Assessing Your Software Vendor’s Survivability

The CIO’s job is not an easy one: equal parts IT innovation salesman; global project manager knitting together the wares of multiple suppliers into a coherent, reliable and cost-effective technology strategy; and prognosticator on the success or failure of major vendors in an industry where repeated waves of change regularly swamp unwary incumbents.

Just consider the fates of former leaders including Amdahl, Burroughs, Compaq, Cullinet, Data General, Digital Equipment, Exodus and Wang, among others. Every decade or so, a new crowd of entrepreneurs overwhelm the incumbents, leaving the IT department to sweep up the remnants. A slide from Morgan Stanley’s December 2009 Mobile Internet Report banners it all:

“Wealth Creation/Destruction is Material in New Computing Cycles – Now in Early Innings of Mobile Internet Cycle, the 5th Cycle of Last Half Century.”

Wealth Creation/Destruction? Early innings of the fifth cycle in 50 years? The IT sector doubles as a wind tunnel for assessing what economist Joseph Schumpeter named “creative destruction”. Can the CIO really distinguish winners from losers soon enough?

Several important determinants of corporate success or demise have become evident during the last four IT cycles, to wit:

Change Warriors – The most successful CEOs can navigate a total change in the company’s technology and business model. That’s a difficult task, made especially challenging when the company has been successful in the past but is now confronting an industry-wide storm. IBM made three such transitions under three different CEOs: Tom Watson Jr., Frank Cary and Lou Gerstner. Apple has navigated three equally impressive transitions under founder, Steve Jobs. So has Oracle under founder Larry Ellison.

Risk Assessment – Choosing the moment for that daring leap from success to new and more competitive ground requires the 20/20 acumen of the trapeze artist timing his leap from one bar to the next. Except there’s no nimble-handed catcher for the business leader. So the more stable the old business model, the flimsier seems the new — making “wait and see” the easier choice.

Prior success can be a millstone once the wheels of change begin to turn. Many years ago, I asked Steve Jobs how Apple could survive the early success of the Mac. “Burn it down!” was his succinct response.

First Mover Advantage – The first entrants into a new market created by a disruptive technology reap the lion’s share of benefits in customers, markets and profits. At least that’s the theory. But too often the new entrants try to mold new technology around old business models with disastrous results.

The PC market leaders in 1979 were Apple, Commodore and Tandy. All three tried to shoehorn microprocessors into older and inappropriate models. Apple emulated the proprietary workstation model (albeit at much lower prices) and was thereby trapped into a minority market share for nearly thirty years. Tandy offered a minicomputer model integrated from operating system to applications to distribution and eventually left the field. Commodore failed by mistakenly accepting the business model of the home entertainment center with $600 prices and minimal support. Significantly, today’s PC market is led by latecomer Dell and traditionalist HP while the Linux market draws major support from newcomer Red Hat and late movers Oracle and IBM.

Cultural Momentum – The organizational structure of an enterprise can be a strategic battering ram in one period and an enervating dead weight in the next. Tom Watson, Jr. built a highly centralized organization to unify IBM around the revolutionary System/360 and batter the other mainframe companies. But times changed and the centralized organization couldn’t operate nimbly enough to counter the plug compatible mainframe and peripheral companies born to exploit System/360’s market dominance.

IBM was sharply and decisively decentralized by Frank Cary but not without unexpected consequences as his decentralized business units inevitably developed duplicate server families and operating systems. These were belatedly uprooted by Lou Gerstner, but too late to prevent major losses in market share to HP and Sun.

Sales Alignment – Flexibility is not a dominant characteristic of previously successful field organizations. True, the salesforce can be the company’s most potent and productive asset. Great reps properly trained and motivated can push a mediocre product far beyond its expected trajectory. Or ease the company through major delays of front-line products as HP’s sales force held the customer base in the 1990s. But the field force also has a dark side in times of radical change. Sales executives will sometimes block new products and distribution models even while new entrants chop away at gross margins. The failure to increase sales productivity during massive market shifts can be disastrous as it was for Digital Equipment and IBM.

Business Models – During times of rapid change, legacy assets can quickly become boat anchors. Before the microprocessor, the leading suppliers of electromechanical calculators fielded extensive customer training and support organizations to underpin their $2,000 products. But when the advent of microprocessors sank calculator prices to $200, these assets turned to sludge. Customers could now justify the purchase for just the two or three functions easily learned from the manual. And if broken, they could mail the gadget back to the factory or just throw it away.

Similarly, Sun enjoyed three advantages in entering the market against that period’s Goliath, Digital Equipment. The start-up was on the cusp of two technological waves missed by its huge rival: RISC hardware and Unix software. Sun’s commission-hungry sales force overran the salaried engineers retained by Digital. And the newcomer’s cost structure provided an unassailable competitive advantage given the older rival’s legacy burdens.

Successful business models are broad, complex and rooted in current reality.

Steadfastness in Leadership – Above all, the successful CEO must be steadfast, holding to the selected strategy even while pundits, customers and especially his direct lieutenants chorus their disapproval. Tom Watson, Jr. introduced tape storage over the objections of his top sales executives who feared losing the highly profitable punched card business. An Wang drove his company’s transitional leap from prior success in calculators to office computers despite the opposition of his top sales executive. Scott McNealy, overriding the recommendation of top Sun executives to resell Microsoft/Intel products, successfully positioned SPARC and Solaris to become “the dot in dot com.” Lou Gerstner ignored the advice of press and pundits to break up the company and jettison the mainframe, which instead remains profitable to the present day. Steadfastness requires that the CEO confront the inevitable conflict between grasping the future and holding the present.

What’s next? Some newcomers will follow the old path, inadvertently conceding the market to the traditionalists. Expect a round of SaaS vendors with their heads firmly stuck in the old license business. Don’t be surprised when new device makers enter the market with uncompetitive perceptions of customer support. Or by old vendors of “open” systems who fail to understand the new stresses posed by cybercrime on their unspoken architectural assumptions. In the interrelated world of global IT, no hiccup goes unfelt.

A Senior Partner of Ostriker von Simson, a consultancy which assists the largest worldwide enterprises in the selection and deployment of advanced technologies. Ernest von Simson is also co-director of the CIO Strategy Exchange, a private sector think tank serving top CIOs. He is on the board of directors of Arcsight, Levanta, and Optaros and previously of a dozen other technology firms. Author of The Limits of Strategy: Lessons in Leadership from the Computer Industry, von Simson teaches a seminar on entrepreneurship at Pace University.