[Editor's note: Needless to say, there's been a lot of panic surrounding the downturn. And panic tends to breed ominous comparisons to past crashes and tough times. For the tech industry, 2001 is the scariest throwback scenario possible. But anyone calling 2009 the next 2001 is jumping the gun, says Deloitte's Eric Openshaw. Below, he explains why prospects are a lot brighter today.]
Remember 2001? Bad news touched all corners of the tech industry. Are we seeing a return to this crash-and-burn scenario seven years later? I don't think so. With IT integrated as a vital tool for growing and streamlining businesses, the industry is in a much different place.
Of course no one is immune to recessionary pressures, but two trends have emerged that will keep tech strong through the slump -- technology consolidation and management innovation.
Past successes have given the big players a major advantage: enough cash on-hand to fill in their R&D gaps. Cisco has about $27 billion, Google $14 billion, and Apple $24 billion, reports the New York Times. The drop in their stock prices portends a race for acquisitions. Companies that have watched their capital dry up in recent months have quickly become targets for cash-rich buyers. These include venture-backed startups that have fallen victim to the liquidity crisis, as well as larger entities with balance sheets registering large amounts of debt.
We've already seen evidence of this trend. IBM snapped up Cognos for about $5 billion at the beginning of the year to pump up its business intelligence strategy. Dell bought storage provider EqualLogic; BMC Software absorbed BladeLogic for data center automation; and Yahoo acquired video publishing platform Maven Networks for just $160 million.
With the drop off in IPOs, expect to see acquisitions rise as the prime exit strategy for early-stage venture capital startups hoping to extend the life of their technology. Yes, most VCs would like to see the fruits of their investment take root as a public company. But any investment that results in long-term viability is a positive.
Acquisition can help ensure continued competitiveness, but in a recession, the companies that are most likely to survive and even flourish are those that innovate from within. A well-run organization can always find a way to deliver greater value with fewer resources
Google has long understood this. When Eric Schmidt joined the organization (in that watershed year, 2001), he immediately instituted what has become known as the 70/20/10 management model. Workers spend 70 percent of their time focused on their core job, 20 percent on related projects that could lead to breakthrough products, and 10 percent on unrelated creativity -- the stuff of big dreams and passion. This approach essentially allows workers to vote with their feet not only on where they want to spend their time, but also on the direction they think the company should take.
This is a structure we expect to see a lot more of -- and not just in the U.S. HCL, a a leading global IT service provider based in India and worth $5 billion, is an adherent of this model. It practices "talent transformation" -- the shifting of top employees to the most exciting and valuable projects. And its emphasis on providing value rather than volume has driven much of its success.
Another avenue for innovation is rethinking supply chain strategies. It's assumed that reducing suppliers makes it easier to conduct business and drive economies of scale. But I believe that increasing the number of vendors -- employing service-oriented architectures -- is actually more beneficial.
For instance, look at Li & Fung, a Hong Kong-based consumer goods trading group. It doesn't own a single factory. Yet in 2007, it brought in $14 billion in revenue thanks to its complex international supply chain. Reengineering traditional processes can rapidly accelerate production. And relying on complementary partners can allow a company to focus on developing its few major strengths.
In addition to acquisition and management structure, my company, Deloitte LLP, is a strong advocate of the 80/20 approach to cost cutting. Instead of wholesale slashing, a smart organization will take the time to evaluate which customers generate 80 percent of its profit and which parts of the company itself create 80 percent of its value. It then works backward to retain that 80 percent, while trimming the other 20. It's a forward-looking strategy that retains the best of any company. Many fall into the trap of slicing and dicing a bit here and there, but end up owning the same problems.
Yes, the coming year probably won't be a piece of cake for tech, but no one should be looking at it as 2001 redux. The industry today is far more robust and mature, and the global economy has never been more dependent on not just its survival, but its ability to thrive and lead the way.
Eric Openshaw is vice chairman and U.S. technology leader at Deloitte LLP. He has more than 30 years of experience advising clients on enterprise transformation, process reengineering and merger and acquisition strategy.