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Back to Fundamentals
In 2000, software application spending began to slow and by the end of the year it had almost come to a halt. As some panic spread from boardrooms to software vendor IPO planning meetings, it was clear a big, unforgiving correction had arrived. And as the ball dropped in New York City on New Year’s Eve, so did 2001 technology spending expectations.
Why were so many taken by surprise? Well, put simply, the impact on IT spending behavior of a few important underlying trends was underestimated or overlooked. These trends included a growing disillusionment with eBusiness, the rise of network centric computing, and the end of a major application buy cycle.
The first, the disillusionment, was set in motion by the realization that the promised advantages and potential of eBusiness could not be realized with current day infrastructure and integration models. That realization triggered a decrease in application buying and an increase in infrastructure buying, causing the entire market to undergo a significant sudden shift in spending patterns.
The second trend was the rise of the next generation computing model - network centric computing. Its burgeoning adoption is hastening the demise of the client/server computing era. Increasingly client/server architecture is seen as a significant barrier in realizing computing and ‘work’ models that demand widely distributed information and applications architectures that are aware of the ‘state’ of the underlying network and vica versa. Network centric computing is driving new application development principles and processes that include content management, multimedia, portability and componentization. This has led many innovators and early adopters to recognize that their IT and application strategies needed a major overhaul in order to remain competitive in the future. Components, agents, and intelligent middleware technology, while nascent, have sufficiently matured to the point where innovators are now doing assembly and testing of new software architectures that are network aware and integrate with communication network management systems for priority and performance optimization.
The third trend, end of a major buying cycle, was missed by many vendors and investors. When the accelerated IT demand experienced in the late ‘90s caused by the Y2K scare and the B2B craze reached its pinnacle, companies shifted their focus from buying, to absorbing, the myriad of purchased technology. The overriding impact of this trend was that IT buyers changed their technology buying behaviors to what can best be described as ‘back to fundamentals’. Buyers are now cautious of new technology that claims to be ‘next generation, end-to-end’ something or other. They are still trying to rationalize what to do with the ‘cool stuff’ they bought in the past two years upon which some of their eBusiness initiatives were launched.
While we cannot ignore the fact that the overall USA economy is cooling, let’s separate that from what is happening within the IT sector. Software is one of the most critical and value added elements of the total Information Technology value chain. While spending patterns of the past three years were ‘extraordinary’, the fact is that IT spending will continue to be driven by eBusiness, supply chain, and increasingly by infrastructure initiatives. And although overall IT spending is expected to slow in 2001-02 to more ‘normal’ software spending levels ‘in line’ with historical 10 year spending averages, as we look forward in time, software will account for an increasingly larger percentage of the overall IT market.
The impact of the slowing economy and more normalized software spending levels has been a seemingly sudden reversion back to fundamentals. IT organizations, under sudden budget pressures, have had to change how they acquire new software technology. They have shifted from experimenting with new ways to solve emerging challenges to, now, implementing proven solutions that demonstrably address discrete business issues. And they want these proven solutions from vendors that both deliver what they promise and are committed to making their customers successful. In many respects, IT organizations have re-adopted the traditional ‘define-evaluate-select-pilot-implement’ application buying processes that were fundamental practices in the ‘80s and early ‘90s.
Many vendors in the industry did not hear the slowdown message or plan for it properly, and therefore were caught by surprise. Their reactive responses have ranged from drastic reduction-in-forces and spending freezes to knee jerk retooling of their positioning. However, some software vendors were adequately prepared for this slowdown. These are the vendors that detected a significant change was ‘in the air’ by mid to late 2000 and developed a lucid, real world understanding of both the future impact on their industry and their capabilities to leverage these trends into opportunities. Not rocket science, just good planning by smart management.
For all software vendors, these back to ‘fundamental’ times require a different market strategy than what has worked in the last few years. Instead of building mind share ahead of market share, software vendors now need to more clearly focus on the tangible benefits they deliver, relative to the business problem they are solving. Vendors with proven products addressing well understood business problems have a clear competitive edge during a ‘fundamentals’ period.
A winning market strategy for this new ‘period’ then, is centered on positioning the company in the target markets’ minds as the proven provider of sought benefits to specific business problems and which enables the customer to achieve critical business objectives. Sounds familiar? But now this means having a stable, proven product (read - not concept) with solid references (read - product is in production) that are brand names within the target market’s industry. And sold by sales channels that can clearly and consistently communicate the value proposition while successfully demonstrating the product (read - not PowerPoint demo), and do business the ‘old fashioned’ way - based on trusted, personal relationships oriented on ensuring their customers’ success by consistently delivering value.
Now that the slowdown has settled in, what can vendors do? The best thing is to stop reacting. Instead, quickly build an assessment of the current market landscape, and the emerging 12-month technology and target market trends, followed by a Marketing Audit to identify areas that need to be reviewed or reworked in order to best deliver customer value. From there determine how all this impacts your strategy and plans. The analysis may indicate big changes in your strategy, or it may justify your current course. Whatever the answer is, you will know you are in sync with the return to fundamentals.
Although the ‘return to fundamentals’ coupled with the technology markets’ shakeout will continue to have a consolidating effect on the market, it does present a perfect opportunity to plan and position your company for the new realities. Indeed, getting everyone back to the fundamentals of enabling business through technology can establish the essential foundation for the next technology wave and enterprise software buy cycle.
Christine Crandell is president and co-founder of NBS/New Business Strategies, a market strategy firm.
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