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For a bath-free 2003 !!


2002 Wrap-up: Bubble Aftermath II, A New Dawn

I wager that 2002's legacy will prove to be that it was the year when one was busy to ensure one would continue to be busy, rather than being (simply) busy as in the immediate past. In 2002, deals were done but they required a lot of shepherding. The main question in my mind, though, is whether that legacy will be confined to 2002 alone (as I hope) or will it extend onward another year or two.

Virtually the entire technology market--and adjacent markets--were engulfed by the dotcom, telecom and Y2K bubbles, during which markets lost touch with themselves and we even had a "new economy" that broke all the rules ;^}. If we define a market as a vast collection of signals, information and expectations, it is almost as if all participants must now go through a prolonged period of reexamination and testing to find out what's real, now that we know something about what wasn't.

We've all seen a series of business scandals and debacles, the scale of which almost anyone would have deemed impossible before 2002, and few would bet unequivocally that we've reached the end yet. The resulting uncertainty has created 2002's overall theme: survival by using technology to solve specific, operationally focused business problems. This survival theme was a constant throughout my discussions with corporate executives, IT managers, technology entrepreneurs, consultants and VCs this year.

In a positive development, everyone more or less accepts the new reality and recognizes that today's uncertain climate may well persist for some time. Consequently, there is a "stiff upper lip" spirit, "Let's move on and do the best we can." Although macroeconomic data are inconclusive as to corporations' IT investments, I see a broad recognition in the market that investments must proceed, but they have to be carefully justified. This raises the bar for providers of IT services and products, but those who remain in the market have adjusted to these demands for the most part.

In 2002, we reached a new equilibrium that set the stage for pockets of expansion in 2003. I say "pockets" because I don't believe that the market will grow uniformly and rapidly in 2003; rather, activity will center around niche opportunities that will grow steadily before congealing into a general upward movement later.

The Ghost of E-Business

In 2002, e-business simultaneously became a memory that died with the dotcom boom and a pervasive, invisible reality. In the late 90s, the lion's share of business value from TCP/IP (Internet) based applications was produced by start-ups, who had knowledge of how people could use asynchronous, digital interactions to accomplish business tasks. Deep B2B domain knowledge wasn't necessary to create value in the early years; rather, insight, creative engineering and speed to market were the keys to success.

As adoption progressed, however, deep understanding of B2B business processes became imperative, and in 2002 it completely eclipsed "Internet" knowledge as the source for creating business value with TCP/IP-based applications. In 2002, the "e-business revolution" completely devolved into a mere continuous evolution, and it's now in the hands of domain specialists in corporations and government, who are applying e-business to increasingly complex and arcane business processes. Start-ups that succeed must have a relentless focus on their customers' specific business processes.

Significant barriers made technology investments challenging propositions in 2002. First and most obvious, the tech-led stock market meltdown discredited technology investments in general, and lower stock prices made everyone feel poorer. Not only that, countless business plans had assumed market returns of 10%, from pension plans to corporate treasury to fund managers, and far lower stock prices diminished corporations' "currencies." As if that weren't enough, corporations' unprecedented investments to counter Y2K and dotcom threats produced low returns when compared with the scope of investment, and no manager wanted to be perceived as making "frivolous" IT investments. Hence, spending was curtailed and everyone insisted on rigorous business cases for technology investments.

Countering these challenges, most of the principles of e-business withstood the test of time, and this kept technology investment on the table. Even better, the technology in TCP/IP-based (Internet) applications improved significantly. The surest sign of an awakening of IT investment next year is economics itself: firms' IT investments haven't paid near the expected dividends, so they will be compelled to get those systems working and producing economic returns.

Here is how they will do it...

Technology White Knight

Web services burst on the technology scene in 2002, even though the technology had been around for years. Following the classic adoption pattern, Web services were used by visionaries in 2001 and an increasing number of early adopters for enterprise solutions in 2002, although most of the market shrugged off the technology. The tech industry, desperate to create demand, hyped Web services incessantly, which raised the suspicions of jaded, cynical technology buyers.

Make no mistake about it, though, Web services will accelerate e-business adoption and technology investment because the technology offers exactly what global enterprises need: a fast, relatively inexpensive "point-to-point" approach to integrating their systems with their suppliers' and business partners.'

