Down market revives "buy from IBM" theory

As the economy sours, Corporate America is assuming a more conservative, risk-averse culture in which the "buy IBM" purchasing mantra is once again gaining ground.

5 min read
When Texaco began soliciting bids for parts of a $3 billion project to upgrade oil rigs with special software, Pradeep Anand thought his company's product would be a slam dunk.

But PointCross, a Redwood City, Calif.-based technology company with 30 employees and no signed contracts, still faces an uphill battle. Texaco has postponed its decision, and a key executive on the project admitted that at least part of the reason for not yet selecting PointCross is they are nervous about teaming with a venture-backed start-up in a high-risk industry: What if PointCross goes belly-up, like so many moribund dot-coms, and leaves Texaco in a lurch?

"The danger of losing all the information associated with a $3 billion project is substantially high," Anand said. "Contrary to popular belief, there are no risk takers out there. No one likes to gamble. We have to show them that they're not gambling but taking a very calculated risk."

Anand is one of hundreds of executives at technology start-ups coming to grips with the new reality of deal making in a downturn. Small companies are feeling squeezed out of big contracts because purchasing executives want a safe bet, worrying that unproven, often cash-strapped companies may fold or become unable to handle the project.

"No one gets fired for buying IBM" became a purchasing department mantra when the computer giant was at its zenith in the 1960s and '70s. Back then, risk-averse technology procurement executives would purchase IBM software and hardware simply because of the company's solid reputation--regardless of how well the IBM products actually worked in individual circumstances.

Business executives, entrepreneurs and analysts say the same philosophy has returned because of the current economic slowdown, which has been accompanied by an attitudinal sea change from the free-wheeling late '90s.

As the economy sours, Corporate America has assumed a more conservative, risk-averse culture in which managers don't want to buy products from smaller dot-coms--especially unproven entities whose venture capital firms may pull the plug if they don't show immediate profits. Instead of going with a start-up, they're relying on the 2001 equivalents of IBM--Oracle, SAP, Siebel Systems, consulting firms such as KPMG, and a few other large players that are squeezing out the small guys.

At the same time, those large companies--once perceived as overstaffed behemoths that weren't as nimble as the start-ups--are gaining ground in niche markets. The start-ups' financial bind combined with the big companies' advancements have served a "double-whammy punch" to young technology companies in the past year, said Adam Kapel, director of strategic marketing in Portland, Ore.-based Emerald Solutions.

"The viability of smaller companies to be here in three years for continuing support is a big concern," Kapel said. "Meanwhile, you've got companies like IBM in hardware and software and Oracle, Accenture and KPMG who have caught up and are now seen as equally innovative and targeted as these young start-ups. That makes it really hard for the start-ups to weather tough times."

Dot-com distrust
The skittishness among corporate buyers has spread to almost all of their business-to-business transactions. For example, content companies are concerned with the financial health of their potential advertisers; IT managers worry about the companies that provide Web hosting services or Internet access.

But it is see A News.com webcast: Dot-coms: Down and out?most pronounced among enterprise software, Internet service providers and consulting companies--all of which tend to be long-term relationships involving not only products, but upgrades, warranties, maintenance and customer service.

Although once largely unknown to young adults who have fueled the Internet technology boom, the "buy IBM" philosophy is becoming an increasingly common buzz phrase in Corporate America.

In a research note on Feb. 15, Merrill Lynch analyst Henry Blodget--once one of the most raging bulls for new technology companies--said AOL was gaining new accounts despite the fact that many customers have been "unhappy" with its services.

"This said, all agree that AOL's awesome reach make it the leader in the industry, enabling it to benefit from the 'no one ever got fired for buying IBM' phenomenon," Blodget wrote.

It's also becoming rather vogue for companies to liken themselves to IBM--an ironic comparison, considering that critics blasted "Big Blue" as an overgrown, bureaucratic, ploddingly slow also-ran when the Internet boom began in the mid-90s.

Sun Microsystems President Edward Zander alluded to the safe and secure, "buy IBM" mantra in a Business Week article in June: "I want to be the safe bet for companies that need the most innovative technology."

Likewise, Chief Executive magazine praised Cisco Systems in its July edition for becoming a modern-day IBM. Based on the results of a peer-group and reader survey, the magazine named Cisco's John Chambers CEO of the year because he installed the company's Internet Operating System as an industry standard.

"The expression, 'No one gets fired for buying Cisco,' is reminiscent of IBM in its glory years," the article gushed.

But perhaps no technology niche has felt the "buy IBM" bind more than the Internet consulting sector. In the past year, even those e-business consultants once considered blue chips are struggling. As venture capital money dries up and forces the consulting firms' dot-com clients to disappear, Internet consulting firms are courting larger corporate clients, going head-to-head against the Big 5 consulting firms.

"At large companies, the decision to hire a supplier is a very public one, and in these large companies, the old saw is still sharp: 'No one ever got fired for buying IBM.' Just change IBM to KPMG or another Big 5 name," preached the January edition of B2B magazine.

Landing the big one
Royal Farros, CEO of iPrint, said his 150-person company has had to learn new ways to lure large corporate clients in recent months. Stock in the Menlo Park, Calif.-based private-labeled print services business has dropped 98.5 percent since its 52-week high of $28.50, closing Wednesday at 44 cents per share. Farros says he spends more time assuring prospective contracts that the company can survive the downturn.

"There's a sentiment out there worrying about the financial health of dot-coms," Farros said. "We're a public company so we don't have to open our books, but we have to comfort them. We have to go in and show them our cash balance divided by burn rate...We have almost six quarters of cash, so they feel more comfortable."

Other technology companies are baring their books, boasting that they are "green" or "yellow" companies that have at least two or four quarters worth of cash to pay their employees and develop new products. (By contrast, "red" companies are those that, given current revenue streams, will likely not live more than two quarters.)

Small software businesses, including PointCross, are also promising to put copies of their source codes in a secure "escrow" account. That way, the client will have the code in case the start-up fails.

Although many companies are feeling the downdraft, Mark K. Weaver, an associate professor at University of Alabama who specializes in small-business management, said savvy companies can use the downturn to their advantage.

"I'm the 'glass is half-full' guy, so I see opportunities when the economy gets bad," Weaver said. "If what you're doing is taking on tasks that big corporations have done internally, you're in a good position. You can say, 'I'm not IBM, and I don't have that kind of security behind me, but I know how to save you money because I'm lean and won't charge as much as the IBMs.'"