The Recession-Proof Enterprise Software Market: It’s Not 2002

The last time we had a major slump in tech spending was way back in 2002. It was an interesting year to be in the enterprise software market, as report after report showed that IT managers were holding back on technology spending, and thereby punishing an industry that had already seen a large chunk of its market– in the form of dotcom, e-business companies – simply disappear.

It was all doom and gloom, all the time.

Ah, those were the days…. of deeply flawed analysis that failed to see the subtleties at work in what was a major shift in IT spending and software utilization. Rather than doom and gloom, the trends of 2002 heralded the beginning of a new boom in enterprise software, one that today promises to keep much of the enterprise software market largely immune to the current economic crisis.

And as long as things stay screwed up the way they currently are – with bad loans, poorly regulated financial practices, and rogue trading à la Société Générale leading the market’s current malaise – the chances are actually quite good that enterprise software will emerge from 2008 with real growth.

Here’s what was really happening in 2002. Don’t get me wrong, we were definitely in a recession, and general market growth, wages, unemployment and other factors were strongly in favor of that conclusion. But the enterprise software market actually had a very different set of problems on hand: a run-up in spending for Y2K and dotcom business models that left companies flush with largely unused software and not enough business coming in to justify buying more.

This software bloat was all over the place. Companies had bought thousands of seats of CRM, SCM, procurement, e-commerce, and other products in the fervent hope that software buying alone would help them remain competitive in case – and this was really an “in case” moment – one or more of the current market fads would turn out to be the key competitive differentiator that would propel them into the brave new dotcom, e-business world.

This spending on applications had followed fast upon a huge surge in infrastructure spending to ward off the other fantasy of the fin de siècle: the so-called Y2K bug. In a similar way, Y2K-driven spending produced an infrastructure glut that left many companies with a severe case of software indigestion as the recession hove into view.

The irony of this software surplus is that, pretty much simultaneously, vendor claims that enterprise software was a net, and measurable, contributor to overall productivity were starting to be recognized as fact, and not just wishful thinking. Alan Greenspan started the ball rolling in 1999 with the almost startling observation that technology spending correlated with overall productivity. As the new century got under way, more and more evidence that IT spending could drive greater productivity was emerging from all sectors of the economy.

Which brings about the other reason why the doomsayers of 2002 were missing the mark. The recognition that IT increased productivity heralded the start of a significant shift in high-tech buying patterns, particularly when it came to enterprise software.

A new buyer emerged, the line-of-business buyer, for whom software was a means to drive direct revenue growth and competitive advantage. These buyers started showing up in droves, opening up new revenue sources and new opportunities for a software market that had traditionally sold much larger, and admittedly very bloated software projects, to big budget IT managers.

So while survey after survey showed that IT spending was hitting a wall, it was clear that the surveys were asking the wrong buyers – CIOs and IT managers, whose budgets were pegged to overall financial performance and for whom the recession meant a genuine cut in spending. But if anyone had bothered to ask the line-of-business managers, they would have found that these buyers were waking up to the fact that strategic application deployment could have a significant impact on bottom and top line revenue, and they were starting to buy and buy and buy.

So, let’s bring this analysis up to the present, and see how it all compares. Unlike 2002, there is no similar software glut in either applications or infrastructure. Au contraire – companies have been cautious in introducing new infrastructure in recent years, and as far as I can tell, most are planning to continue long-term upgrade projects that will easily take them through 2008.

Point number one: There’s still a lot of infrastructure – as in enterprise services and the like – to sell, even if the overall economy starts slumping. Reinforcing point number one is the fact that those line-of-business buyers haven’t lost the mandate to buy software that can improve the top and bottom line.

Which brings us to point number two: There’s still a healthy demand for innovative applications. If a software expenditure can be justified with respect to improving revenues or lowering costs, the green light is still on. Surely, sectors like financial services and retail may be in for a serious slow-down, but by and large line-of-business buyers realize that, even if things do slow down, enterprise software can increase productivity, improve competitive advantage, and otherwise have a positive ROI and positive net effect on the business.

Finally, there’s point number three. So far, despite the very negative news that seems to arrive every day, what’s happening in the credit and financial markets ain’t nothing compared to the meltdown when the dotcom bubble burst. Let’s remember those heady days of disintermediation and e-commerce: that bubble was all encompassing, with the entire economy, including many many ma-and-pa investors, playing the stock market like hedge fund managers. When the bubble burst, everyone got dinged, or worse.

Now, while every investor is getting dinged by the fallout from the falling market, the big losers are, very unfortunately, a lot of poor people who were sold mortgages they never should have bought, and, much less unfortunately, some very wealthy individuals and institutions who bought the securities built on this sub-prime mortgage house of cards. When you see companies like SocGen roiling a big European exchange because of a rogue trader, it’s actually a relief to know that the whole business model of the Western economy isn’t being challenged by a reality check that was long in coming.

That’s the difference between then and now – the fundamentals are still fundamentally strong, and the koolaid from the sub-prime mortgage mess hasn’t been drunk by an entire population of investors.

And that’s why point number three is so important, and why a lot of strong tech companies turned in strong fourth quarters. There’s still a lot of strength in the economy, and still a lot of reasons why businesses won’t just disappear they way they did in the last recession.

So, take a breath and think of 2002, and then be glad it’s 2008. Enterprise software is still a strong bet for buyer and investor alike. And will continue to be so, despite the chaos in the rest of the economy. See you at the upturn.