The Tech Challenge

Late last year, when the economic ice storm howled into

Silicon Valley, Adobe Systems 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, Salesforce.com, 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 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 Salesforce.com 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. US

corporations spent $2.2 trillion on IT 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’s 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 Fleisher, CEO of market researcher

Gartner Group. "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

VP for advanced strategies at Microsoft.

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’s 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. 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 has installed a wireless

LAN on its vast corporate campus in Redmond. 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.

Tyre major Pirelli 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 in Palo Alto, California, 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 RoI 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 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 websites 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 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

expects US 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’

Real.com 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 is working on software

to simplify setting up and using such a network. Microsoft 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 and Verizon

are testing the technology. Hailstorm fits in with the vision of Nicholas

Negroponte, Media Lab director at MIT: 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.

By Steve Hamm with Andrew Park in Dallas, Roger O Crockett in

Chicago, and Spencer Ante in New York in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc