I was having dinner with a couple of friends recently when one of them mentioned that a team of engineers from Intuit was going to visit his house and spend a couple of hours watching him use Quicken. Intuit has been doing this for years as part of its "follow me home" program. Instead of sitting around an office dreaming up new features to add to the money management program, Intuit's engineers hit the road to see how customers actually use the software, then use the insights they gain to improve the next version of Quicken. Intuit's constant efforts to improve the program go a long way to explain why it still holds the lion's share of the personal finance software market.
I then asked my other friend, who had been the chief technology officer at a once-sizable Silicon Valley business software company, whether his firm ever did anything like this. He laughed and answered no. "I'm not sure I'd want to be around when they were trying to use it," he chuckled.
My friend's erstwhile employer is now struggling to stay in business, while Intuit's revenues are expected to jump 25 percent or more this year, to $1.7 billion. This is no mere coincidence. During tough economic times like these, companies that focus on responding to customers fare better than those that don't. During the boom years, Silicon Valley companies thrived even when they paid no attention to customer needs. Indeed, that's what the dot-com boom and bust was all about: companies providing products and services no one asked for and, ultimately, no one would pay for.
It is critical that Silicon Valley find a way to get back on the growth track. Santa Clara County, home to so many high-tech firms, has lost 145,000 jobs in the past two years, nearly 15 percent of its total work force, according to the California Employment Development Department. Onetime highfliers saw revenues plummet between 2001 and 2002: JDS Uniphase's were off 61 percent; BroadVision's were off 53 percent; Redback Networks' were off 45 percent; and SGI's were off 35 percent. These are real dollars. Sun Microsystems' revenues declined $1.9 billion in 2002 alone.
There are signs in Silicon Valley that high-tech companies are finally changing their ways, but too many are still doing business the old way. Ask corporate CIOs what their most pressing needs are today, and they'll probably say something like this: "We need to find ways to cut costs and to make better use of the products we already have, and we aren't interested in new technologies unless they are proven and can provide a quick payback."
CIOs are indeed under pressure to do more with less. A recent Merrill Lynch study found that 62 percent of the CIOs surveyed said IT spending as a percent of total revenues was decreasing at their company. When asked what the top three challenges were in 2003, these same CIOs said, "maintain operations with lower budget," "cut costs," and "complete major projects." In other words, they aren't much interested in speculative new technologies from Silicon Valley.
But if you ask a Silicon Valley entrepreneur what he's up to these days, too often the response is something along these lines: "We have invented a hot new technology no one else has thought of. We know what customers need even if they don't realize it yet."
What corporate America wants more than ever are products that solve problems. Call it customer-driven innovation. Too often, Silicon Valley delivers products dreamed up in a room full of engineers. Call it technology-driven innovation.
The history of Silicon Valley is filled with companies focused on technology-driven innovation. Remember application service providers? The Internet made it possible to run software applications remotely, and let users access them from a PC on the desktop. Instead of customers owning and operating the applications, that job would be turned over to a specialist, the ASP. It sounded good in theory. The problem was that no one took the time to ask customers if they wanted to run their businesses this way. By and large they didn't, and the next new thing turned out to be the next big bust.
What about voice portals? They seemed like a great idea at the time, too: Simply call a toll-free number, and through the magic of voice-recognition software, you would get easy access to stock quotes, e-mail, directions, just about everything available at a portal like My Yahoo!. In theory, one could even navigate the Web using voice commands. The problem was that it wasn't easy. In fact, voice turned out to be a clumsy and time-consuming way to get mostly mundane information. Oops!
There are a few companies that have successfully employed customer-driven innovation. Dell Computer is one of the best. Denizens of Silicon Valley often disparage Dell, saying that it is not a real technology company but simply a packager of technologies other companies develop. In fact, Dell does innovate; it just does it differently. By selling directly to customers, it accumulates vast amounts of information about how its products are being used, and it uses that data to prioritize its innovation efforts. Many of these innovations are incremental rather than dramatic, but they are important nonetheless. Take a series of improvements Dell has developed in areas like energy use and systems administration, reducing the total cost of ownership of networked PCs. That innovation may not get much ink in Wired, but it certainly helps customers save money.
Even some of Silicon Valley's most die-hard technology-driven companies, like Sun Microsystems, are beginning to change their ways. Until recently, Sun would sneer at the suggestion that it offer servers running anything other than its own operating system, Solaris, on its own processor, SPARC. No longer. In the face of declining demand for Solaris/SPARC-based servers, and growing demand for low-cost servers using standard hardware and software, Sun has caved. The company recently introduced the LX50 server, using the Pentium III microprocessor and Linux operating system. The LX50 won't get Sun many patents, but the company might just find that its customers want to buy them.
Hewlett-Packard, in many ways the progenitor of Silicon Valley, has been struggling with the same issue for decades. In the early years, H-P developed products primarily for other engineers, so the engineer and the customer were one and the same. But when H-P began developing products for non-engineers, it had a hard time adjusting. Instead of finding out what customers wanted, H-P engineers continued to turn to the person next to themanother engineerfor advice. There was even a name for H-P's woes: the "next-bench syndrome." That problem has largely been eliminated under Carly Fiorina, the first CEO of H-P who is not an engineer. Fiorina's H-P is putting as much emphasis on services as on technology, and it is paying off. The company recently won the largest outsourcing deal in its history, a ten-year contract with Procter & Gamble worth $3 billion.
Silicon Valley companies like H-P and Sun are listening and responding to their customers much more than they did in the past, and that's a good thing for CIOs. As information chiefs try to rein in IT spending and get more bang for the buck, they need technology partners that will focus on boosting efficiency. It's also a good thing for Silicon Valley, because it is what must happen if the region is once again to become a center of growth.
Things are changing in Silicon Valley, and it's not just the high-tech firms. The Palo Alto restaurant where my friends and I ate dinner that night was nearly fullquite a contrast from a year ago when on many occasions the tables were nearly empty. The economy hasn't improved, but the restaurant has adapted. Like many other restaurants in the area, it has added less-expensive wines to the wine list and lower-priced entrees to the menu. That's as good an example as any in Silicon Valley of customer-driven innovation.
Eric Nee, a longtime observer of Silicon Valley, has served in a variety of editorial positions at Forbes, Fortune and Upside magazines. His next column will appear in July. Please send comments and questions on this column to firstname.lastname@example.org.