Milestone Group Quarterly: October 2003
Articles
OpEd:
John Hagel on the Tech Recovery
Author of Out of the Box, NetGain and NetWorth, contributor to many Harvard Business Review articles, former high tech practice leader at McKinsey & Company, and respected technology and management guru, John Hagel reframes the question "when will IT spending increase?", and asks tech companies themselves to re-think how they sell.
As tech stocks continue their upward march, nervous analysts begin to focus on what will be required to increase tech spending. Tech stock prices have risen far more rapidly than tech company revenues. Unless tech spending significantly rises over the next six to twelve months, we are likely to see another tech stock slump.
Much of the current stock rise appears to be a response to aggressive cost cutting efforts by tech companies to boost near-term profits and to a general improvement in the economy. Cost cutting has been essential, but it delivers only a one-time benefit. On the surface, it appears reasonable to assume that a general economic revival will lead to increased tech spending. And yet, do we want to bet our portfolios - or our companies - on this assumption? What if something different is going on, something more structural than cyclical?
Often, insights (not to mention accurate answers) come from reframing questions. Maybe the right question is not "when will tech spending finally revive?" What if we were to ask, "what must technology companies do to respond to changing customer needs?" That shifts the focus to the technology companies themselves.
Two things happen. First, we begin to look more closely at what technology companies can do to counter, or at least dampen, the recent drop in technology spending, rather than simply waiting for customers to begin buying technology again. Second, the focus shifts from trying to predict an uncertain future to taking a more active role in shaping the future.
From this perspective, we begin to see that the current gridlock in technology spending may in fact be due to a growing gap between what customers urgently need and what technology vendors are selling. What do technology customers need? They are looking for technology that can be bought in small increments with modest investment and that can deliver tangible business benefits (especially operating cost and asset savings) with short lead-times (six months preferable, twelve months at the limit). In short, they want a compelling, short-term business case focused on helping to take cost out of operations.
What are technology providers offering? They continue to offer grand visions in the quest for mega-sales. They promise fundamental new architectures, massive business change and untold wealth for those brave enough to march down the long path ahead. After all, you can’t change the world overnight.
Here’s the disconnect. Grand visions sound expensive. Implementation tends to be very complicated with lots of risk of failure. If that weren’t enough, they also require long lead-times with difficult to quantify pay-offs. This is exactly what executives don’t want right now.
There’s another disconnect at work as well. The focus of decision-making in technology customers is shifting. CIO’s and the IT departments used to be the key decision-makers. Increasingly, CIO’s are becoming more risk averse in purchasing technology while non-technology executives (especially Chief Financial Officers and senior line managers) have become more involved in making major technology purchase decisions. These executives are the least receptive to grand visions and most demanding in terms of clear and compelling business cases. Yet, technology vendors continue to focus on the CIO and IT departments. This is where they tend to have the best relationships and where they have had the greatest success in the past.
Of course, many factors contribute to the current downturn in technology spending. But, based on my discussions with senior executives of large companies, the disconnect between what customers need and vendors sell looms as a significant factor. Companies are buying technology, even relatively new, untried technology, but only if they can be convinced there is a compelling short-term business case. This in fact is driving the rapid pace of early adoption of Web services technology. Web services are being deployed in production environments very rapidly in a broad array of industries. For a discussion of the economics driving early adoption of this technology, see my new book Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow through Web Services.
Yet, this early adoption occurs almost in spite of the efforts of the technology vendors. Both large and small vendors are spinning elaborate visions of dynamic composition of applications using Web services technology and the advent (finally) of the virtual corporation. Rather than paying attention to these visions, line executives are beginning to see the opportunity to get operating costs and assets quickly out of the business by using this new technology in small, surgical increments to create connections across existing applications. These mundane plumbing uses of Web services technology often bore the technologists, but they excite line executives who are under growing pressure to deliver short-term results to the bottom line.
How can technology vendors overcome this disconnect? It won’t be easy. It begins with changing mind-sets of the senior management. Senior managers of technology vendors rose to their current positions by riding the waves of vision after vision targeted primarily to IT executives. Visions like client-server architectures, enterprise architectures and electronic markets helped to drive significant technology spending in the 1990’s. Moving away from the search for the next grand vision to a much more pragmatic marketing proposition will go against the grain of many senior technology executives. As one executive recently told me: "John, if you are right about all this, this is going to become a much more boring business and I’m not sure I want to be a part of it."
Changing such deeply engrained mind-sets will not be easy. But that is only the first challenge. Technology companies are deeply grooved to support "vision-based" selling. Sales forces are organized to support major technology platform sales. Salespeople have deep relationships with senior technology executives. They are heavy hitters that focus all their attention on sales worth tens of millions or hundreds of millions of dollars. Smaller sales opportunities fall by the wayside in the quest for "the big one." Compensation systems tend to reward this focus on the mega-sale. Advancement depends on it. The economics of the business, hooked on large implementations of broad-based technology platforms, requires it. Marketing departments support the sales force efforts by churning out white papers, position papers and press events outlining the grand visions.
Significant restructuring of the organization and economics of these companies will be required to address current customer needs. But here’s the good news. Technology vendors can start with small steps to make the transition. They can begin by setting up small, specialized SWAT teams in the sales force with the mission to target promising segments of non-technology executives that are under pressure to deliver significant near-term business results. These SWAT teams could quickly pull together compelling examples of companies deploying small increments of technology to deliver short-term business impact. They could create simple economic models to quantify the business benefits for each prospect. They won’t make big sales (at least at the outset), but they should start making a lot of smaller sales that will begin to add up. As these SWAT teams begin to show results, their organization and approach could be fine-tuned and extended to broader parts of the sales force.
Of course, technology vendors could continue to sit on the sidelines and wait for customers to change. But they are likely to be disappointed. The changes described above are fundamental and long-term. They are not cyclical. Technology companies that continue to pursue the old approach to selling will find that they are capturing a smaller and smaller share of the growing technology spend.
On the other hand, technology companies that move now to reposition their sales and marketing efforts will reap the near-term benefit of increasing sales. They will also be far more credible when they present their vision for the future direction of technology because they will already have demonstrated their understanding and commitment to addressing the needs of their customers today. Most importantly, these few early moving technology vendors may in fact help to catalyze a broader revival of technology spending.
John Hagel (www.johnhagel.com) is a management consultant and author. He works with senior management to shape business strategies and improve business performance. His experience includes senior management positions in technology businesses and sixteen years as a consultant with McKinsey & Co. He wrote the recently released book Out of the Box, on the business implications of Web services technology. He is also the author of the best-selling business books, Net Gain and Net Worth and has co-authored several Harvard Business Review articles.
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