Do Tough Economic Times Accelerate Change?

I have to brace myself these days when I read the Wall Street Journal in the morning.  For the last few months, it's been nothing but grim economic news on a historically unprecedented scale.

Way back when, I did an economics degree, and I had to do a bit of macroeconomic modelling.  I laugh now about that whole exercise -- a total waste of time as we've appeared to have lost complete track of what the global economy has morphed into.

It looks like we don't have a clear understanding anymore regarding how the different pieces are structured and interrelate -- making "fixing" the problem essentially a guessing game with trillions of dollars at stake.

But there is hope -- challenging times have this unique way of accelerating structural changes.  Yes, it's very painful stuff for everyone involved, but you eventually get to the other side of it all, and it isn't business as before when you're all done.

One consensus example you hear frequently is the last dot-bomb bust -- the bones of which (cheap fibre and web technology) laid the groundwork for much of what we see today in the web 2.0 world.

So, what structural changes might we see this time around?

The IT Side Of The Equation

You probably are aware that I spend all sorts of times with customers, and I'm not just yammering away the whole time.  I ask questions, probe a bit, and try to get an understanding of what's going on in their world.

It's funny, though.  Back in August and September, there was a bit of "crisis?  what crisis?" thinking.  Well, it's now November, and I think everyone has caught up to the plot line.  And, as a result, an interesting picture is starting to emerge.

Scenario #1: IT In A Tough Place

One group of IT people are finding themselves in a conflicted situation.  On one hand, they've been asked to cut back like everyone else.  On the other hand, they're facing unprecedented demands from the business who's now using IT to understand and reposition the business as never before.

My most illustrative example is data warehouse and business analytics.  In good times, they're nice things to have.  In tough times, people hammer these environments trying to understand what the business is doing, and what should be done.

My buddies at Cisco tell me that their Telepresence solution is a hot topic these days -- it's less about effective collaboration, and more about staying off airplanes -- same idea, use technology to run the business better.

At a macro level, the business is being extremely clear to IT as to what's important, and what's not.  These IT groups have dropped all the marginal projects floating around to focus on a few big ones, since resources are scarce.  These same IT groups are pruning the ranks a bit as well, and letting some of the non-high-performers go.

In my book, this accelerates change in a big way: narrows the focus, improves the team, gets the business very engaged in this whole IT thing. 

Painful, yes, but al least there's an element of good to all of this if you think about it.

Scenario #2: What Is Core, What Is Context?

More than a few IT organizations have been working along the lines of planning their long-term future.  An interesting sub-thread is "what do we do ourselves?" vs. "what do we ask others to do for us?"

Or, put differently, what adds unique value, and what just has to be done as a normal part of doing business?

There are outsourcers, service providers and consultants out there, waiting to be leveraged.  Now that there's less IT money going around, will views change?

I'd have to say "yes" -- an increasingly frequent topic is now how we see other customers approaching this conversation.  The tempo has picked up -- it's not just theoretical any more.

One part of our business that's getting a bit more attention these days is EMC's SMS -- Storage Managed Services.  We basically run the storage farm for customers, providing a service catalog at an established declining price curve, and the customer is free to flex up or down as their needs change.

Can we do it better / faster / cheaper than internal IT?  It really depends on the IT organization, and where they want to invest in being best-in-class.  Some have made the decision that they don't want to invest in being experts at managing storage at scale, and would rather have us do it.

And I'll think you'll see more of that sort of thing in the future.

Scenario #3: IT Might Be Very Busy

Another, more interesting group, find themselves with a unique opportunity. 

You see, there are more businesses than you might think who aren't really all that affected by the downturn.  No one is recession-proof, but many are surprisingly recession-resistant.  I find these organizations fascinating, given my intense interest in economics.

Generally speaking, these people have well-run IT functions that are productively engaged with the business.  And they've told me something very surprising.

These people tell me that 2009 may be the busiest year yet for the IT group.

Why?  IT is on sale.

