“Only the paranoid survive”
– Former Intel CEO Andy Grove
Things seem so good in the enterprise technology universe right now it is a little scary. The IT transition to cloud/mobile/social has entrepreneurs and investors salivating, with three significant forces at work:
- Real, not PowerPoint, multi-billion dollar opportunities are emerging for new entrants
- IT buyers have new productivity options for workers and better values for their operating and capital spending
- Incumbents are getting needed wake up calls on their technologies and business models.
So why am I nervous?
The Detroit Syndrome
Forty years ago, the Middle East oil embargo ripped a hole the size of a Buick through the American automotive industry. Over the following decades, the Big 3 automakers suffered huge market share losses, two major bankruptcies and government bailouts. Smaller, cheaper and more fuel-efficient cars from Japan broke the Detroit oligopoly and proved not everyone wanted big, powerful sedans, powered by a Detroit’s V8s.
As David Halberstam documented in The Reckoning, hubris and management blindness led to an enormous transfer of value from American to international car manufacturers. In 2012, the American auto industry had a $140 billion trade deficit. That’s like Apple losing everything.
Tech Drives Today’s Economy
Today, tech is a huge growth driver of the U.S. economy. Millions of jobs – not just in Silicon Valley but across the U.S. – directly depend on it. And that’s just the beginning: Enrico Moretti of UC Berkeley estimates that 1 job in traditional manufacturing generates 1.6 additional jobs, but one job in tech generates closer to 5 incremental jobs.
But the last heyday of enterprise IT crested around 2000, as “CIO as rock star” gave way to “CIO as cost center.” IT spending in the developed world has been basically flat ever since.
5 Challenges For Enterprise Technology
And now, enterprise technology faces an incredibly complex series of challenges and opportunities:
1. Customer Collaboration is Reducing Switching Costs. The IT industry has long relied on vendor-led standards bodies (IETF, IEEE) to ensure interoperability, but the dramatic growth of customer-led collaborative efforts in the open source and cloud movements is reworking the playing field. Rackspace-led OpenStack and Facebook-led Open Compute initiatives are cookbooks for the commoditization of IT infrastructure. If low-cost producers take over the infrastructure business, they will likely come from offshore producers (China, India, etc.) and not U.S. manufacturers. And don’t forget GitHub if you are in the software business.
2. The Cloud and the Rental Economy. The tremendous cost, energy, speed and operational savings presented by Cloud and SaaS technologies are changing how we think about IT. Why buy from HP or Oracle when you can rent from Amazon or Workday? Why let capacity sit idle when you can pay for it as you need it? This is a good thing, as resources will be used more efficiently. But it poses challenges for enterprise tech vendors. “We are one or two amortization cycles away” from the coming drop-off of premise-based IT purchases, warns Lightspeed Ventures’ Tim Danford.
3. BYOD and BYOA. The verdict is in: IT managers are coping, sometimes kicking and screaming, with the influx of customer-purchased devices as corporate computing platforms (Bring Your Own Device). The next wave of mobile challenges will come from BYOA (Bring Your Own Applications), where applications like Evernote and Box replace popular Microsoft programs like Sharepoint or even the Office suite. The classic enterprise software license could be a few apps away from oblivion.
4. The Lean Vendor. User-led IT communities like Spiceworks are replacing how buyers learn about products and services. Tech marketing is becoming a content and education task, not a promotional activity. This is giving the high-touch (read high cost) sales and marketing models of traditional vendors a run for the money. Companies like Ubiquiti Networks are not only taking advantage of this new buying behavior, they are passing on their own lowered selling, general and administrative (SG&A) costs to customers in the form of great technology and user-friendly innovation at lower prices. As a CIO friend of mine once told me: “When you walk into a vendor’s offices and they’re nicer than your own, remember you paid for it.”
5. Distributed Computing Model. Current computing models are built around a central premise: a client (e.g., Microsoft) will talk to a server (x86, IBM) in a single location to process an application. If you own either end of the equation, you can exact enormous value. But the cloud architecture is massively distributed, apps might have to touch dozens of places to process everything, totally disrupting that vendorscape. More significantly, the new in-demand IT skills sets look less like a traditional Fortune 500 corporation and more like Google or Facebook. Distributed computing scientists are this generation’s Einsteins.
3 Ways To Save Enterprise Tech
In Silicon Valley, it’s easy to assume the next generation of giants will grow just down the street. But the rest of the world is working to take advantage of the same trends while eyeing the large and relatively wide-open U.S. market.
I for one do not want to wake up in a decade and buy a book charting the downfall of the American technology industry by the next David Halberstam. Here’s what has to happen for the enterprise technology industry to avoid The Detroit Syndrome:
1. Incumbents need to blow up their own business models before challengers do it for them. The first wave of Detroit’s reaction to the initial oil-shock resulted in half-baked responses like the Ford Pinto, Chevy Vega and AMC Gremlin. And what did the auto industry do when oil prices moderated in the late 1980s and early 1990s? They went back to promoting horsepower instead of fuel efficiency and rolled out fleets of gas-guzzling SUVs that were great for short-term profits but made them even more vulnerable to the next oil shocks.
2. Some of today’s startups must grow into the new giants. While there are many enterprise tech vendors in $500 million to $5 billion range, few new suppliers have cracked the $10 billion run rate as independent companies. Large tech companies play a critical role in the IT economy, but customers must use their wallets to keep their own ecosystems healthy by fostering competition and innovations.
3. Systemic security and privacy solutions must be found. Buyer confidence could be torpedoed by cybercrime and careless data leakage. It will take a range of enabling technologies to give enterprise buyers more purchase confidence to embrace innovation.
Enterprise tech is not the Rust Belt, not by a long shot. There is every possibility that the technology industry will not go the way of the automobile industry. But the seeds of our growth could also be the seeds of our decay. And the ability to thrive requires innovations in our minds as much as our technologies. In the words of Mark Twain: “Circumstances make man, not man circumstances.”
Image courtesy of Shutterstock.