More optimistic views on the future of enterprise software

With SAP’s decision to forgo its 2009 guidance a paradoxical beacon of truth in a falling market, I have decided to return from vacation a day early and get busy trying to gauge the market for enterprise software in the coming year. It’s not an easy task, needless to day, or SAP wouldn’t have risked punishing its stock with a frank admission that it has no idea what to expect next year. But I can’t resist trying, and here’s what I’m coming up with.

At first, I was tempted to disagree with George Colony’s optimistic assessment that the tech market won’t suffer through the current downturn as much as it did in the dotcom implosion. He’s right that, last time around, tech was front and center in the downturn, and took it in the shorts when it became clear that, as the dotcom fluff headed for the dustbin of history, the tech companies that had been minting money on the upside began bleeding red ink. Yet another example of garbage in, garbage out, in this case those ridiculous, disintermediating business models that seemed so simply ingenious even a fool could become a billionaire. And more than few did, until it all became the fool’s errand we now know the dotcom boom to have been.

I even began to feel that the dean of Forrester Research had made an error in being overly optimistic by discounting the fact that, unlike last time around, enterprise software is so intertwined with the global economy that a downturn of this magnitude has to hit everyone, everywhere. This time around, so I believed, there’s no place to run for cover when it’s the entire global economy that’s disintegrating: Companies like IBM, SAP, Microsoft, and Oracle, and pretty much anyone else that’s catering to the global economy now has to feel, and ride out, that global economy’s pain. In that wonderfully flat world that Tom Friedman made as if on order for an all too eager technology sector, if you live by the sword, you’re destined to die by the sword (and, apparently, in a hot, crowded way, so his new book claims). We’re all flat worlders, right? Ergo, we’re all doomed.

But this weird little optimism keeps creeping into my admittedly tortured sleep, as evidenced by some weird little facts that I’m having trouble fitting into my “we’re all doomed” scenario. And as I parse these facts I’m starting to come around to agree with George, though less than it might appear.

Part of this change of heart is fueled by the fact that is no shortage of economic activity in the real economy, despite a plunging market that looks like a prize fight gone berserk: Eight of the last eight planes I’ve flown this month have been full; New Yorkers, or least people who visit New York, are shopping and museuming and schlepping like crazy, despite the apparent total collapse of the local financial sector. Meanwhile, back home in Berkeley, before I took off on a much-needed vacation with my family, it was standing room only signing up my daughter for next season’s swim class at the Y, and my mechanic, while bemoaning the fate of his friends who work at the new car lots around town, was putting in the extra hours trying to keep up with the demand for his services.

Hey, if this is a depression, this doesn’t seem as depressing as it’s supposed to be.

Now, you will say, rightly so, that I’ve just described a series of bubbles far from the reality of the genuine downturn that has bankrupted, dispossessed, and impoverished more individuals than I could count. And you’re right. When you look at some of the core sectors of the economy that have been decimated by the current downturn, there’s nothing but shredded bank accounts and shredded lives. But I have trouble looking at the sectors that are taking the biggest hits and not seeing the modern equivalents of those bogus dotcom businesses models that fundamentally lacked the fundamentals to keep on gorging themselves at the revenue trough as long as they did, much less as long as their proponents believed they were destined to gorge.

So, let’s look at what’s tanking and try to find the solid, honest, well-managed sector that, despite its ability to deliver fair value and fair price, and reap fair profit, is dying on the vine: We can certainly exclude the bankers and mortgagers and hedgers from this list. Ditto for Detroit, which simply never understood the need to build cars that people actually want to buy. Credit card issuers, the spiritual cousins of the banker-mortgage-hedgers, are next, so yesterday’s New York Times has told me: bad debt is mounting, and it looks like it’s going to exceed the quantity of bad debt racked up in the dotcom error. Oops, there goes Visa.

Now, it’s true that every industry that sold to or otherwise depended on these BS-artists is hurting, as well as their employees – or ex-employees. And all the victims of this collateral damage that does provide evidence for some of that flat world, global gloom that the Friedman-ites are nattering about.

But there are strong reasons why the tech sector, and thereby enterprise software, isn’t in the same losers league as the biggest losers in the current recession, and here is where George Colony is right, even if we see the why and how a little differently: The fallout of the dotcom disaster annihilated lots of companies that, frankly, had earned the right to be annihilated. These were dogs to begin with, bad ideas that never should have been given the green light, not to mention the billions of greenbacks they wasted on their way into oblivion.

And so it is with so much of the global chaos of today: So far, the biggest disasters are taking place in the sectors that tend to deserve it, and every one of the failed companies that have been bailed out or left to rot had good reason to fail, and most deserved their fate.

All of which has left me with the following optimistic conclusion: One of the great effects of the dotcom bust was a winnowing of a lot of junk and jive and untenable business models and companies from the technology sector. What emerged from that disaster was a core set of big companies – IBM, Microsoft, SAP, Oracle, and a few others – and a core conviction, held by start-ups and multi-billion behemoths, that we’ll never make those mistakes again. And hence my new optimistic perspective on life in the current recession.

Since the last recession, technology in general, and enterprise software in particular, has proven its ability to actually deliver value for money, and return on investment, and competitive differentiation, and enhanced productivity. This sector is, by and large, not about ripping off the rest of the world for a fast buck (okay, it’s not all perfect – but we’re not talking Lehman or Fannie or Freddie or AIG here, nor are we talking Enron either).

And therefore, unlike the rip-off artists who have been culled in the current recession, and the ones who will soon be culled, the technology sector and the enterprise software sub-sector won’t disappear or suffer anywhere near the same devastating losses a la Lehman or Freddie or Fannie.

I’m now convinced this recession will be a little like the last time around insofar as we’ll see a lot of deadweight being jettisoned in a shockingly merciless fashion. And it will be completely different in that tech will actually remain relatively strong and emerge relatively unscathed, simply because it was so well-tempered in the last recession and has been focused on delivering measurable value, not speculative profits, ever since.

Yes, things are ugly and will likely get worse before they get better. And lots of undeserving people will be harmed by a lot of thoughtless people who probably deserve worse than they’re getting off with. But in the end, there were a lot of lessons learned the last time around, and I think they’re going to pay off. And just when the stakes couldn’t be higher.