Technology Hits a Midlife Bump

ARTIN PICHINSON is one of Silicon Valley's undertakers. His company, Sherwood Partners, has carved out a prosperous niche as an expert in shutting down failed technology start-ups on behalf of venture capital firms and other disenchanted investors. And, this summer, he plans to move his company's headquarters to Palo Alto, Calif., the heartland of opportunity for his rapidly growing business.

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Mr. Pichinson, 57, does not always bury companies. Some can be rehabilitated or sold off. But Sherwood Partners has shut down 150 once-aspiring start-ups in the last two years, and Mr. Pichinson figures that thousands more are destined to fold. His company stands ready to help things along.

"We're doctors of reality," said Mr. Pichinson, who began his business career in the garment industry. "You don't have to have a Harvard M.B.A. to know that more money has to come in than go out."

The winnowing of the corporate population is just one sign that the information technology industry is maturing in ways that will affect technology companies, their customers and investors for years to come. But what's painful for Silicon Valley is beneficial for those who use the stuff it produces.

The industry, according to Irving Wladawsky-Berger, a strategy executive at I.B.M., has entered "the post-technology era." It is not that technology itself no longer matters, he explained. Instead, he said, the steady advances in chips, disk storage and software mean that the focus is no longer on the technology itself — with its arcane language of processing speeds and gigabytes — but on what people and companies can do with it.

As a result, industry executives and analysts say, the balance of power is shifting away from technology suppliers and toward their corporate customers. At the same time, the use of lower-cost building blocks of computer hardware and software is spreading, making it easier for companies and individuals to share data and work together using industry standards rather than remain dependent on one or two main suppliers.

These trends, they say, point to increased pressure on prices and profits for most technology companies, a good deal for corporate customers and a very tricky time for investors.

This is more than a backlash against the bubble years, or a mere pendulum swing in attitudes and practices. The technology itself will still deliver waves of innovation in the future. Yet an industry that has risen to account for 10 percent of the economy and nearly 60 percent of business capital spending can no longer play by its own rules.

"I don't see a loss of faith in technology, but gravity has been turned back on," said Dick Lampman, the director of Hewlett-Packard's research laboratories.

Yet an article published last week in The Harvard Business Review does question corporate America's faith in the value of technology. Titled "IT Doesn't Matter," the article argues that information technology is inevitably headed in the same direction as the railroads, the telegraph, electricity and the internal combustion engine.

All of these industrial technologies aged from their boom-time youth to become, in economic terms, ordinary factors of production, or "commodity inputs," the article noted. "From a strategic standpoint, they became invisible; they no longer mattered," wrote Nicholas G. Carr, editor at large of The Harvard Business Review. "That is exactly what is happening to information technology today."

Most corporate executives, however, still think there is a lot they can do with technology to give them an edge. Glen Salow, the chief information officer of the American Express Company, sees the recent trends in the industry as working to his advantage. First, he said, the hard times in the technology business have increasingly meant that big corporate customers hold the upper hand in their dealings with suppliers. That shift, Mr. Salow added, has given him not only more bargaining power on price, but also more influence in the products and services that are developed.

Corporate customers want to use technology to achieve goals like cutting costs, improving customer service and speeding the pace of bringing new products to market. But in the past, the computer industry has often treated customers with a certain arrogance, selling raw technology, take it or leave it.

 
MR. SALOW recalled a conversation he had in the late 1990's with the chief executive of a major computer company, whom he declined to identify. As Mr. Salow recalled, the computer executive told him, "My job is to make the hottest box on earth and deliver it on your loading dock."

"You don't hear that kind of talk anymore from him or anyone else," he said. "There has been a huge change from that perspective. The voice of the customer is being heard."

Corporate customers are insisting that technology companies adopt industry-standard software formats and communications protocols, so that the many different kinds of computer systems in corporate data centers can work together. In doing so, the companies are encouraging a technology trend that was really kicked off by the Internet, with its global reach that connects all sorts of technologies. For the Internet to work, the computer plumbing had to cooperate. And hardware and software standards make it more difficult for technology companies to "lock in" customers to their more expensive, homegrown technology offerings.

With their new power, customers are also pressing for greater flexibility in how they buy computing resources — especially as a utility-style service in which they pay only for as much as they use, as if they were buying electricity. Mr. Salow signed a utility pricing and outsourcing deal with I.B.M. last year, in which 1,500 technology workers were transferred to I.B.M. The arrangement, he explained, reduces fixed technology expenses, giving American Express more flexibility.

The widespread use of software standards, Mr. Salow added, enables the thousands of internal programmers at American Express to build new applications almost as if snapping together Lego blocks, reducing the amount of code that has to be written by hand. A result, he said, is that the software for, say, a new credit card offering or a fraud-detection feature can be built and put into use in about two weeks; five years ago, this might have taken six months.

"It all frees you up to take more gambles because each risk is not so costly and you can move a lot faster," Mr. Salow said.

Several big companies besides I.B.M. — including Hewlett-Packard, Sun Microsystems, Microsoft, Oracle and Veritas — are moving to utility computing. But Salesforce.com was founded in 1999 specifically to capitalize on the trend. It sells sales-force automation software over the Internet; users with a standard Web browser get access to it for a monthly fee.

Marc R. Benioff, the founder and chief executive of Salesforce.com, regards his company as a force for change in an industry that he says is still mired in the "preutility era." In the future, Mr. Benioff said, "the risk and complexity of computing should shift to the utility."

Mr. Benioff's message and his low-cost, no-frills offering have gone over well at a time when companies are squeezing technology budgets.

