The Tech Challenge

Businesses are fed up with paying for underperforming technology. They are looking for products that will save money and spur growth

By Steve Hamm. With Andrew Park in Dallas, Roger Crockett in Chicago, and Spencer Ante in New York.
Business Week

August 27, 2001

Late last year, when the economic ice storm howled into Silicon Valley, software maker Adobe Systems Inc. (ADBE ) had been toying with the idea of buying a $10 million system for managing its sales operations. Instead, to hold down costs, it signed up with an Internet company, Inc., which provides 200 salespeople with up-to-the-minute information about their customers and sales activities via any Web browser. The cost: a mere $50 per person per month. Setup time: a couple of days. "It was something we could use immediately and very inexpensively," says Bruce R. Chizen, Adobe's chief executive.

Those are words that CEOs rarely get to utter when they're talking about computers and software. Indeed, according to Lew Epstein, Adobe's vice-president for North American sales, who lined up the deal, "software typically delivers less than you expect in more time and for more money than you expect."

This is the tech industry's greatest failing. For years, producers of everything from computers and software to handheld gadgets have promised products that are ever more powerful, easier to use, and increasingly affordable. All too often, the industry has failed to keep those promises. U.S. corporations spent $2.2 trillion on information technology during the 1990s, says market researcher IDC. That helped productivity growth rates nearly double in the second half of the decade. But corporations also spent money on stuff that didn't live up to the hype. At the same time, consumers were deluged with new gizmos, software programs, and Web-browsing experiences. Some were megahits, such as the Windows PC operating system. But many more were flops. Remember Apple Computer Inc.'s (AAPL ) Newton? It was supposed to understand handwriting--but couldn't.

Now comes the big cool-down. A decade-long cycle of a booming economy and technical innovation has come to an end. Nobody knows exactly how the next months and years will play out. But one thing is sure: Now, more than at any time in the past decade, buyers are demanding products and services that really deliver.

Business customers are in deep penny-pinching mode. Their info-tech spending is expected to increase just 8.6%, to $1 trillion worldwide this year, vs. 12.4% last year, according to IDC. That's forcing them to concentrate on getting the most out of the software and computers they already have. Anything new has to guarantee that it will boost productivity or create new sources of revenue. The goal is getting a healthy return on investment, or ROI. "Businesses are saying they want more bang for the buck out of the technology they buy," says Michael D. Fleisher, CEO of market researcher Gartner Group Inc. "If this industry doesn't deliver that, it will lose the hearts and minds of the business leaders, and they will look elsewhere to make their gains."

For consumers, the era of being guinea pigs for tech companies is over. A host of new gizmos and services is on the way. They're supposed to do for the rest of the house what the food processor and microwave did for the kitchen: harness technology to make life a lot easier. But to win converts during an economic slowdown, these products and services will have to be inexpensive and work as reliably as the telephone. "You'll either take that seriously, or you won't be able to play," says Craig Mundie, senior vice-president for advanced strategies at Microsoft Corp.

Winning over those tightwad corporate buyers will be the toughest immediate challenge. According to a survey in late May of 225 chief information officers by Morgan Stanley Dean Witter & Co., they're most likely to cut consulting and new custom software development--the really complicated stuff. Least likely to face the knife are hardware and software that improve security, networks, and customer relationships. The first two are essential to keeping e-businesses running. Companies are counting on customer-relationship software to cut costs and boost revenues.

QUICK RESULTS. Seven months ago, Orlando-based Hard Rock Cafe International wanted to boost revenues by increasing the frequency of visits of regular patrons to its 104 restaurants. Using E.piphany Inc.'s (EPNY ) relationship-marketing software along with a set of fan-club programs, it amassed a list of more than 225,000 customers. Hard Rock then e-mailed promotional offers to these customers that encouraged them to visit its restaurants and buy souvenirs on its Web site. After one promotion, Hard Rock sold more than $150,000 in merchandise. Often it takes years for corporations to make back the cost of their technology, but Hard Rock already has recovered 80% of its expenses. "It was a very quick turnaround," says Kelly Maddern, director of information technology.

One of the most promising new technologies for producing a solid return on investment is collaborative software. These are programs that improve communications between employees, or between a company and its suppliers and other business partners. Using software from i2Technologies (ITWO ) that links it with its suppliers, for instance, energy producer Ashland Inc. cut its annual costs by about $30 million. By taking purchases that had been made independently by people at its 100 facilities and focusing them on one online catalog, and by reducing the number of its suppliers from tens of thousands to about 1,000 reachable online, Ashland secured volume discounts from those core suppliers. Plus, because the e-purchasing system creates close collaborative relationships, Ashland's suppliers recommend products that are more appropriate and affordable.

To get employees plugged in so they can collaborate and make decisions quickly, many corporations are buying laptops or handhelds equipped with wireless technologies that blend the mobility of cellular with the rich information of the Net. For instance, Microsoft Corp. (MSFT ) has installed a wireless local-area network on its vast corporate campus in Redmond, Wash. If an important meeting is called suddenly, an employee away from his or her desk can find out via an e-mail alert to a laptop computer, then wirelessly tap into the Web to gather information and prepare a presentation for the meeting.

