<<<< WHY DO HI-TECH LEADERS THINK IT'S TOO EARLY TO START CELEBRATING?
Richard Waters and Simon London
For a reality check on the state of the technology industry, you need only to talk to its customers.
Don Haile, a long-time International Business Machines executive who now oversees information technology at the Fidelity mutual fund group, is typical. He is responsible for an annual budget that runs into the hundreds of millions of dollars: if the three-year slump that has hit technology is coming to an end, it will be because people like Mr Haile are laying out cash again. [And, in turn, his customers are spending again.]
Last week, the Fidelity chief information officer was meeting a group of big tech spenders from other companies. But to judge by the mood, it was hard to see much sign of hope for beleaguered technology suppliers. "I'm sitting in a room with 40 chief information officers right now, and I can tell you that there isn't a lot of: 'Hey, the floodgates have opened!' " he said.
That is not what you would conclude from a casual glance at the stock market. On Wall Street, the floodgates have certainly opened and technology stocks are back with a vengeance. The Nasdaq stock market -- where most of the leading US tech stocks are traded -- has risen by 29 per cent so far this year as the technology sector has seen its biggest rally since the boom.
This has wider significance than its impact on the personal wealth of technology investors. As technology ate up a large share of capital spending in the 1990s, it became an engine of the economic growth. It was also credited by Alan Greenspan, chairman of the Federal Reserve, among others, with fuelling an acceleration in productivity growth, although the precise scale and nature of its impact is still debated.
A recovery in tech spending now could cement the fragile economic recovery in the US and help lay the foundation for the next advance in productivity in the corporate world. Two big questions hang over the latest share price jump and its anticipation of recovery for the tech sector. The first has to do with timing. The stock market has already predicted a revival four times only to be proved wrong. This time around the stock market bounce has been far stronger -- making the potential disappointment much greater.
The second, more significant question concerns the nature of the next technology rebound, if and when it comes. Fundamental changes in the technology landscape mean that the next wave of corporate technology buying will be very different from the last. That could benefit buyers of technology and the economy at large, but leave makers of hardware and software struggling to recover the sort of growth or profit margins they enjoyed in the last boom -- something that would force the stock market to rethink its view of the industry.
To judge by the broad economic evidence, recent comments by tech industry leaders and the continuing parsimony of buyers, there is not much of a rebound going on yet -- though for most tech companies, at least things do not seem still to be getting worse.
Orders for new technology equipment have bottomed out and started a recovery, albeit a weak one. But capacity utilisation rates by technology manufacturers are still low, pointing to the overhang from the over-investment of the 1990s and the continuing weakness in demand.
According to a survey of corporate technology officers by Goldman Sachs, buyers sound more interested in spending than they did earlier in the year when the troubled international situation made them more worried about their own employers' prospects. But this merely signals an end to the bleeding, not the beginning of a solid revival.
The optimists claim this muted rebound is typical of the early stages of an economic recovery, even if around customers are holding back even longer than usual out of concern about the general economic situation. "I don't think anything has fundamentally changed in this industry, though the downturn has gotten extended much longer than anyone thought," says Mike Splinter, chief executive officer of Applied Materials.
As the biggest maker of equipment for the semiconductor industry, Applied Materials's order book is a leading indicator for the tech sector, signalling the extent to which production capacity for the industry's most basic component is growing.
Mr Splinter declares himself to be "very cautiously optimistic". Customers are still holding back from adding new production capacity, he says -- but adds that this delay will produce a whip-saw effect when the recovery picks up momentum as chipmakers scramble to increase capacity.
Like others in Silicon Valley, he sees plenty of reason for long-term hope. Broadband networks capable of delivering higher volumes of information are still in their infancy. High-speed wireless systems that will support a new generation of technology are being built around the world. Many people in emerging markets have yet to feel the impact of technology.
"When you add all that up, there's just tremendous opportunity for growth, if the economy around the world can get back on a positive note," says Mr Splinter.
The big companies whose purchases drive much of the tech industry also say they believe the IT revolution has much further to go. "Unlike three or four years ago, virtually every one of our corporate projects has an IT component today," says Stephen David, chief information officer at Procter & Gamble. "It has permeated every area of the business."
While the impact of technology continues to spread, the dynamics of the tech industry have changed. To some extent this is the result of the overcapacity left behind by the bust. "We haven't seen any price increases in PCs, telecoms, software, hardware," says John Belden, director of IT integration at Timken, a bearings and steel company based in Ohio. "It's still a buyer's market."
More importantly, though, the shift reflects two broader trends in the technology itself. The first is that the technology wave that emerged in the second half of the 1990s has largely passed but the next wave has yet to arrive.
Put simply, the last wave saw companies automate many of their core back office activities and start the process of pushing technology out to the departmental level. Through centralised "enterprise resource planning" systems they were able to take more direct control of complex global operations.
Until the technology made greater global standardisation possible, for instance, P&G used 16 different specifications for the same dark blue used in its products, says Mr David. "We've saved hundreds of millions of dollars in materials costs by moving on to five databases and standardising."
Yet this wave of investment in technology has also left companies with a mess to clear up. They built systems that did not link to each other and added new technology to handle specific jobs without keeping an overall track of the efficiency of their IT. Sorting out this last wave of spending is consuming most corporate IT departments at the moment.
