A few weeks ago, Warren Buffett announced that Berkshire Hathway was the single largest investor in IBM In an interview with CNBC, Buffett explained:
We went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things.
And later:
It’s a company that helps IT departments do their job better. r. But, you know, we work with a given auditor, we work with a given law firm. That doesn’t mean we’re happy every minute of every day about everything they do but it is a big deal for a big company to change auditors, change law firms. The IT departments, I—you know, we’ve got dozens and dozens of IT departments at Berkshire. I don’t know how they run. I mean, but we went around and asked them and you find out that there’s—they very much get working hand in glove with suppliers. And that doesn’t—that doesn’t mean things won’t change but it does mean that there’s a lot of continuity to it. And then I think as you go around the world, IBM, in the most recent quarter, reported double-digit gains in 40 countries. Now, I would imagine if you’re in some country around the world and you’re developing your IT department, you’re probably going to feel more comfortable with IBM than with many companies.
That’s well and good. IBM is the best of the enterprise software companies, and enterprise software is much more a game of getting vendor lock-in than a game of producing superior products. If you’re evaluating a company in that sector, step one is to call every CTO you know and ask how inconvenient it would be for them to switch to another competitor, and step two is to wait for the P/E ratio to drop.
Then again, one could use the same process to go long Oracle stock, and Oracle’s most recent quarter was a big disappointment for investors. Oracle didn’t mess up anything in particular—everywhere you look, they showed up slightly under expectations.
That’s just one earnings report, but it’s a harbinger of things to come. The enterprise pie is shrinking, and the consumer web is responsible.
Most of the interesting companies selling to businesses aren’t selling a massive software plus consulting package to a big company’s CTO; they’re either sneaking into an organization through the engineering team, or growing with their customers.
Take GitHub, for example. Github provides the world’s best way to manage programming projects (not “manage” in the sense of coming up with Gantt charts, but in the sense of being able to track changes to a codebase, spot bugs, test new features, etc.). The details of what Github does don’t quite matter here—what matters is how they’re growing.
Github’s pricing starts at $0, for open-source projects. Their smallest account is $7 per month; for a single developer working on a single special project at work, that’s a good deal. Business plans start at $25/month (at many companies, that means no management approval necessary), and scale up in cost as they get more projects. At the high end, Github offers an Enterprise product with the kind of security features CTOs are paid to care about, for a minimum of $5,000 per year.
It is insanely easy for Github to get one person at a big company using it (in fact, it’s safe to say that every respected technology company employs at least a few Github users—in some places, a Github profile is a substitute for a résumé). And once people start using Github for a single project (then a single team, then a single office, then everyone), there’s no point at which it’s simpler to switch to another product than to use Github.
But the CTO can be oblivious to most of this process. The bigger the company, the longer they can stay oblivious. If due diligence starts and stops with the CTO, it’s easy to get a rosy picture of the Enterprise Incumbent’s future right up to the point where the incumbent is suddenly obsolete.
Hosting code repositories is just one product, though. What about internal communications? (Yammer can sneak in while SalesForce’s sales rep is still waiting for a call back.) What about project management? (Basecamp can organize a new project five minutes after signup.) What about document tracking? (Which is faster? Installing and configuring Sharepoint, or getting Dropbox for teams)?
Enterprise software companies are competing with consumer software products that sell to end enterprise users. And they’re far less agile; plenty of enterprise products have user interfaces five to ten years behind the interfaces of free or very cheap competitors. (One infamous Oracle product has an interface where the “Next” button is labeled “Back to Summary.”) Traditional due diligence won’t work when big decisions get made at the bottom of the org chart, not the top.
Digital Due Diligence Weekly