One of the reasons that the technology investment wave collapsed in 2000 was that the users of Internet applications had visions and expectations of "one click" visibility into any information related to their transactions. These expectations could be met in many B2C solutions because those transactions were relatively simple. B2B transactions, however, usually involve deep supply chain integration among highly specialized legacy systems, and there was no practical, quick means to integrate these systems to provide the desired functionality. That painful technology constraint was a key force in pushing the whole market into the ravine.

However, this is precisely what Web services and "service-oriented architecture" deliver: rapid, controlled and extensible connectivity for corporations' largest and most complex systems. As analysts and early adopters explained in conferences throughout 2002, Web services and service-oriented architecture are key enablers of the extended, e-business enterprise.

Web services are a standardized approach to packaging and sharing bits of key corporate information by turning data and software functionality into "services" that can be used by other applications. A simple example that you may have experienced is using UPS's package tracking system from within an e-commerce site to track the route/status of your order. Another way to think about it is that the e-commerce site "syndicates" functionality of UPS's site. As slick as Web services are, however, they don't produce value unless the underlying systems have an architecture that is componentized and flexible (a "service-oriented" architecture). Happily, corporations can use SOA to rearchitect their legacy systems to "unlock" their data and make it available to customers and business partners via Web services.

Technology and Innovation

Paradoxically, the state of the market made it much more difficult to build a tech company in 2002, but few of the critical success factors of building companies changed. Regarding marketing strategy, the market's general guiding principal was a focus on hard-hitting, visible operational problems. Corporations and, increasingly, individuals were in survival mode, which was a serious business. Everyone had been burned by technology investment or knew someone who was. To put it mildly, enthusiasm dampened for "next big thing" value propositions #;-/

These were environmental factors; however, this climate was little different than a "normal" climate for creating technology companies except that the degree of adversity was greater due to the bubble bust. Few of the tactics or premises for launching companies were different--it was just that they were more important and there was less margin for error. Investors and buyers were no longer in an experimental, bullish mood, so founders had to have a much more compelling value proposition, they needed the right IT strategy, and they had to execute especially well. On the plus side, there was less competition for business and employees ;-).

Regarding business and IT strategy, I would watch developments among the major nodes of technology consumption, corporations and government. Web services and service-oriented architecture will increasingly give corporations new capabilities and challenges. As more corporations adopt open, service-oriented architectures over the next two years, I would make sure that my value proposition and IT strategy were in synch with that.

In addition, e-business is enabling corporations to morph their business models, as many have long predicted, myself included. For one example, travel through Citibank's and American Airlines' websites. Notice the degree of commitment within the alliance, which is reflected by color and symbolism. I don't know this for a fact, but I would guess that the strategy for their alliance revolves around redefining currency because they operate in adjacent links of a currency value chain. Citibank's customers are rewarded in the currency of airline frequent flyer miles, and American Air fulfills them. What if American Air sees itself as a brand for fulfilling airline miles and it were to shift emphasis into building a core competency in this area? (after all, it already developed a huge "side" business in SABRE). Theoretically, it could exit the airline operations business at some optimal point, a business that has high capital requirements, low profitability and overcapacity in many markets.

Markets Scrubbed

Of course, markets gyrated wildly throughout 2002. As I observed their antics, it seemed very obvious that the markets were flailing, trying to find a new equilibrium. At a high level, I see markets as complex systems for finding the value of the goods and services that are being exchanged. Once participants get badly burned, they have to go through a prolonged period of testing in order to find out what's real and what they can bet their money on. The whole system was badly discredited in 2002, and it will take quite some time for confidence to return.

On the plus side, demographics are an unalienable force that will help the market. Boomers are a large educated population that needs the highest returns it can get, and the stock market has proven itself as the most efficient means to earn the highest returns over time. Also, the 90s tech boom engaged an unprecedented percentage of the population and educated them, and I believe that their continued participation will prove to be a permanent change.

The markets gored dotcom executives, and regulators and the larger market pilloried corporate executives. Unfortunately, this was a necessary part of the bubble cycle, which accomplished several things that will help the market to return to normalcy: it reset expectations ("it's okay to make less money"!), it gave burned investors a feeling of control and retribution, which will facilitate their reentry into the markets, and it is producing some checks and balances that will attempt to make future bubbles more difficult.

