It should go without saying that the current financial crisis is going to loom large over the business plans of young and new software companies. In fact, there is an article out that suggests that the removal of Lehman and Merrill from the buyer pool has reduced the IT budget of the financial services sector by 6%. Let’s let that marinate for a moment.
It’s one thing to have a cyclical contraction in spending. It’s another thing entirely to compound that problem with demand destruction. Worse still, the demand destruction is not due to a symptomatic pricing issue, but rather the abject removal of key buyers from the market.
Even more complicating is the difficulties in financing businesses operations. I’m not talking about raising venture money, but good old commercial credit. Many companies use debt for expansion, and many times that expansion includes computer systems. Companies are now having their hands forced to not just pay lip service to lowering their CapEx associated with IT, and moving it to OpEx. They have no CapEx dollars left. They need (must) find a way to fund software and services. Enter SaaS business models, and the Cloud more broadly. I would expect a knee jerk and rapid migration of buyers in the market to seek out SaaS solutions for line of business applications, and a reduction in spending on CapEx associated with IT.
Here’s the sad irony of the current financial debacle. IT is what got us here. IT has been wielded as an offensive asset for many of these firms. The calculations required to price and model out many of the derivative products they were buying in insane. I almost took a job at Merrill working on their Fixed Income Derivatives desk back in 1995. Scary. Here’s what’s more scary: my Fixed Income homework from my FNC235 class (*there’s a nod to all Wharton peeps who ever had Prof. Basak) is what got me the job. The MD actually said “hire this guy. I can’t make heads or tails of his homework and he got them all right.”
People worry about Google being the current incarnation of Skynet, but I would look more to the systems which have been handed the ability to make trades for humans based on human created models which very few people understand, much less can maintain in such manner as to adapt to what are being called 10 sigma events.
I was in NYC when 9/11 happened. I remember a quote that still hangs with me: that we suffered a failure of imagination in our ability to stop the terrorist attacks. There’s a similar sentiment to be had here. The failure of imagination in the building of these models has led to many models essentially acting (reacting?) the same way, causing herd like behavior in a flight to or from assets. The combination of programmed trading, naked shorts and no uptick rule has led to some serious unintended consequences.