Technocalypse: The economic crisis and it’s impact on innovation

Financial markets are in free fall, the credit market is frozen, the economic crisis is nearing biblical proportions, and investors are running scared (The credit crisis and bailout in plain English). The technology industry, more than any other, is driven and buoyed by venture capital money and without continued and sustained operating capital many companies will succumb to the end faster than they normally would have – the world no longer runs on dreams alone.

Recently Sequoia Capital hosted an event with about 100 CIO’s from their portfolio companies. The message was clear: “Game over man, game over” It is about survival, which means slash and burn, stop R&D investment, freeze headcount and focus efforts on preserving capital (here) – my guess is that many of those companies will not survive the decade.

What does this have to do with innovation?

There is no single way that every company responds, but most companies will move into capital preservation mode as they perceive every dollar spent is a step closer to the abyss of bankruptcy. This will result in budget cuts for new projects and existing projects going under the microscope. For some companies there will be reductions in force, many contracts most likely will not be renewed, and investment in new technologies will be limited and require a strong, justifiable and defensible ROI (the ever elusive white whale of the security industry) – hard dollar costs savings must impact the current fiscal year or the CFO will nix it – same for services or outsourcing. For technologies that are currently deployed the organizations will look to extend their value, for technologies not yet deployed there will be a strong emphasis on replacement of existing technology and infrastructure consolidation that can result in cutting FTE’s, costs, etc. There will be a lot of stalling, negotiating and finger pointing in the coming year. The A/R departments of most vendors will be working 16 hour days.

Couple of predictions:

  • Innovation will come to a grinding halt until the credit markets recover and capital is made available. Innovation tends to be driven by start-ups, not well established large, broad-scoped vendors. Over the past decade many start-ups have acted as remote R&D wings for larger vendors, once the technologies coalesce into a well know problem, with a set of solutions and actual buyers, then the large vendors step in and scoop up the smaller players and we have market consolidation (examples – DLP, SIEM, etc)
  • The impending banking and financial oversight that will result from the economic crisis, the bail-out (current and those still to come) and a new presidency will result in laws that will be once again misinterpreted and impact IT through a set of silly compliance initiatives that will both delight the services/consulting industry, and piss off/distract the IT people.
  • Organizations will become more focused on finding efficiencies of process with what they are currently using as opposed to finding the next piece of technology that solves x,y, and/or z – this could be a good thing for some, but putting lipstick on a pig of technology, only results in a silly looking pig.
  • Many organizations will turn to a 3rd party services or outsourcing model and they will find that the 3rd party is just as sucky in providing those services as they were themselves. Hilarity ensues when SLA’s are not met and now the organization is not in a position to reclaim ownership.
  • Every vendor will become a virtualization, cloud or SaaS vendor, many of them will not even know what that means until they become virtually bankrupt with their dreams as a service (DaaS) stuck in the clouds.

This whole thing will result in accelerated, forced enterprise and vendor Darwinism. Only the strong companies with a proven track record of success built on an operating and business model that is both agile and pragmatic will survive. For those that do survive they will exit the crisis foundationally stronger than they have ever been, they will become the new technology thought leaders, their employees will be highly respected and their leadership will be in high-demand. For me personally I am very bullish on my companies prospects and more importantly I am embracing the experiences of our time as an opportunity for growth and learning, plus it’s nice to know that items on my shopping list are less expensive than they were 12 months ago.

9 thoughts on “Technocalypse: The economic crisis and it’s impact on innovation

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  2. “Only the strong companies with a proven track record of success built on an operating and business model that is both agile and pragmatic will survive.”

    Ever seen a great white shark attack a surfboard thinking its a seal? Since when is being pragmatic a Darwinistic trait of “survival of the fittest?”

  3. @Joe

    Really, that is your argument against pragmatism in the business world as one of the tenets for survival? In the case of the Great White, you are talking about an animal that has been evolved over millions of years to take a seat at the top of the food chain, the fact that it uses biting in the way we use our hands to feel, doesn’t generally result in it’s death or serious injury. If a shark bites a surfboard the impact on the shark is minimal. On the other hand a business that isn’t judicious in it’s cash management will perish, like Lehman Brothers.

