Monday, March 3, 2008

Buffets says it, and I believe it

I am a devout Buffet fan, and I don't mean Jimmy. Instead, I refer to his "Uncle Warren".

Today Warren Buffet declared that the US economy is now in recession. Here's the quote from this mornings Reuters article:

"Buffett said that 'from a common-sense standpoint right now, we're in a recession,' though the U.S. economy has not yet recorded two straight quarters of declining gross domestic product, a traditional indicator of recession.

He said the environment is 'nothing like '73 or '74 yet,' referring to a deep economic downturn also marked by rising oil prices, higher inflation and falling stocks."

Here's the link:

Here's what I think:

With all of the mounting evidence that the US (and other western economies) are cooling off, the effect is already starting to show up in business spending. Even if businesses are healthy, management sees it as prudent to prepare for the worst. This means renewed spending scrutiny, budget cuts and precautionary RIFs. Of course, it should be noted that this has the effect of a self-fulfilling prophecy. And, the tools that government has at its disposal - putting money into the economy through interest rates and tax rebates - will not work if everyone believes the worst is yet to come. So, my belief is that conditions will continue to worsen and that we'll be dealing with the effects for the rest of 2008.

From a software industry perspective, this means that companies that can't demonstrate real value - i.e., an ability to save money - will suffer mightily. Having said that, Business Intelligence and Enterprise Performance Management solutions, positioned accordingly and to the "right" person (senior levels of business management), ought to fair better than other initiatives.

Software companies focused upon selling tools to IT will have a hard time in this economy and will need to retool (no pun intended) to address the requisite business priorities. Many will fail trying.

Ironically, many domain-specific application software companies that have been successful in niche markets, are seemingly intent on expanding into the more general tools market. In this case the "grass" is NOT greener on the other side of the fence. My advice to those companies is to sit tight and appreciate the successful (albeit smaller) market that you're in.

Here's another cheery thought: those software companies that survive the recession will emerge stronger and more viable and will reap substantial rewards when the economy starts to improve.