Learning the Lessons of the Tech Slump

The application infrastructure or “middleware” market has limped through a dismal year, but there are signs 2003 will bring happier times. Like all industry slumps, the recession has spurred (or should spur) some necessary changes in the way players do business. The industry is, in fact, reforming itself. “What are the new rules for success in the coming year and what are the likely opportunities in 2003?”

Analytical Summary

2003 is likely to bring more growth to surviving players in the application infrastructure space due to consolidation, the need to replenish software, and hard-to-resist benefits of some new technology. However, vendors would do well to learn the lessons of the past two years and adjust marketing and product development accordingly. More flexible pricing, better development tools, realistic ROI, and an understanding of business benefits, rather than mindless touting of new technology, are all recommended. Vendors also need to quickly respond to growth markets with product suites and focused selling efforts (for example, government may be out, healthcare and energy in).

PERSPECTIVE

As 2003 begins, most vendors in the application infrastructure space are likely breathing a sigh of relief that 2002 is over. The year saw stagnant to falling revenues, large losses, and “industry consolidation,” as weaker vendors fell off the map. Users held off on purchases, or in some cases cancelled, or severely scaled back projects. There is reason to believe, however, that 2003 will see a return to modest growth. But vendors need to take heed from the lessons learned during the recession and adjust their selling and marketing (if they haven’t already). They also need to quickly focus on likely areas of growth during the next year.

Growth in individual companies is bound to resume because of some fundamental forces of nature. For one, the glut of IT products incurred during the 1998-2001 boom is being whittled down. Customers inevitably grow, change, or combine, and need new software to support new endeavors. Also, since the number of companies in this space has declined, the “survivors” will benefit. The rush to attract HP/Compaq’s considerable is just one example.

Also, new technologies are on the market that are offering hard-to-resist operational efficiencies and future savings. Web Services and open XML-based integration is just one. Already firms such as Oracle, BEA, and webMethods are offering up some mildly encouraging financial news.

If vendors, however, think that they can go back to the old rules (say pre-2001) they are wrong. The accumulated 20 years of industry hype and bad experiences seem to have fundamentally changed the way users are purchasing IT. In forum after forum, users are expressing some new requirements for projects. They want guarantees it will work with their existing infrastructure. They want airtight ROI studies, not reports that are half wishful thinking. They want guarantees on implementation time. They want reasonable and flexible pricing. They want non-proprietary architectures that can be extended even if their vendors don’t survive. Adjustments vendors should consider including:

• Flexible pricing. Both lower overall prices for projects should be considered, but also, more “pay-as-you go or “pay as it works” types of schemes. Pricing per project is attractive to some, while user seat, or CPU pricing works better for others. Vendors should pay close attention to the traction IBM has with its On Demand initiative. All options should be on the table.
• Less Professional Services/customization work. Templates, pre- built business flows, sample applications, and easier to use tools will also help, as will demonstrable methodologies that save time and money. Vendors must display an understanding of the business problem in order to truly come up with methodologies that save time and achieve business goals.
• Direct business benefits, not hype. Users want direct, demonstrable business payback from new software, not abstract benefits. For example in the still-emerging Enterprise Information Integration market, vendors should move away from touting the technological thrill of aggregating information just for its owns sake. Instead, they should be detailing who urgently needs to bring such information together to solve a pressing business problem.
• New technology, when it’s ready. Technologies such as Web Services will likely reach the point when mainstream users will consider it this year. Vendors have to demonstrate that others have already worked out the kinks in the technology and it is now ready for the masses.
• Proprietary-less. Users will move away from proprietary technology when they can, and when they can’t they will want to surround the technology with XML, JMS, or any other number of standard-based technologies. They want to be able to use their existing tools, or use tools that look a lot like them. In other words, if its proprietary, make sure it doesn’t look it.

Vendors must also be able to respond quickly to growth areas, which may come from unexpected sources. Vertically, for example, while government sales were lucrative to some in 2002, budget cuts, particularly at the state level may make this market less attractive this year. Healthcare, although crowded with competitors will likely grow. In terms of technologies, Web Services, in particular Web Services management will likely emerge as an area of interest as there are two many methods to create these services today, and not enough accountability for what was created.

RECOMMENDED ACTIONS

Vendor Actions

• Vendors in the application infrastructure should become more flexible with pricing, moving to per-project fees and schemes to “pay-as-you-go” or “pay-as-it-works” or as it goes into production. Vendors should closely monitor IBM’s “On Demand” initiative.
• Vendors should continue to provide more templates, sample applications, pre-built business flows, and easier-to-use tools.
• Vendors should develop, or partner with SIs to develop, methodologies that correspond more directly with their software and with the particularities of a customer or project.
• Marketing should emphasize business benefits, not technology, and ROI studies should be more realistic.
• Vendors should emphasize that others have already cut taken risks and their teeth on new technology such as Web Services.
• Vendors should be able to more quickly respond to growth areas, both in terms of vertical industries and technology. Waiting a year for a new vertical product suite isn’t a good idea.

User Actions

• Users that have shied away from upgrades or new projects over the past two years should consider new products this year (for example, verticalized integration suites) as the industry is reforming itself and the hype versus reality gap is being reduced.
• Users should take advantage of vendors current “flexibility” in pricing and service in order to upgrade to new technology to solve business problems.
• Users who don’t have budget should ask for flexible arrangements, especially for larger projects.
• Users should consider new standards-based technologies in the areas of integration as way to cut long term costs.