Not everybody is up for trying out cutting-edge technologies, though. Some corporations just want help in digesting the technology they already have. One approach gaining popularity is so-called enterprise integration software--which links disparate programs so information can be passed more easily between them. Pirelli, the Italian tire company, wanted to link its inventory and order systems to its 2,000 tire dealers to reduce inventories and improve customer service. But it decided not to buy new customer-relationship software. Instead, Pirelli bought integration software from TIBCO Software Inc. (TIBX ) in Palo Alto, Calif., which connects more than 100 software programs that didn't previously work together. Pirelli figures this approach cost half as much as adding new applications, and it was up and running in one-third the time.

For some products, a better return on investment comes from paying less. That's what's happening with PCs: Computer makers are slashing their sticker prices to win business. The average price for a business PC has dropped 19% since last fall, to $1,017, according to market researcher NPD Intelect. Dell Computer Corp. (DELL ) is leading the charge--advertising cuts as deep as 20% and going even deeper when it negotiates individual contracts. Blue Shield of California recently wrangled a deal for 700 Dell PCs that will save it about $1 million off the price it paid to a competitor for a similar deal last year.

Price cuts likely will slow at some point, since desktop PCs have become unprofitable for most PC companies. Now, a new price war is being fought over more powerful computer servers.

MAKE IT WORK. Dirt-cheap hardware alone doesn't solve corporations' biggest technology headache: the complexity of managing big networks. To address that, most hardware makers are starting to sell computing as a service to their corporate customers. Joining a host of companies, they operate data centers that run Web sites and applications and store data for corporations, delivering services as a utility via the Web. Analysts say companies can expect to shave 15% to 20% off their costs by outsourcing their computing this way. The latest advance in the data centers is the arrival of so-called blade servers, computers that are less than two inches thick and can easily be added when more power is needed. Concern about handing over their data to outsiders has slowed the takeoff for computing-on-tap. Still, the economic pinch is driving corporations to cut costs, so IDC expects the market to mushroom, from $6.4 billion last year to $59.9 billion in 2005.

The just-make-it-work imperative is equally acute when it comes to consumer products. For years, tech companies have been promising high-speed Internet access. Because of the cost and complexity, fewer than 10 million American homes have speedy access. To woo customers, companies are now making it far easier to install and use than in the past.

Previously, subscribers who didn't want to pay $200 for professional installation had to load several CD-ROMs and install modem drivers to get their PCs to work with their new modems. It might take a few hours--or a few days--to get up and running. SBC Communications Inc. (SBC ) last year started providing new subscribers with a package of self-help software that streamlines the setup process. The software walks customers through the setup in less than an hour. SBC says 85% of new subscribers use the software, and the company is adding 4,000 fast-access customers a day. The payoff: SBC ranks No. 1 in the country, with more than 1 million such subscribers.

Other broadband providers are doing similar things to make their services more palatable. That's one reason market researcher TeleChoice Inc. expects U.S. residential fast-access phone connections to grow from 5.7 million this year to 14.5 million by the end of 2003.

That kind of attention to the consumer experience will be needed to make the online music business take hold. By attracting 26 million users, the Napster music-swapping service proved that both the technology and the demand exist to turn the Web into a powerful music distribution vehicle. Now that court challenges from the music industry have eviscerated Napster, it's up to the recording companies to transform music on the Web from a phenomenon into a business. Two major online sales sites owned by partnerships of the major labels, MusicNet and Pressplay, are expected to debut by the end of the summer. Their first challenge will be coming up with prices customers are willing to pay that also deliver profits. The winning sites will be the ones that use this new media to create a truly compelling new experience--as MTV did 20 years ago. RealNetworks' (RNWK ) site is showing the way with its GoldPass subscription service. For $9.95 a month, subscribers get access to a wide variety of music, video interviews with pop stars, and live sporting events. The service has landed more than 300,000 subscribers in a year.

SEEN, NOT HEARD. Look for a similar breakthrough in the popularity of home computer networking. IDC expects homes with networks to quadruple, to 16.4 million by 2004. The allure: Home networks will let several people in a household get online, at one time and for one price. AOL (AOL ) is working on software to simplify setting up and using such a network. Microsoft (MSFT ) is building basic home networking technology into its upcoming Windows XP operating system. On top of that, if you have one wireless network at home and another at work, and you carry your laptop back and forth, you don't have to fiddle with the computer settings anymore to switch from one network to another. The laptop "discovers" the networks and then automatically makes the switch to the correct network.

This kind of machine-to-machine communication could bring the next important advances in computing. Microsoft, for one, is creating a family of technologies called Hailstorm, due next year, that stores such personal info as your name, address, credit cards, and calendar, and passes it--with your permission--between Web sites. It's designed to ease online purchases, to alert you when your airplane flight is late, or to let you know when you're due at the dentist. All of this happens in the background, so you don't have to get involved in the details. Companies including American Express (AXP ) and Verizon (VZ ) are testing the technology. Hailstorm fits in with the vision of Nicholas Negroponte, Media Lab director at Massachusetts Institute of Technology: Digital servants shouldn't require a lot of supervision. "These things will be able to know you, be able to learn, be able to improve--and be able to get out of your face," he says.

Tech slowdown? Sure. But this also is a time when practical new products can emerge that deliver value and satisfaction for customers, shaping the way technology is created and used for many years to come.


Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.