The Economic Climate and SMEs
Where’s the innovation?
The software industry these days is all about ‘Web 2.0’ applications hogging the limelight. It seems that the most innovation in the tech industry is coming from SME’s and consumer software companies. Big software enterprises like Oracle, Tibco and SAP claim that this is due to the ‘lock-in’ nature of database architecture. The database is at the center of everything. The “business intelligence” tools that are sitting on top of ERP and database systems is oxymoronic, as it is only a tool for generating reports – meaning that it delivers information about what’s happened to your business after the fact, when it’s too late for you to do anything about it, so it’s not really “intelligence”. Innovation in the enterprise software industry deserves a failing mark. Despite the huge up-front investments for ERP, BI, CRM and payroll software, it seems that SME’s are being much more creative. Take a company like Alfresco Software for instance; they created an enterprise content management system entirely based on open source. They dramatically lower TCO through open source distribution, working in the user’s native environment and by minimizing training. The industry has been so enthusiastic about this product that they now have more than 200 customers, which include governmental institutions like Harvard, MIT and the European commission.
There are hundreds of examples like Alfresco, we believe that SME’s and consumer software companies are nowadays the real innovators in the enterprise software industry. The problem is that 500-pound gorilla companies like (again) Oracle and SAP acquire these innovative SME’s as soon as they become a threat to their existence. In just three years time Oracle spent well over $20 million to acquire 30 companies in the enterprise software industry. Oracle’s strategic goal is clear: buy innovators for their technology and customers, then stitch the acquired technology together into their massive application suite. Oracle has shown over the past years that they are internally unable to innovate, thus they can only show growth by acquiring the innovators that the market needs so badly. The problem is obviously that these SME’s are very susceptible to disruptions in the economic climate. Stable and beneficial economic circumstances are needed for small companies to perform organic growth. The climate of economic conditions thus proves to be a vital driving force for developments in enterprise IT. SME’s emerge when economic conditions are good, and in this mundane industry, it are the SME’s that innovate the most.
Economic conditions as impetus for innovation to arise
The period in advance of the dot-com bubble in 2000 was marked by a lot of newly founded IT companies. Due to “suffix investors” stock prices were shooting up if those companies simply added an “e” prefix to their name or a “.com” to the end. A massive initial batch of sell orders processed on March 13th triggered a chain reaction of selling that may have been accelerated by business spending in preparation for the Y2K switchover. The exact causes of the crash have been debated ever since it occurred but eventually the NASDAQ collapsed, in just six days it had lost nearly 9 percent and many dot-coms ran out of capital and were acquired or liquidated. In the aftermath, the dot-com bubble crash wiped out $5 trillion in market value of technology companies from March 2000 to October 2002. A few large dot-com companies, such as Amazon.com and eBay, survived the turmoil and appear assured of long-term survival.
Enablers
We believe that it takes three basic but critical ingredients for the creation of a financially sustainable (innovative) IT enterprise that is capable to withstand recessions and bubbles.
Access to continuous markets
Having access to the market and a potential set of clients who have a continuous need for a product or service and are willing to pay for it. Long-term viable business opportunities can lead to a sustained advantage. This force attributes to the creation of a stable economic climate where IT firms have room to grow and innovate.
Sufficient skill and experience to create a beneficial environment
It might sound rather simplistic, but sufficient skill and experience to not only provide the product/service, but also to set up and manage a growing IT business that is able to keep on innovating the company is rare. This force is to emphasize that IT corporations should try to take an ambidextrous view on the market (outside-in and inside-out).
Venture funding
Venture funding is required to set up the business and allow it to test the business opportunity until the business stands on its own. Regardless of the many business opportunities that might lie ahead, in the case of an economic meltdown investors tend to become risk aversive and opportunistic funding becomes rare, leaving many SME’s out in the cold.
Inhibitors
A surge of the Gross domestic product
The current U.S. GDP is projected to shrink by 0.9% due to the economic crisis (2009). The most recent numbers are that IT expenditures will drop by 3.8% . This decline means an even greater drop than the 2.1% shrinkage due to the bursting of the Internet bubble in 2001. Corporate IT expenditure is thus highly correlated to contemporary economic conditions. It is therefore safe to say that as costs are growing and growing, companies might start looking for more efficient enterprise solutions in times of an economic downturn e.g. alternatives like open source enterprise software.
Venture funding becomes rare in times of an economic downturn and thus threatens the survival and emergence of SME's. Which in turn is detrimental to the creation of disruptive enterprise IT software.
Corporate greed
It appears that innovation stops in the enterprise IT industry when the Management is willing to become a target for (hostile) take-over. This 'willingness' usually originates from personal incentives. SMEs have proven to be more innovative than big enterprise IT vendors. The industry needs these SMEs, but when the management is volunteering or agreeing on a merger: R&D budgets are cut, people are laid off, corporate culture is destroyed and the focus on innovation slows down.