SAP and Microsoft, Watch Your Back

The outlook for retailing may be dicey, but Gothic Cabinet Craft, a furniture chain with 40 stores in New York and New Jersey, has one variable under tight control: tech spending. It just installed a new computer system equipped with Google (GOOG) Apps, a collection of software, including e-mail and word processing, that runs on a Google data center rather than on Gothic's gear. The cost: just $32,000 for the new PCs and zero for Google Apps. The alternative was shelling out more than $100,000 for computers and Microsoft (MSFT) software. "We wouldn't have been able to do anything if the Google service wasn't available," says Aristidis Zaharopoulos, the company's vice-president.

The chain is among the more than 1 million companies using Google Apps. Large companies are on board, too, including Genentech (DNA), with 17,000 employees. Many customers pay nothing, while others spend $50 a year per user for advanced features.

As the U.S. enters what appears likely to be a painful recession, a major shift is taking place in how businesses assess technology products. They're under terrific pressure to cut costs. According to a newly revised forecast from market researcher IDC, growth in U.S. tech spending will decline to 0.9% in 2009, down from a previous forecast of 4.9% growth. But rather than just slice budgets across the board, many companies are switching to a handful of new technologies that save them money.

These technologies existed during the last recession, but they were immature. Now they're established, and the downturn seems likely to hasten their adoption. Chief among them are software delivered over the Internet, known as cloud computing, such as Google Apps; so-called virtualization software, which allows companies to run multiple applications on a single server computer; and open-source software, which is created collaboratively by multiple companies and is typically less expensive than the traditional kind. "These are tools that management can use to get through a crisis," says Michael Hickey, president of the Business Insight Div. of Pitney Bowes in Stamford, Conn., who just bought software from on-demand supplier Salesforce.com.

STRATEGIC SHIFT

A lot of large companies are tapping these technologies to good advantage. Walt Disney (DIS), for example, uses Linux open-source software on its animated movies.

This strategic shift could alter the competitive landscape of the tech world. Among the vulnerable are leaders such as Microsoft and Germany's SAP (SAP), a maker of software for corporations. Potential gainers include Google, Salesforce.com (CRM), and VMware (VMW), the top maker of virtualization software. "Microsoft would probably like the world to stop rotating. It's responding, but Google is leading the way with technology that's cheaper and quicker," says George F. Colony, president of tech market researcher Forrester Research (FORR).

Microsoft and SAP insist they're not in danger. Microsoft says it's quickly moving applications online, gaining on VMware in the virtualization market, and even using some open-source software. "We're going to gobble up share," predicts Bill Hilf, general manager of Windows server marketing. SAP argues that in times of uncertainty, most businesses will stick with suppliers they know. "If you're not a strategic partner, God help you," says William R. McDermott, SAP's head of global sales and service.

Neither company can afford to be complacent. More than a dozen corporate tech bosses interviewed by BusinessWeek recently say they're making or considering shifts in their tech-buying strategy. Suppliers that don't adjust will be the worse for it when the economy finally recovers.