If you think about it, the demand curve for IT products and services has shifted rapidly to the left.  That means that there's a supply imbalance, which means that all sorts of stuff is on sale, so to speak.

True for automobiles, real estate, luxury goods, airplane travel, as well.  From an IT perspective, hardware will be cheap.  Software will be cheap.  Really bright people may be cheap as well.  Grim, but probably true.

The thinking is "what a great opportunity to invest in all that large-scale stuff we couldn't consider before".

These people want to accelerate their transition to a fully-virtualized environment.  Or re-architect the SAN and storage environment.  Or get serious about having a business continuity capability.  Or build a new data center.

And that's just the infrastructure side.

On the application side, there's interest in getting eDiscovery done, or re-engineering business processes and workflow, or investing in information-centric security, or revamping their external web site -- the list gets pretty long with this crowd.

Now, understandably, that's a view through the EMC portfolio, but I feel like I'm talking to some sort of hedge fund when I talk to these IT groups, since they see a rare opportunity to accelerate all the big initiatives they've been meaning to get to for a while.

I just wish I was meeting more of these people, though ... :-)

The Supply Side of IT 

There isn't a single supplier of IT goods and services that won't be affected by all of this.  Change in the IT industry is accelerating as well, if you read the signs.

First, every vendor is frantically re-positioning their storyline around saving money, being more efficient, and so on.  New borchures, new advertising, new campaigns -- the works.

If you're a vendor, and you don't tell people you save IT money in 2009, you're gonna be in a world of hurt.  Yes, other things are important, but I can already tell what the lead marketing message is going to be.

Outreach Will Be Important

I think some vendors are a bit more exposed than others. 

I read a post from a NetApp blogger on how it was so important to embrace this efficiency thinking going forward.  I agree with the sentiment, but I think there's more to that than meets the eye.

Historically, many of us are of the impression that NetApp boxes generally have had very poor utilization.  If you run a fleet of these things, simply measure production storage against raw, and I'd be surprised if you had numbers above 50%. 

During the last downturn, EMC had the same problem in its installed base, and it bit us pretty badly.  As a result, part of our DNA is that we keep an eye on our customers' environments, and if they're not running at decently high levels of utilization, we work proactively to bring utilization levels up.

Before the customer "discovers" the problem, so to speak. 

My coaching for Netapp (and every other infrastructure vendor as well) is that now would be a good time to proactively reach out to your customers to raise utlization levels, without having to buy something entirely new to get that benefit. 

Indeed, this sort of thinking goes beyond simply making the quarterly revenue number -- it focuses on your customers' need to help them reassure management that IT is doing everything possible to squeeze every asset on the floor. 

It'll be interesting to see how many vendors work with customers to leverage what's already installed, and how many try and sell something entirely new.

The Weaker Players Will Suffer

You hear about this "flight to quality" in tough economic times.  For many goods and services, it's true, and I think IT will be one of these categories.

Look at it this way: if you're you can only afford so much -- do you want to risk it on a vendor who either can't deliver, or (ulp!) might not be around?  And, with good deals everywhere, why compromise?

It was sad to watch Sun's recent "open storage" announcement, only to be followed by announcing massive layoffs.  Just to be brutally clear, a layoffof this magnitude isn't just shedding a bit of excess weight, this is cutting muscle and bone. 

One announcment pretty much undermines the other, which is unfortunate.  Regardless of the merits of Sun's approach, they now have to operate under a cloud, so to speak.  And not the good kind.  My heart goes out to all those affected.

But what about all those younger companies with much smaller revenues?  I'd bet that most of them are thinking about survival more than anything else these days.

Vendor balance sheets, earning announcements and product portfolios really matter during these times.

Thankfully, I think EMC is in pretty good shape as far as such things go. 

Our executive management is characteristically conservative when it comes to financial management, which generally serves us well when the economy goes south.  We've got an extremely broad portfolio, many of our offerings play directly to cost-savings and efficiency, we stay very close to our customers, we play in many different segments (enterprise, commercial, even consumer) and geographies. 

