelligence, security and business process outsourcing initiatives.Faritec is a late entrant into these already fiercely contested markets. However, Tomlinson hopes that the group`s approach of offering business intelligence and security solutions as a managed service will set it apart from the pack.But this strategy carries risk and is only likely to yield results in two or three years time. The South African market has yet to warm to the concept, whether it is labelled as managed services or application service provision or hosted services.Empowerment credentialsTomlinson lays at least some of the blame for slow sales in the Enterprise Solutions division at the door of the group`s lack of a black economic empowerment (BEE) partner.The right empowerment credentials are critical for doing business not only with the government – a market segment where Faritec has never been particularly active – but increasingly also with the larger blue-chip corporations, as Tomlinson notes. After a long search, Faritec has identified a suitable empowerment partner and hopes to conclude its negotiations with this party by the end of March.“I`ve spent the last 12 months looking at BEE and we`ve spoken to a number of potential partners. A number of problems keep arising – particularly with initiatives and investments that conflict with our business,” says Tomlinson.With a share price that languished at 36 cents at the time of writing, Faritec seems like an attractive acquisition target or a prime candidate for a delisting from the JSE. The group is open to both of these possibilities, althoughh it will only consider proposals that enhance shareholder value, claims Tomlinson.“There will be some degree of consolidation in the next 12 to 24 months. The market is over-traded,” says Tomlinson. “There are two ways that we could participate in the process – we could merge with or acquire one or two of the other parties out there, or we could be acquired by another company.”Faritec`s board has also debated the possibility of delisting from the JSE, but for now that is not an attractive option because many shareholders bought into the group at higher levels.“I don`t see this as a strategic decision – business goes on either way. However, it [delisting] doesn`t make sense at a share price of around 40 cents because of the premium we`ve had to pay for the shares,” says Tomlinson. “At around R1 or R1.50, it may become attractive and if the right proposal comes along, we`d consider it.”Tomlinson says that the group has kept a lid on its costs and hopes to see a recovery in IT spending during calendar 2003, although he warns that he expects trading conditions to remain difficult for some time yet.Still, the challenges that Faritec faces today are relatively minor compared to the problems of two years ago when the group called off two major acquisitions, retrenched 10 percent of its staff and battled with free-falling margins and revenues. Among the groups profiled in this feature, it is one of those best positioned to bounce back when the market turns.