As far as 2003, I hazard that it will be largely more of the same but that pockets of support will build. This will happen because markets are fundamentally a social phenomenon, and most participants are rewarded when markets are efficient price finding mechanisms. I do think that a steady wave of support for technology markets will build beginning in 2003 and throughout 2004, especially as a consistent e-business (technology) value proposition unfolds. Web services and SOA are a technology and approach that will provide major customers what they need to achieve the extended enterprise. This will present numerous opportunities for innovation for people with deep domain (industry) knowledge.

But... Wild Cards Persist

Any of these exogenous factors can interact to produce "special effects" on the technology market (pack your 3-D goggles, but I hope you won't need them ,^)...

2002 saw the U.S. retool its military, which had been organized around "fighting" the Cold War for over fifty years. It vigorously pursued perceived enemies worldwide, with apparent success. I believe that the Bush Administration is fully aware that containing terrorist threats is vital to rebooting the economy, and it also keeps al Qaeda on the defensive. It's obvious that a healthy economy is a potent weapon in fighting a prolonged war.

It's easy to have a sense of security due to the lack of attacks on the U.S. mainland this year, but markets are weak and vulnerable to further exogenous shocks. In fact, markets worldwide are in an unprecedented global recession, a side benefit of globalization: Europe is now dragged down by its former economic strongman, Germany, not to mention the costs of integrating its members and an aging population. Japan is mired in quicksand, Latin America has melted down, and India and Pakistan are rattling sabers. China will continue its robust expansion, but it is an uncertain capitalist (and investment), to say the least!

From the perspective of the technology market, terrorist enemies have proven themselves over time to be tenacious and extremely difficult to neutralize permanently, so I believe that government and the private sector will be significant consumers of technologies related to security, biochemweapons and military mobility for the next several years.

The venerable consumer market largely carried the U.S. economy overall in 2002, and I fear that it's treading on thin ice. Consumer borrowing is very high, and the housing market is showing signs of weakness. Predictions abound on both sides, that it is in its own soon-to-be-burst bubble or that its robustness is solid due to demographics (boomer wealth and investment). This is a major wild card for 2003 and the one I fear the most.

A major unknown is "war" with Iraq, both in terms of its length, terrorist fallout and impact on oil prices (and therefore on the economy). Obviously, Iraq has prepared for such a war for many years, and it's difficult to predict what it might have in store on the battlefield. On the other hand, the U.S. military has learned a lot in terms of tactics and its weapons constantly give new capabilities.

Toweling Off

In all, 2002 was a painful one for most in the technology and consulting sectors (yours truly was a member of both!). Anyone who had lived through a major bust in the past could have told us so, but the fascinating thing about life in the Information Age is that it's not only about information, it's about life experience. We all looked at the numbers; we knew what past busts and bubbles looked like by the numbers. And most of us still took a bath to some extent, one way or another. Although a painful experience, it reminds me that life is about living and making choices that might be fortunate or not. Also, to use a knowledge management concept, a lot about investments and bubbles is tacit knowledge, which one can only acquire through experience. If we encounter another bubble, I know that many of us won't get burned as badly the second time.

I am also convinced that the tech bubble was unavoidable. When you're considering widespread adoption of a new model of creating economic value like e-business, there is always a huge gap between envisioning how it can work and making it work consistently and pervasively so that it produces a consistent economic return. The stock market didn't recognize that difference in the 90s and would not have recognized it without a strong, prolonged message that it was out of whack. The market didn't know when to stop.

A satisfying thing about the technology market in 2002 is how predictable it was, from a development perspective. The e-business life cycle that my PwC Consulting colleagues and I built is being realized right on schedule (see "The Rise of the Extended Enterprise"). Web services and service-oriented architecture are the technological mechanisms that will make pervasive connectedness among enterprises a reality because they are realistic and practical.

We rebooted in 2002, and the tech market will be resuscitated in 2003, although it will be groggy for a while. Pad your seat as much as you can for further bumps, but look for vital signs next year.

My best wishes to you and yours for 2003!

Former Wrap-ups