Consulting » IT STRATEGY – Delay, disruption and downturn: normal economic service is resumed

IT STRATEGY - Delay, disruption and downturn: normal economic service is resumed

The IT slump that's coming seems unprecedented after recent growth. But it's nothing new. We should all expect less.

Winter is an appropriate time for gloom. There’s certainly a lot of gloomy technology news around at the moment, with job cuts at IT service companies and the failure of some high-profile dotcoms, ASPs and electronic trading hubs. There’s also evidence that corporate IT spending is slowing. Surveys by Merrill Lynch and Morgan Stanley Dean Witter suggest that the year-on-year growth will be around 5% in 2001 compared to 12% in 2000.

We shouldn’t have an exaggeratedly negative view of what’s going on. Periods of slowdown and disruption are a normal feature of our economic system, and are often the time when new and better things emerge. We also need to put the gloomy news in context. Getting it right first time is rare in business, especially when trying something new.

This was brought home to me on a cycling holiday in Vermont some years ago. It was easy to imagine that the hilly landscape, with its dense covering of trees, had been the same back to Indian times. But looking closer you could sometimes see ruined buildings, and even an old cemetery whose gravestones bore the names of European settlers.

What had happened was that from the late 1880s farmers in Vermont found it increasingly difficult to compete with the new farms being opened up in the mid-West, whose produce, distributed by the railways, was flooding the country. Many Vermont farmers abandoned their land and entire communities moved to new settlements created further west. For some, that was not the end of the process. When depression hit the mid-west in the 1930s some New Englanders moved on again, many ending up in California.

So what we are seeing is nothing new – it’s what the great Austrian emigre economist Joseph Schumpeter (1883-1950) called creative destruction. Capitalism, he wrote in Capitalism, Socialism and Democracy (1942), “incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating the new one. This process of creative destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern must live in.”

The problem – and in many ways it’s a happy one – is that our generation of business leaders aren’t familiar with slumps. We haven’t seen much of a slowdown since 1990-91, so there are plenty of important people with very limited experience of bad times.

However, business leaders will soon learn that one of the things we can expect is consolidation. As the buyout of TWA by American Airlines is already making clear, sheer size is no protection. Richard Holway notes in the latest issue of his monthly review of the financial performance of firms in the IT services sector* that “some of the big players are themselves vulnerable – EDS and CSC especially so”. But he goes on to say, “The real action will take place among the smaller and weaker players, many of whom will sell up as the only alternative to calling in the receiver.”

This process of ripping things up and starting again is not confined to economic life, of course. You only have to think of divorce to realise that it is a phenomenon that can have positive as well as negative consequences.

If we confine ourselves to thinking about inanimate objects, it is easy to see that the mark two and mark three versions of products are usually better. This is particularly clear in the history computer hardware. Consider portables for instance, that have moved on from the suitcase-like Osbornes and Kaypros of the early 1980s to the nifty little Handsprings, Palms and Sony Vaios of today.

Software is less clear cut. Some people argue that you don’t get much more out of a modern spreadsheet or word processor than you did a decade ago. But the progress in some categories has been enormous. Take software that conducts polls and questionnaires, for example. Modern products like Zoomerang and Global Market Insite are immeasurably easier to use and more powerful than earlier offerings. The business model of many of the players in this market has evolved along with their products. First, they wrote software to devise and process forms. Then they did software to poll people on-line. Now they are offering even nicer software, and they’ll sell you lists of people to poll.

There’s even some evidence that the surviving dotcom shopping sites are beginning to get their acts together. In December, a team from Accenture (Andersen Consulting, as was) placed several hundred orders on a large number of shopping web sites to test out the consumer experience. Only 8% of transactions failed, which is a big improvement over the 25% failure rate Andersen found in a similar exercise the previous year.

So there’s gloomy news around, but positive things are happening too.

The important thing is to be prepared for failure: it is normal service.

Ian Stobie is research editor of Computing.

* System House, January 2001. Published by Richard Holway,, [email protected].

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