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Information technology: Great expectations? - Views on News from Equitymaster
 
 
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  • Mar 21, 2001

    Information technology: Great expectations?

    The outlook towards the technology sector has been fickle for the past year or so. This has been more than reflected in the volatility of the stock prices and more than felt by the investors who have invested heavily in the technology sector. Lets do a quick recap, not so long ago everybody was talking about an information technology revolution, which would change the world, as we know it. There was going to be a paradigm shift and businesses would no longer be conducted the traditional way. The projections about E-commerce were mind-boggling. The tech sector became the darling of the stock markets all over the world. Even an economic slowdown could not touch these technology companies as they were the answer to doing business the better way and the best answer to tiding over difficult times.

    But then tragedy struck, as slow down in the US economy deepened, one tech company after the other came with profit warnings. The myth was broken. Were these companies affected only due to the slow down or there is something more to it? There is; as people began to realize that things were not going exactly the way they had predicted. It was not that the Information technology revolution was over; only it turned out to be more of an evolution. The rapid growth rates (and therefore the cash flows), which were the premise of huge investments and spends on IT were no longer realistic. They needed to be looked at harder.

    What had led to the projections in the first place? Most of the projections made are based on a cue from the past. The hardware sales and technology spending in the past that had grown at amazing pace had set the tone for the optimism. For example the PC sales in the US had been growing at double digit figures, the number of Internet user doubled almost every 18 months and the technology spend in the US grew by 42% in 1998 and 37% in 1999.

    The firm belief in an information technology revolution had led to a frenzy in IT spending. A chunk of the spending was by the “dot-coms” many of which never lived to see tomorrow and a host of businesses that did not meet targeted growth. And of course then came the great US slow down. All these factors together hit the companies hard.

    The growth rate for tech spending has been cut to half from what was seen in the past. The expected growth in tech spend is expected to be in the range of 5% to 12%, far lower than 20% plus seen in the past decade or so. The gloom seems to be spreading. Even IT companies in Europe joined the list of those issuing profit warnings.

    As always there is a prediction of a “Second Wave”. Carly Fiorina, the chief executive of Hewlett-Packard, has predicted a huge new wave of technology spending much larger than the last. According to Ms Fiorina, the next phase will involve transforming business processes rather than making current processes more efficient which will require a closer working relationship with customers. To meet this challenge HP is concentrating on its consulting business.

    No doubt information technology will continue to be adapted more and more by businesses to meet their strategic objectives. According to a survey by CIO.com about half (47%) of the IT professionals surveyed felt technology would provide the leading edge to move ahead of competitors. The top issues that information technology was to address were customer relationship management (CRM), e-business and enterprise resource planning (ERP). The other issues that technology needed to address were that of network infrastructure, supply chain automation and security tools.

    The foremost expectations from IT spend was to reduce cost of doing business and improve efficiency. The other strategic goals were improved customer service and generate more revenues. Only, 8% said that the decision was not tied to a specific business goal.

    The important point here is that Information Technology is a means to an end not an end in itself. And a service industry cannot buck the trend if the conventional industries that it draws its revenues from are not doing well. It is this fundamental point that has to be the base of all expectations from the IT sector.

     

     

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