John Katsaros

Our Peet's Index is Down

Our simple way to understand how well the economy is doing is to watch the crowd outside of Peet's Coffee, right across the street from IRG Galactic Headquarters in sunny downtown Los Altos. In the morning it's the spouses driving their bright new fancy cars and in the afternoon it's the job seekers taking a bike ride at the end of the day. Unfortunately, this month's index is down – the fancy new cars aren't new anymore and, worst yet, at 5PM there were 25 bikers hanging in and around the coffee shop. Not a good sign for May's e-commerce index.

Getting Out of this Hole

In the past we've recalled Charles Kettering's famous quote from a speech he gave in the 1930s during the depression to a group of advertising executives, "I believe business will come back when we get some products that people want to buy." Kettering, the inventor of the electric car-starter, founder of Delco and head of GM's research labs to 1947 after he sold Delco to GM in 1916, was one of the leading technologists in the early half of the twentieth century. In the same speech, Kettering also said, "Research is simply to find out what you are going to do when you can't keep on doing what you are doing now." These are both excellent points and as relevant today as they were eighty years ago. But where will the buying start? We believe that for tech infrastructure companies the way out of this recession will be led by the financial services industry for two reasons - 1) As a percent of revenue, financial services spends more on IT than any other industry sector; and 2) Financial services companies are the fastest when it comes to changing their spending plans (while some industries set out 12 month budgets with little chance of changing mid way, financial services companies are known to review IT spending allocations on a monthly basis if needed). So if you're an infrastructure company take a look at your NY facing financial sales teams (if you don't have one put one in place immediately) and get ready to catch a wave of spending (hopefully).

Strategies for Gaining Market Share in a Difficult Economy

While we're not expecting you to put each of these twelve strategies to work, we're hoping that a few might stimulate your thinking as you make your plans for 2010, a year which may be brighter than 2009 but still with its complications:

1. Change your value proposition to suit the times - Customers need to see very strong value props.

2. Adjust your packaging and/or price point - You might still be using a pricing strategy that made sense in early 2008 but doesn't suit today's environment.

3. Go for market share - Market share is cheap right now. Do what's necessary to gain adoption and win over new customers/use cases, even if it means chasing smaller deals that can grow later on.

4. Hire your competitors' top sales performers - they could be frustrated.

5. Focus on the pipeline - Work each deal to its fullest and find ways to win back those that have dropped out.

6. Google Adwords are cheaper now - So use them.

7. Shift more resources to sales - Do the math to see if more feet on the street will pay off.

8. Get new sales team members up to speed in half the time - Makes sense to figure out what slows this down.

9. Get support and engineering teams in front of more customers - It's amazing how effective this can be at winning over new use cases.

10. Sell more to your installed base- Heck, they like you already.

11. Go Vertical - Gives you the ability to develop stronger value propositions and to partner with other vendors to offer more complete solutions for your customers.

12. Track Discounting - It's an early indicator as to whether demand is strengthening or softening.

Cisco Joins Dow

This week GM was removed from the Dow Jones industrial index and replaced by Cisco.  GM was the last automaker on the index.  Now there are five high tech companies in the Dow including HP, Intel, IBM, and Microsoft.  I guess the only surprise here is why it took so long.  Cisco has been a bellwether of high tech spending for years.

Who will the winners be?

This week President Obama formally nominated Julius Genachowski as the next head of the FCC. One of the highlights of the new administration's economic recovery plans is its inclusion of significant spending for expanding broadband but what that means (or how that is measured) isn't yet clear. Obama said, "It means expanding broadband access to millions of Americans, so business can compete on a level-playing field, wherever they're located," but that doesn't tell us a whole lot. Today the US broadband footprint starts with large DSL and cable providers providing access in major metropolitan areas, smaller cable operators serving the next tier and an army (2,000 or so) of smaller WISPs (Wireless Internet Service Providers) serving clusters of rural areas where terrestrial cable and DSL providers are economically unwilling to serve. So what, exactly, will expanded broadband mean — free or reduced pricing to low income urban families, subsidized services for hard to reach homes in low density rural locations? Satellite dishes for everyone? Maybe Genachowski will provide some hints during his nomination process.

Passing on the Uphill

This week someone reminded us of a famous quote attributed to Lance Armstrong — "I pass on the uphill" which is as good advice to cyclists as it is to businesses during this recession as was Wayne Gretzky's quote "skate to where the puck is going to be, not where it is" during good times. It's hard to gain ground on your competition during the downturn as there is a sort of randomness as to which groups of customers cut their budgets and when. On the downhill side of a recession things are in freefall. But real market share battles begin once things bottom out and customers start increasing their spending. Getting your timing right is tricky but you don't want to be caught without enough selling power. It's the old problem — deep cuts in marketing and sales may impede your ability to ramp up fast enough to catch the market when it turns. Everyone's situation is different but "feet on the street" might be the best way to keep on top of customers' spending plans so that you can pass others as your markets start moving uphill. Once again, the all important "sales pipeline" is one of the best early indicators to measure future performance.

The "ilities" aren't enough

The "ilities" don't work as value propositions because everyone has them. You know what the ilities are - marketing buzzwords like scalability, reliability, usability, maintainability, interoperability, openness-ability and portability. These do not reflect any basic customer sensibility or requirement. Most customers are immune to these words since all vendors make the same claims. But what we find most worrisome is that despite these glaring problems, many vendors actually seem to believe their own nonsense for instance by believing that their "scalability" is better than anyone and customers will line up for a piece of it. It is one thing to fib politely in a customer presentation (where you are not exactly expected to speak the complete truth), and it is another thing entirely to build a business strategy on the same flimsy reasoning (to ‘‘inhale your own exhaust'' as it is colorfully described). To our horror, in all too many cases, after mixing their marketing Kool-Aid they actually drink it. We are not against marketers who spin stories to promote their new products. This is part of the game when dealing with creative and highly charged entrepreneurs. As insiders we enjoy seeing creativity at work. The ‘‘spun'' truth is as OK as a polite lie, but can be deadly if you actually believe it. What are we preaching? If you rely on the ilities, it's time to rework you value proposition to something much more substantial (read on...).

Market Conditions

It's easy to blame your present frustrations on "Market Conditions." By all appearances, times are tough, especially when compared to those good old days of bubble economics. It's gotten so that you don't want to turn on the TV. By now we've all seen Sequoia's October PowerPoint of Doom telling their portfolio companies that the GOOD TIMES were over and to get real (cut down expenses) or go home. It's times like this that you can't help but recall Charles Kettering's famous quote from a speech he gave in the 1930s during the depression to a group of advertising executives, "I believe business will come back when we get some products that people want to buy." Kettering, the inventor of the electric car-starter, founder of Delco and head of GM's research labs to 1947 after he sold Delco to GM in 1916, was one of the leading technologists in the early half of the twentieth century. In the same speech, Keetering also said, "Research is simply to find out what you are going to do when you can't keep on doing what you are doing now." A lot of companies are caught up in the same dilemma. In the past few months, the world has changed --products that made perfect sense 24 months ago may have little relevance today. Other ideas which maybe didn't previously get traction might potentially be big hits. It's time to sort this out and figure out "what people want to buy."

Selling Our Way Out of this Recession

So what's the big picture? How, and when, does this recession end for technology infrastructure companies? Back in 2002 when we were asking this same question about that recession, our answer was relatively straightforward -- we pointed at the financial services sector as being the tipping point for tech companies to come out of the recession -- that's because financial services sector: 1) could gain a lot of competitive advantage from technology deployments, 2) was one of the largest spenders on Information Technology (as much as 10% of revenue in some years), 3) was quick to make changes in their budgets (some companies could change their budgeting in just 30 days) and 4) was relatively healthy. And in fact, that is pretty much what happened as financial companies not only led the way out of that recession by spending on new tech infrastructure, they also helped opened up important new value propositions -- compliance and service management -- which previously had been niche markets. Many infrastructure companies were able to build up the financial services market as the "anchor tenant" of their verticals. Our advice to our clients was "the subway token salesman" -- hire a salesperson in lower Manhattan and be ready when the financial services companies started spending again. So how does the recession end for infrastructure companies this time around? There are a lot of worrisome market sectors -- the financial services market is compressing (while generally negative, this may open up some opportunities for infrastructure spending in support of M&A activities). Automotive is in trouble. Manufacturing is flat on its back. Higher Education may have to cut back technology spending as they figure out how to straighten out their endowments. Retailers are worried about making it through the holidays. Wholesale distribution and transportation/package delivery are going sideways. So are Consumer Products companies. Media and Telecommunications companies are faced with difficult decisions. The travel and hospitality industries are under stress. On the positive side - Healthcare looks promising (during the presidential campaign Obama cited technology as an opportunity to significantly reduce healthcare spending) although spending may take time to ramp up. Life Sciences (pharmaceutical, biotech, medical devices) is relatively strong. Engineering and Construction might get a boost as part of the recovery package (although, once again, real spending on technology infrastructure might take time to come online). Aerospace is holding its own. Defense and Home Land Security possibly will help. The High Tech sector has a proclivity for infrastructure spending. That leaves markets like utilities which, while interesting, are relatively small contributors.

So what's the way out? Once again, a recession is something that infrastructure companies will have to sell their way out of. As odd as it may sound, the subway token salesperson for financial services markets is probably not such a bad idea, although this time around a broader strategy is needed. The financial services sector has to settle down pretty soon (if it doesn't then the recession won't end) and when it settles technology spending budgets will begin strengthening. And with more regulations on the way, compliance and service management will be an even bigger driver for changes to financial technology infrastructure. But with fewer financial services companies and a smaller workforce, this time a broader base of vertical sectors is needed. Clearly Healthcare and Life Sciences are markets worth investing in. The same goes for the Federal market. Our suggestions are to "go vertical" by marketing specifically to industry segments. - Reach deep into several verticals, find meaningful value propositions, develop vertical partnerships to establish high value use that will drive technology decision making. Next Issue: Part #2.

Recession Tales

If you didn't think there was a recession before you went the RSA conference, you might have come away with a completely different view. The conference was "too quiet" which may have been due to its unusual scheduling (usually the conference is in February while this year it was in April during a week which conflicted with two other infrastructure events plus Spring Break for many families). But you couldn't help feeling the slowdown -- it didn't seem as big or as active as past RSA events. And there is plenty of reason for thinking that the security business could be in for an economic driven slowdown. As you know, the security value propositions have evolved to include risk and compliance. Several vertical markets, most notably the financial services vertical (banking, securities and insurance) consequently play a greater role in the early adoption cycle of these products -- the financial industry understands risk and has lots of regulations to deal with. Unless you've been under a rock for the past six months, it's hard to miss the fact that the financial sector is being pummeled due to the mortgage crisis -- companies in this space are loosing billions. It's well known that companies in the financial sector are quick to respond to changes in their bottom line by increasing (or in this case decreasing) their IT spending. And of course, it's likely that what gets cut first is discretionary spending on new project initiatives (the very thing that the security infrastructure sector needs the most). So it may be that there is a direct path from the front page woes of the financial industry to a slowdown in the rate of adoption of new security initiatives. Usually, we look to the financial sector to lead infrastructure sectors out of a recession by being the first to increase budgets. The question is: "If not them, then who?"