How recessions should alter vendor behavior
Oracle had a recent show here in Chicago. Attendees were given a very nice breakfast, a keynote from an Oracle executive and an opportunity to kick the tires on scads of Oracle products.
The keynote address was a quick primer on how to justify new IT spending via a business case. Part of the talk was instructive – but – I found a chunk of it tougher to swallow. Let’s dissect the speaker’s argument:
- First, the speaker showed how cutting 10% from a company’s IT budget has a small effect on total business profitability while the same percentage cut from other non-SG&A areas (like manufacturing costs) has a far more pronounced impact on both total profit and operating expenses. This is true as the cost of IT in many corporations today is less than 4% of total revenues and cutting 10% of that is only 0.4% of total revenue. In better run firms, the cost of IT is less than 1% percent of total revenue and a 10% reduction here is quite small. But this math game misses a couple of critical points. In many firms, executives are being asked to cut 10% or more from every department, cost center, etc. and not just IT. Can IT keep its budget when other groups are expected to pare back? That will take some real convincing and political savvy. I have my doubts that IT can avoid many cuts because as a firm faces declining revenues (as most firms will during a recession), it must also cut all costs (including IT) in a corresponding fashion. It’s the rare firm that can justify continued pre-recession spending levels in the midst of a bad recession.
- Second, the speaker identified a number of firms that have maintained their investment spending during recessionary periods. These companies were then able to emerge from the recession armed with the tools to devastate their competitors. Again, this is factually correct but this recession may well be longer and deeper than many in recent memory. Prudent business leaders are conserving cash for three very important reasons: a) they don’t have any to spare; b) their credit lines are constrained thanks to that Wall Street meltdown; or, c) they expect this recession (and corresponding cash restrictions) will be in place a long time. It will be hard for IT personnel to get budget for many IT initiatives beyond the basics.
- Third, the speaker suggested that business growth should really take off at the conclusion of the recession. A 36% growth figure was suggested as possible and businesses are cautioned to use the current timeframe to get their infrastructure (this includes IT) in order and ready to efficiently and effectively grow. In theory, I’m with the speaker but top executives aren’t ready to commit to this. I’ve had this identical conversation with two CEOs lately. Both agree that it is logically correct but they are more terrified of the recession to come right now. They are not convinced that we’ve seen the bottom of this one and for now they’ll conserve cash. They are looking after the long-term viability of their business today – growth strategies are less important when survival is the paramount business concern.
What I was really hoping for was that Oracle would have announced a different strategy for coping with a (big) recession: lower cost solutions from Oracle. Oracle has achieved some of the highest operating margins in the software industry. They’ve done so by making a number of acquisitions, achieving significant economies of scale and by meticulously monitoring their expenses. I cannot fault Oracle one bit on the accomplishments they’ve made here. They’ve done this quite well. Their post-merger integration processes should be the envy of thousands of other firms. But, these new economic gains they’ve made aren’t getting down to the customers. These savings are accruing to the shareholders. Should shareholders get the benefits of great management? Absolutely. But, customers and ORCL could both benefit today from lower cost solutions from Oracle. Oracle would gain in the long-term from gaining market share and from squeezing less efficient vendors out of the marketplace.
I believe it’s time for the operationally excellent Oracle to mirror another operationally excellent firm: Wal-Mart (full disclosure: I own 100 shares of Wal-Mart). Wal-Mart uses its efficiencies to relentlessly drive down its costs and prices and in return captures ever greater market share. This last Fall, I did an application software purchase negotiation and the Oracle database license was more costly than the application software suite under consideration. I didn’t think that was right then, and in a recession, I still don’t.
Software and service firms can sell in a recession when they possess:
- products with great ROI - business-usable innovation - real innovation (not copying an idea that a competitor introduced five years ago) - add-on capabilities, especially strong vertical solutions - solutions that can be implemented really fast (think SaaS) - solutions will immediate value delivery - solutions that do not require a blank check for an implementer to complete
What won’t sell well in a recession?
- re-packaged suites - new platforms under old applications - generic, horizontal applications - re-automation initiatives
Vendors: Use this recession to re-discover the value you could deliver to customers. Re-discover what a difference your firm could make to end-users. Re-discover and re-invent processes - don’t just re-package the past. Buyers never remain static. They change and evolve. A recession actually accelerates these buyer changes as it forces them to re-evaluate their spending, their true IT needs, their scarce capital and other resources. Get in tune with the new business customer and their value proposition needs. Ignore them at your peril.