    The laws that apply to nature are not always literally transferable to the business world.

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  5. Though I appreciate the points which you’ve brought forth in this post I wonder if there isn’t one or two which should’ve been included were not. I believe it is safe to say that in many respects innovation is driven by those 1-5 guys / gals who get irritated with large-bloated-vendor-x and decide they can do better and for less and begin the beautiful and sometimes painstaking task of creating a start up. Reality dictates however that startups more often than not need no help from economic conditions (good or bad — if you don’t believe me conduct an audit survey of key players in and from the valley who have been active for the last 20 years and ask them about the voluminous numbers of start ups which came and went with VC & Angel capital to burn even in the best of times) to pull themselves into the Abyss of economic despair and subsequent bankruptcy (I will direct you to the flagrant mismanagment of the famed Predictive Systems which was acquired by INS now part of BT which at one time had an acquarium rumored to be worth 1 million USD in their Manhattan office — this was during the boom and yet the boom came down upon them and others). Innonvation will not come to a grinding halt. It can’t simply put. For to suggest such a thing would also suggest that an integral element of the human animal has so too come to a grinding halt and universally decided to flit the bit switch to the ‘off’ position. Innovation will continue however scrutinization (from within start ups and outside of them), will become more prevalant as time to market varies depending on what exactly the innovation is and to what degree it addresses a need (not a want — in other words I need solution to aide in the uptime of my sales force, bolster productivity while ensuring the highest level of efficient security management for client data but I want a 100gbps switch…needs vs wants just like mom and dad taught us about in our youth). The economic conditions represent opportunity for both internal IT shops and those who cater to them. You assert that due to the recent bailout and other recent occurrences that a littany of new, misguided legislature will ensue which will subsequently confuse, confound and lead to increased levels of irritation on the part of those who are tasked with ahering to and ostensibly, complying with. I believe however that this is an opportunity in disguise provided that organizations succomb to a mindset driven by true governance (think ITIL kids not legislature) and sound risk management practices, philosophy and execution (never mind bollocks, let’s look to frameworks not individual acts to help guide us). I have spent most of my adult life in Information Security & Risk Management and have been beating this drum (like so many others before me) to deaf ears, however I believe that the time soon will be ripe for organizations to embrace and truly capitalize (for the benefit of all involved — clients / customers, vendors, consumers, shareholders), from sound risk managment practices. This will of course require work and no shortage of intellectual honesty. Difficult to fathom but not impossible. In some respects this will see organizations seek to optimize and maximize their current investments and environments but by no means should this mean or suggest there will not be opportunity to innovate and grow these environments to meet the current & future needs going forward. Does this mean there will be a shift (yet again), towards outsourcing / outtasking? To an extent, yes but this is nothing new and shouldn’t be given any more concern than outsourcing or outtasking has received over the last 20 years. It’s a fact of life in the business world and won’t change any time soon. Organizations will always look to cut costs and save in the near term (especially those responsible for answering to wall street). With respect to vendor every vendor becoming a software as a service provider….I think that there will be an upswing in that but just like anything else there will be natural cycles associated with subscription to these services and the parting of ways with these providers in order to reclaim ownership of the service and bring it in house. In the end however, it is my belief that solid governance strategy combined with a mature risk based model will win out and that those organizations which seek to subscribe to them (start up or enterprise), will do far more favorably in the end.

    my .02

  6. The ideas mentioned are very inspirating. I am just wondering having above discussion in mind if this crisis may lead to global repositioning in innovation and technology power. Putting some key trends together like saturation of private and public money in Europe and U.S., cost cutting spread at TNCs (including R&D budgets),… and some perception that only strongest have chance to survive, this may consolidate innovation around some key global centers. U.S. will most probably remain leader but who could be the second? Not sure about Europe. Interesting how it will touch China – it may result that Chinese could leverage the crisis to move quickly forward (e.g. through acquisition of currently cheaper technologies..). Then cost cutting – will this result in just killing the projects as mentioned or it will be more aggressively shifted to low cost countries?

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