The rationalisation takes a number of forms. For instance, it became the norm in the 1990s to simply add a new computer server each time a company was adding a new departmental application. This has left most big companies with thousands of under-used machines, expensive to maintain and support.
According to Mr David, "almost everyone is drastically consolidating servers" to deal with "atrocious" capacity utilisation rates that in some cases are only 10-15 per cent. The work of sorting through the after-effects of the last tech buying binge will keep many companies busy for some time, delaying new tech initiatives.
The aftermath of the 1990s takeover wave has added to this effort to rationalise and integrate corporate IT systems, providing one of the few solid props to technology spending in recent years. "To get the synergies, you've got to tear apart and reconstruct the IT systems," says Mr Belden at Timken, which last year bought a rival bearings company for $850m.
In Europe, where tech spending is now stuck in a deeper rut than in North America, mergers and acquisitions provide one of the few forces that are still driving big-time investment. Deutsche Post, the German mail operator, has been forced to spend millions of euros to bring together the IT infrastructure of various acquisitions, including DHL and Securicor, its express delivery subsidiaries. Under an initiative dubbed STAR, it plans to bring its "track and trace" databases together to feed into one system and eventually to provide global customers with a single bill.
The synergies from such IT rationalisation are meant to increase profits by about 40 per cent to $3 billion by 2005, including $200 million of savings from a new group-wide procurement system. Rationalisation of existing technology like this provides some work to the technology suppliers but is not comparable with the sort of boom in new technology seen in the 1990s.
The second broad trend in technology is the emergence of a generation of cheaper, standardised hardware and software components to build IT systems.
Linking simple, standardised elements to carry out ever more complex tasks has become the driving force behind much technology innovation. For instance, companies are increasingly turning to simpler servers known as "blades", stacked together in racks, to carry out their routine corporate functions.
Capital One, the fast-growing US credit card supplier whose business has been built on the sophisticated segmentation of customers using technology, is experimenting with the idea of linking PCs to carry out complex calculations, says Gregor Baylor, chief information officer.
Using "grid" technology -- a method of linking remote machines to handle common tasks -- the finance company has tied 100 standard desktop computers together and come up with "orders of magnitude faster analysis at orders of magnitude lower cost," says Mr Baylor.
Open-source software such as the Linux computer operating system is another example of this shift to more open technology. "You're going to see a lot more Linux, and a lot more open-source," says Mr Haile at Fidelity. The mutual fund concern, for instance, uses an open-source program known as Struts to provide the underpinnings of its internet platform -- a sign of how open-source is spreading far beyond the operating system that made it famous.
By using technology based on open standards, customers are consciously rejecting the proprietary software and hardware that tech companies have traditionally produced. The US Navy's retail outlet, known as Nexcom, is among the many outfits considering using the Linux operating system. "The cost of Microsoft-based solutions puts a big dent in revenues," says Bill Finefield, chief information officer. Nexcom hopes to slice 40 per cent from its infrastructure expenses by cutting software costs and using standard PCs instead of more specialised point-of-sale equipment, he says.
"Everyone feels open-source forms of code, and open systems, will be the "preferred low-cost approach," says Mr David at P&G. "No one wants proprietary [technology]."
This focus on low-cost standardisation is weighing on any rebound in overall tech spending and forcing the big tech suppliers to re-examine their strategies. Even Sun Microsystems, which held out longer than most, has started to offer servers that run the Linux operating system or are based on industry-standard Intel chips.
It also means that, when the next big wave of tech investment comes, it will be very different from the last. In fact, the most promising technology with a claim to being the industry's next big thing is actually built entirely on open standards. Known as "web services", it involves embedding a number of technology standards, such as XML, into computer systems so that they can work together more effectively.
Web services mean different things to different people. On one level, it should become easier to assemble applications out of pieces of software code that reside in different systems. This could provide "the mechanism we've been looking for in the software industry for many years to achieve reuse of code," says Mr Haile, reducing cost and the time it takes to develop an application.
On another level, the simple ability to link computers using common standards may let companies work together more closely. For a logistics company like FedEx, it creates huge new possibilities, says Rob Carter, the company's chief information officer. Customers could delve directly into FedEx's systems to extract information about goods that are being shipped. "What people call the bubble bursting I call the Big Bang: it is still a phenomenon, the biggest revolution in computing we have seen," says Mr Carter.
For a consumer goods company like P&G, which faces the challenge of keeping thousands of different products on store shelves around the world without interruption, this sort of linking of corporate systems in real time could bring great benefits, says Mr David. "Our vision is to be able to produce every one of our [products] every day" to keep the shelves stocked, he says.
However, even companies that have big hopes for this next generation of technology do not expect it to lead to big spending on hardware or pre-packaged software. "You have to provide the team with technology tools to help them build the applications," says Mr Carter at FedEx. "But the main challenge here is keeping them focused on innovative ways to use the technology to get closer to the customer."
Innovation in technology is far from dead. But for the technology industry, just starting to pick itself up from a devastating three-year bust, learning to live in the new world of open standards will provide a whole new challenge.
Additional reporting by Scott Morrison in San Francisco and Dan Roberts in London
Financial Times July 14 2003 >>>>
Keith Hudson, 6 Upper Camden Place, Bath, England
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