COMMENT: Tech sector is paying the price for failing to deliver value for money

Attempting to tackle the subjects of the markets and technology with the sort of long lead times inevitable on a monthly magazine could be considered foolhardy at best. Both areas move so fast that yesterday’s big drop on the stock exchange or last week’s new product announcement could be consigned to historical irrelevance by the time you read the issue. Suffice to say, it’s easy to recall the sage advice of a parent unfamiliar with high finance, but who has lived through a couple of recessions, who said many years ago: ‘When the amateurs start making money from the markets, it’s a sign for the professionals to get out.’ Thanks, mum.

But although the Net bubble always was going to burst at some point, what seems remarkable about the slide in technology shares is that there are still people out there who refuse to believe that the reason companies are worth money is that they generate wealth. And they generate wealth by selling things that people and businesses want.

One frothy public relations officer telephoned the Financial Director offices a few weeks ago to pump up her client’s performance in the market. She was insistent that her high-tech client’s stellar share price was worthy of an article – and that one of the managers at the company was an ideal spokesman on the subject. When confronted with the ‘old economy’ view that even if the current yo-yoing of tech stocks was to calm down without a major slide occurring, eventually all companies would be valued on fundamentals rather than vague optimism about them becoming the next Microsoft, she denied it – she just didn’t understand what we were on about.

But take a step even further back from the debate on fundamentals versus growth potential – go back to the industry itself and the products it ships. It is here that we’re more likely to find the real lessons on the tech boom, and discover whether or not the valuations ascribed to the IT companies are realistic or not.

The first thing to remember is that corporate IT is very far from being the painless panacea for productivity that the Silicon Valley cheerleaders would have us believe. The latest in a long line of research documents to bear this out comes from the Chartered Institute of Management Accountants (CIMA), which surveyed 251 businesses and found that 70% of them had spent more on IT ‘than average’ over the past twelve months. Businesses have been saying exactly the same thing for every one of the past ten quarters. And IT is still by far the most likely cost in the business to be rising. So rather than coming down – as processing power and functionality have been getting cheaper – the cost of keeping your data systems running has been going up. ‘Companies cannot be spending wisely,’ concludes CIMA technical director Tony Dart. ‘An investment must – in the end – deliver a return. This is generally acknowledged except in the case of IT.’ And IT stocks, it seems.

Some parts of the IT industry have responded to this type of criticism: you can read about technologies such as application service provision and e-procurement, which ought to save companies money, in this month’s IT Decisions supplement. But far too many big IT vendors, IT departments and IT consultants are happy to carry on releasing bloated software packages, high-maintenance hardware and systems that simply don’t add value.

Fund managers and day-traders alike, meanwhile, are trying to pick out the next Microsoft or Oracle, dreaming of the day some dot.com’s killer technology becomes the next Windows or Office and they can all cash in. But the world has moved on. As more and more business organisations question the wisdom of throwing money into the IT pit, new technologies are emerging that reject the whole idea of monopolies and big business ruling the roost.

We’ve already seen how Linux, the free operating system, has shaken the existing corporate technology giants; how Microsoft is facing all manner of draconian sanctions for making too much money and forcing competitors out of the market; and how standardised technologies are emerging where single companies are unable to unfairly dominate a market (for example, XML and MP3).

FD correspondent Malcolm Wheatley has also reported in IT Decisions on the way IBM has revamped it’s aged AS/400 line of minicomputers to meet ongoing demand for stable, cost-effective technology as the foundation of e-commerce. New technologies which are explicitly not based on their parent companies showing miraculous growth and becoming the next Microsoft are starting to take hold. Of course this means that investment in speculative technology stocks is a real no-no – corporations are going to get fed up with throwing good money after bad into IT, and will look to known quantities and real value-creating technologies, not gadgets and gizmos.

IBM, the old stalwart, might be the best stock to hold after all. And as mum always said, ‘There’s no such thing as get rich quick.’

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