We think we're in a pretty good position, all things considered.  But those that aren't will be casualties of "structural change".

Are Service Providers, System Integrators and Outsourcers Sitting Pretty?

I think so.  Frequently, these people can take cost out of IT in a way that traditional IT organizations find difficult to do.  It's not only scale -- they have the expertise to go with it. 

None of these people will say so in public, but when I talk to them, there's a gleam in their eye that one consequence of this economic downturn might be an acceleration from home-grown IT to service-oriented IT provided by external providers.

The Big Picture?

OK, so my crystal ball may have a crack or two in it, but I think the picture is becoming clearer.

Put all of this together, and -- yes -- this economic downturn will accelerate change on both the demand side as well as the supply side of IT. 

Investment should accelerate in technologies and services that save money and create substantial value; marginal offerings will languish.  Vendors that can work with customers to achieve clear business objectives, rather than just sell product, should do very well indeed.

IT organizations have a unique opportunity to sharpen their focus, and -- in some situations -- tackle the big projects they've been meaning to do for a while.

This sort of disruptive change isn't particularly fun, or pleasant, for anyone. 

But at least some good can come from all of it -- at least, I hope so.

Courteous comments welcome as always.

Comments

[Alex McDonald]

Outreach; an excellent point Chuck.

NetApp are on it and have been for some time. http://blogs.netapp.com/shadeofblue/2008/11/squeeze-until-t.html

[Mike Hammer]

Hi Chuck

I'm a regular reader of your blog, and I wondered when the FUD against Sun will start, now that they have some really interesting offerings. Didn't take long at all...

So much I can tell you. We will be looking into Sun's new offering, as we want to get rid of your overpriced storage (and Netapp's too!).

As a long time Solaris/ZFS user, I think Sun has a killer-product out, now that non-Unix people can benefit from its features.

It seems to me that Sun has arrived in the 21st century, while you are still messing with 20th century technology and trying to glue new features on it, for what it wasn't designed.

Good luck selling your products, when budgets are tight. And even if they aren't, a lower price tag is always nice.

Mike

[Chuck Hollis]

Hi Mike

This post wasn't intended as Sun-bashing. Other posts, maybe, but not this one.

In the world I live in, a ~20% layoff coupled with no viable business model isn't exactly a positive thing for long-term survival. And, as we all know, Sun hasn't exactly been thriving before the downturn, either.

Let me know how do with the do-it-yourself approach, and what sort of pushback you get from the grownups at your company over your intentions.

Cheers!

[Mika Hammer]

"do-it-yourself approach"

I think, you didn't take a look at Sun's new offering at all. There is no do-it-yourself approach at all.

"pushback you get from the grownups"

The grownups in my company are always open for saving money.

And certainly, if they get more features without paying additional license fees (e.g. Analytics, no volume based replication, NFS, iSCSI, unlimited snapshots etc.). And last but not least, an interface that also grownups can use...

[Customer Storage Expert]

I agree with Mike about one thing - Sun has moved into the 21st century.

The answer to your question, "Do Tough Economic Times Accelerate Change?" No.

Tough economic times will cause people to question everything. While everything is questioned discretionary spendign halts. The change will not occur until 12 - 18 months after the questions are answered regardless of the macroeconomic model we find ourselves in.

[Blaine Berger]

Chuck - No one is sitting pretty. There will be plenty of suffering for all organizations...not just Information Technology vendors. The difference maker (as it always turns out to be in times like these) will be those organizations who are *acting* versus those who are *watching*.

"Weaker Than Expected Demand" will be a well-worn phrase by the time the dust clears. Your post reminds companies to stay relevant to their customer's pain.

Customers also need to review their own operation such as killing the weak IT projects and re-deploying those resources.
http://www.e-oasis.com/alerts/2008/2009playbook/

[Mike Hammer]

Reduction of 7% of EMC's workforce is also quite a lot.

So much to your comments in November....

[Chuck Hollis]

Mike -- yes, it is, isnt' it?

-- Chuck