"Nobody wanted to flinch," says Edward Barnholt, chief executive of Agilent Technologies (A). "Everybody was building for 50 percent market growth. We didn't want to miss the opportunity on the upside if business was to go for another six months."
This shoot-for-the-stars attitude was evident at Palm (PALM). A determination to dominate the market for handheld devices caused the Silicon Valley company to pursue ambitious expansion plans, building inventory for the launch of two new products.
Unfortunately, the company missed warning signs that it would fall short of third-quarter earnings projections; Palm is now saddled with inventory that rose 200 percent to $102 million. Palm chief executive Carl Yankowski labored to explain the sales slowdown with words like "jarring" and "abrupt."
Palm wasn't alone in misreading the tea leaves. In the business-to-business software market alone, venture capitalists poured $25 billion into 1,000 companies in 2000. Old-economy companies, threatened by Internet-savvy upstarts, accelerated technology purchases. That helped lift IT spending to unprecedented levels: 20 percent growth each year from 1997 to 2000, an increase over the 10 percent growth during the previous seven years.
The spending orgy led to overcapacity in everything from the Internet to semiconductor production. The seeds of the downturn were sown. And the few who urged caution were largely ignored. "No one wanted to believe our numbers because our numbers didn't impress investors and didn't help their business plans," says Hilary Mine, telecom analyst with Probe Research, which forecast an aggressive 100 percent growth. "But everyone wanted to hear 800 to 1,000 percent."
Michael Crosno, chief executive of software company Epicentric, admits that by September he noticed sales were taking longer to close: 150 days instead of 115. "It was building up like a water balloon," Crosno now recognizes, yet he was one of many executives in high tech who ignored the inevitable and did nothing. "We all got a little fat and sassy," Crosno says. "You started believing your own hype."
If Crosno and his fellow execs had been really listening to customers, they might've foreseen the decline in spending. Staples spent aggressively in 2000 building out its fledgling online sales operations to handle sales that were rising twice as fast as expected. The company wrote check after check to vendors such as Digital River (DRIV), IBM (IBM), Trigo Technologies and WebMethods. It invested heavily in software to manage inventory, track orders and link to its existing pricing database, and it added more networking capacity to handle heavy Web traffic.
