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:

http://www.reuters.com/article/ousiv/idUSWEN425620080303

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.

-Howard

Brave New World?

It’s February and winter is nearly over here in New Hampshire. Well, maybe not. But it’s nice to have an extra hour of daylight since the start of winter and the snow is starting to recede a bit. But, this is New Hampshire and it’s always wise to temper one’s optimism for an early spring. After all, the groundhog has said six more weeks of winter (ten in New Hampshire).

Recently I’ve been spending some time in “the valley” where the weather hasn’t been much better (cold and rainy). However, some software companies that I’ve visited have a pretty sunny outlook on the future, and with good cause. Here’s why:

1. Acquisition mania, which has led to the near total demise of “pure-plays” has created significant complexity and confusion with “mega vendors”. This has led to a slowdown in sales, a decline in employee morale, and opportunity for smaller, more agile vendors, with a simple message and little or no baggage.
2. Entrepreneurial/innovator types rarely stick around long at mega vendors. This has freed up the main ingredient of innovation (really smart and talented people). I’ve met many of them in recent weeks. Joining ranks with smaller concerns, they bring energy, enthusiasm, experience and a pent up desire to “get it right this time”.
3. Almost all of the emerging software vendors that I’ve spoken to recently are focused on selling to the business and not the IT department. Often they solve tough business problems, faster and cheaper than many internal IT functions can (e.g., this fiscal year not next). This obviously creates some internal tension and these vendors have taken to checking under their cars before leaving the customer site.

I try to resist new buzzwords like “BI 2.0”, but there’s definitely something different going on. This market is changing dramatically. It’s exciting and invigorating and I’m enjoying being a part of it. But, for now, I’ll hold off trying to name it.

See you out there,

Howard

Retailers had weak sales in December - AP Newswire Jan. 10, 2008

Today AP Newswire released an article which supports my 1/2/08 post about the economy and holiday retail sales.

"Many merchants who reported sales figures Thursday failed to meet already lowered sales projections, making this the weakest holiday season since 2002. Their performance led a string of stores to reduce earnings outlooks for the fourth quarter."

Here's a link to the article:

http://news.yahoo.com/s/ap/20080110/ap_on_bi_ge/retail_sales;_ylt=AuL7PSbZ9fVMg5apxkBGdPqb.HQA

Goldman Sachs Expects Recession

Looks like Goldman Sachs agrees with the prediction that I posted on January 2nd.

Today they released a statement saying that they expect the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter.

You can read the release here:

http://news.yahoo.com/s/nm/20080109/bs_nm/usa_economy_goldman_dc_2

New Year's Predictions

Happy New Year to all!

With everyone back to work after holiday celebrations, it’s time to start thinking about what’s ahead in 2008. To help, I’ve put together a few predictions.

The Economy: In my opinion, the “Big Kahuna” of predictions has to do with the economy. I may not be an economist, but I’ve been around long enough to know the signs of recession when I see them. A quick look in the local (US) newspaper tells part of the story: numerous housing foreclosures and auctions. I haven’t seen that since 1992. In addition, rumors a of a weak holiday retail season abound. Coupled with the current and unfolding lending crisis, a dismal Q4 earnings report could seal it. If I’m right, this means that 2008 budgets will be flat to down – especially for IT. The rest of my predictions are either caused by or accelerated by this prediction.

Market consolidation: As everyone is already aware, 2007 was a year of massive consolidation for BI and EPM software vendors. Although Hyperion, Business Objects and Cognos are gone, the fun’s not over yet. As the big guys feel even more pressure to boost revenues and profits, I believe they’ll gobble up any remaining, above-average software vendors of size (> $100M USD).

Leveraging Existing Investments: With a combination of lower budgets and real urgency to improve business performance, I expect many organizations to try and get more value from software and systems they already own. This would be especially good news for systems integrators – especially those with deep expertise in key vertical and functional areas. So, I would anticipate consultancies become even busier than in 2007 and for a whole new crop to emerge in 2008. Caveat Emptor!

Rise of the Business Buyer: I don’t want to give Nick Carr (Does IT Matter? Information Technology and the Corrosion of Competitive Advantage - Harvard Business School Press) too much credit, but many IT Departments have become alienated from the business and less relevant than they could or should have been. An exclusive focus upon the largest software solution providers doesn’t help. In defense of IT, much of this may not be their fault and they may find themselves in an impossible situation. Nevertheless, emerging software vendors and consultants have caught on to the trend and are focusing selling efforts on business management – with the promise of implementing business solutions faster than IT can. Of course, these vendors may eventually have to deal with IT, but will avoid it (if at all possible) until business management is “on board”.

New Approaches Map to the Emerging Market: On-demand, open source and software appliances have been around for a few years and have experienced varying rates of adoption and success. However, with the above forces changing the shape of the market in 2008 – these options - offering lower cost and fast deployment - become vastly more appealing – especially to business users! Expect to see lots more of each at the expense of traditional software offerings.

What do you think?

The big winners??

Here's another thought related to the recent market consolidation: Systems integrators could be the big winners.

My logic: As the big enterprise software companies add to their portfolios by gobbling up pure-play vendors, they also dramatically increase product and platform complexity. So, while it might be easier (in some sense) to have a single supplier of software, implementation difficulty and cost will grow. User organizations lacking sufficient skills will heavily leverage SIs (even more than today) as they strive to quickly deliver quality applications to meet pressing business requirements.

Using basic micro-economic principals: the price of consulting will rise as supply is already constrained. Until supply catches up with demand, the SIs could be rolling in dough - with margins rivaling software products.

What do you think?

The ruckus about consolidation

I think most folks are keenly aware of the dramatic consolidation that has taken place in the BI market during 2007. In fact, there are only a handful of significant pure-play vendors left standing. these include: Actuate, Informatica, Information Builders, Microstrategy, SAS and SPSS.

When I was at Gartner, I observed ongoing consolidation in the market and viewed it as somewhat healthy - sort of a "pruning" of the "dead wood". From the 1990s and through 2005, most of those acquisitions were of smaller companies, not ones with revenues of $800M - $1.2B and market caps in excess of $3B.

The stage for this consolidation was set quite some time ago as the pure-play market matured and three dominant and sizable leaders emerged: Business Objects, Cognos and Hyperion. As other enterprise software markets cooled (e.g., ERP), BI and PM offered higher growth rates and margins. And, with all three of these in relatively good financial condition, any acquisition could be readily made accretive. So it came down to a question of when it would occur and who would be first. At Hyperion there was always a sense that once one fell, all would fall.

So what happens next? Well, I think we're in the midst of a fundamental paradigm shift where the rules are about to change and its not limited to BI or PM.

More on that later...