Salesforce.com expects its revenue to about double this year, to $100 million. The company has started with sales-force automation, a software market where Siebel Systems is the leader.

Yet Mr. Benioff has ambitious plans to move into other big software markets where companies like SAP, PeopleSoft and others sell software for managing manufacturing, planning, human resources and other operations for large corporations. These big, complex "enterprise" software systems can cost millions of dollars and take several months or years to install and use.

"I think there is going to be a huge democratization of these enterprise technologies because of this on-demand computing enabled by the Internet," Mr. Benioff said. "Our evangelical mission is to destroy enterprise software as it exists today."

 
THE push toward utility computing, according to Mr. Wladawsky-Berger of I.B.M., fits neatly into his concept of a post-technology era. "In the last few years," he said, "the underlying components have become so powerful, reliable and inexpensive that you don't have to worry so much about the underlying engine, and you can move up to higher-level concerns."

I.B.M. has moved more and more toward becoming a provider not only of technology, but also of business expertise in 17 industries from banking to electronics and transportation. Its $3.5 billion purchase of PricewaterhouseCoopers Consulting last year was a step toward that goal.

Mr. Wladawsky-Berger is in charge of guiding that strategy, which I.B.M. is promoting as "on-demand computing." The on-demand concept represents a maturing of computing in a sense, he said, but more as "the next evolutionary step in information technology, where the fun really begins" rather than an aging industry in decline.

Each successive wave of computing — from mainframes to minicomputers to personal computers to the Internet — has opened the door to new users and created new problems. Each of those, in turn, must be addressed if the industry is to move ahead. The Internet brought an explosion of computing complexity. And while many dot-coms are gone, Internet technology has spread widely, becoming a mainstream technology in corporations.

Marc Andreessen, a co-founder of Netscape Communications, whose software introduced Web browsing to millions and touched off the Internet boom, is now chairman of Opsware, whose data-center software is intended to tackle the complexity crisis. "At Netscape, we were building all the software components that made this possible and created the problem, and we didn't grasp the implications," said Mr. Andreessen, who is 31.

I.B.M., Hewlett-Packard, Microsoft and Sun have also begun major efforts to address the complexity problem with automated management tools that can replace people. But analysts say there is also room for innovative start-ups like Opsware.

"At the same time there is this relentless cost-cutting, there is also a lot of excitement about this market for tools to cope with the complexity conundrum, where a boatload of computer science is going to have to move into the corporate mainstream," said Mark Stahlman, an independent industry analyst.

Roger McNamee has been a professional investor in technology companies for more than two decades, starting as an analyst at T. Rowe Price. In 1991, backed by Kleiner Perkins Caufield & Byers, the venture capital firm, Mr. McNamee became a co-founder of Integral Capital Partners, a so-called crossover fund investing in start-ups as well as fast-growing public companies. Integral Capital thrived in the 1990's. But late in the decade, Mr. McNamee said he and his partners became "really concerned about how wacky the market had become." In the second half of 1999, at the peak of the bubble, Integral returned $1.5 billion to investors in its main fund.

In 1999, Mr. McNamee and three colleagues founded Silver Lake Partners to invest in mature companies. Silver Lake quickly raised $2.3 billion from institutional investors and wealthy individuals, including three of technology's best-known billionaires, Bill Gates, Lawrence J. Ellison and Michael Dell. Silver Lake's strategy is to make longer-term investments, taking a five-year perspective, of $250 million or so in each company. "We're looking mostly for winners in consolidating industries," Mr. McNamee explained. "This is a period of thinning the herd."

And once the downturn is over, Mr. McNamee is skeptical that spending on technology will ever return to its long-term trend, dating back to the 1960's, of increasing at two to three times the growth rate of the economy. So, he said, broad-based technology funds are probably a formula for losing money. "This is absolutely a stock-picker's environment," Mr. McNamee observed.

For its part, Silver Lake is betting that the corporate winners will include Flextronics, a contract manufacturer of computers, cellphones and other products; Seagate Technology, a disk drive maker; Gartner Inc., the technology research firm; and Ameritrade, the online broker.

One of Silver Lake's investors, Mr. Ellison, the chairman of Oracle, has been one of the most vocal proponents of the view that the technology industry is graying. "Thousands of companies are on life support that just have to die," he said. "Our industry is in the inevitable process of maturing."

Yet Mr. Ellison's concept of a maturing industry is not exactly a listless old age. There will be fewer companies and slower growth, he said, but still plenty of leeway for entrepreneurial creativity. "There will continue to be very cool new computing technologies," Mr. Ellison said.

Unlike so many industrial technologies — railroads, say, or the telegraph — the stored-program computer is a general-purpose tool, animated by software, a medium without material constraints. The unrelenting pace of improvement in processing speeds, data storage and miniaturization means the tools are more powerful and smaller; people then figure out things to do with them.

Indeed, innovation continues apace, despite the downturn. Advances are evident in a range of technologies — wireless, data center automation, speech recognition, intelligent software, telephone service over the Internet, sensors, natural language processing, and on and on.

Underestimating the potential for computing has proved a common pitfall over the years, from Thomas J. Watson at I.B.M. in 1943 ("I think there is a world market for maybe five computers") Ken Olsen at Digital Equipment in 1977 ("There is no reason anyone would want a computer in their home").

Jim Gray, a computer scientist, has worked in the industry for more than 30 years. For his pioneering research on databases and transaction processing at I.B.M. and elsewhere, he won the 1999 A. M. Turing Award, sometimes called the Nobel of computer science. "I've seen the `end' at least twice in my career — only to be surprised by the next wave," said Mr. Gray, who now works for Microsoft. "My guess is that this computer thing has just gotten started."