Lesson From History

I am starting to see signs of important changes in technology and IT organizations. The increased complexity of IT and business services forces the industry down a new path. In this context, there are signs reminiscent of what happened to the mainframe vendors in the late 80s and early 90s, when the transition from proprietary to open systems was usually not very successful. In fact, the major players of today (with the exception of IBM) were small potatoes in the 80s, while the major players of that time are either gone or dying. And some vendors today seem to be following the same recipe for eventual disaster.

What’s happening, in the case of a major change of market direction in a company with revenue based on old technology, is what I would call a “sales force failure.” This is the inability of the sales force to get out of its base of usual customers and compete head to head with new vendors in the new market.

Usually these organizations are technically capable of building up-to-date products, but the sales results often don’t meet expectations. Since the new product created internally does not sell, the company management may be tempted to fix the problem (i.e., satisfy the shareholders in the short term) by cutting the cost center, that is the engineering organization making this new product. With R&D gone, the marketing group  may license another product to replace the one that it killed. Of course, the margins are not the same, but the cost is almost nonexistent. Eventually, this product does not sell either (the sales force is still in the same condition), and, when the old legacy products are finally dead, the company is no more than a value-added reseller.

It is extremely difficult to get out of this predicament. A distribution network is a hard thing to build, and, when built, it is even more difficult to change. By comparison, it seems easier to dispatch the R&D group, because there are many products on the market that can be sold with a reasonable margin.

But this is only cosmetic. The actual work of steering the company in another direction has not been done as long as the marketing group and the distribution channel have not renewed their modus operandi.

Building an effective R&D group is no easy task either. Innovation, or perceived innovation creating value for the end user, is still the main competitive advantage in new, expanding markets like IT management software. Engineering teams capable of vision and talent take time to create. They are important assets, and careful consideration should be given about their long-term role before considering them a “cost center:” They are the key to future revenue.

Regards,

JP Garbani