Market Upheaval Bites IT

SAN MATEO (04/14/2000) - A shakeout is coming for the dot-com start-ups of the New Economy, and the impact on users could be long-lasting. The likely consequence is a shift away from traditional two-to five-year strategic IT planning toward nimble business models that let users quickly chart new courses in IT strategy.

Recently, technology stocks on Nasdaq and other securities exchanges have taken a hit, with investors particularly nervous about the business-to-business space. That, coupled with dire predictions of bankruptcy and consolidation by IT market research firms Gartner Group Inc. and Forrester Research Inc., points to a dot-com roller coaster headed downhill.

"I think it highlights the need [for dot-com start-ups] to have solid business models," said Brent Reynolds, an operations analyst at Capitol One. "Those who don't are doomed to be taken over, which, for many start-ups, is part of their business strategy."

However, many dot-coms are generally viewed as running ahead without a map and with little prospect of showing a profit. The spectacles of start-ups announcing that that they might run out of cash have caused Wall Street to pull in the reins.

This week, Gartner predicted that 95 percent to 98 percent of Internet start-ups will be acquired, merged, or out of business in two years. Forrester echoed that prediction with a strikingly similar time frame, declaring that there will be three waves of consolidation for business-to-consumer dot-coms.

The business-to-consumer sites selling products such as books and music face consolidation in the fall, about the same time undifferentiated product vendors will begin going under, predicts Forrester. However, merchants selling heavily branded products will be stable through 2001, according to Forrester.

Although some dispute the numbers, Merrill Lynch predicted a 75 percent casualty rate before Gartner; the trend is unmistakable. With an estimated 400 to 500 public Internet-based companies, there has clearly been funding for companies "that won't make it," said Ed McCabe, an analyst at Merrill Lynch.

"Throwing money at everything Internet will slow down. This is a natural weeding out of the market," McCabe said. In the PC, automotive, and biotechnology industries, for instance, there were shakeouts where a few dominant players were culled from many.

End-users should have few worries about the major, established IT suppliers, but they will have to do a better job of scrutinizing the business viability of their dot-com providers, McCabe said. In particular, the net market makers who are behind the daily blooming of highly speculative Internet trading exchanges are vulnerable, he said. But they are not major players yet. "If they fail, they won't turn an industry on its head," he said.

So, as bankruptcies and consolidations loom, end-users need to apply some of the old rules to the New Economy, said Bob Parker, an analyst at AMR Research, in Boston.

A nimble approach is the byword -- even AMR cautions clients that they might have to abandon their business-to-business IT implementations after a year because the market is changing so rapidly, Parker said. "You have to be willing to throw them [the installations] out after a year," he said.

As stopgap measures, end-users should maintain their access to third-party suppliers' code, ensure that there's a knowledge transfer, and be prepared to shift quickly, Parker said. "The ground under your feet isn't exactly solid yet," he said.

To adjust to a new business model, users "can turn to the guru consultants," and do a better job of understanding the mechanics of market forces, as well as incorporate those dynamics into their business models, Parker said. "It's kind of like going from being an observer with a telescope to an air traffic controller. It won't be for the faint of heart," he said.

Although some end-users agreed that a purge is under way, others said the dot-com frenzy is still at a fever pitch and will continue well into the decade.

"I think 2001 is too aggressive; it will be more like 2003," said Randy Beaver, a relationship manager for technology and operations at Bank of America in San Francisco. The Internet economy is "still in full swing right now," he said.

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