Even in a recession you can’t get enough of IT

Investment in IT has fallen by the steepest level in more than 30 years. But this is no time to make-do and mend, says Fiona Harvey.

Looking back over what was probably the worst year in the short history of the information technology industry, at first glance it looks as if we’ve finally had enough of IT.

Sales of hardware and software have slumped, leading to a spate of dismal profit warnings among technology suppliers. IT vacancies have fallen to record lows. The big consultancies have been shedding wave after wave of staff. Companies no longer seem interested in pursuing major IT projects – the only area where enthusiasm continues is in the government and public sector, which came late to the tech party.

The reason for the sudden loss of appetite for IT spending can be traced to the excesses of the late 1990s, when companies were urged to upgrade their systems in preparation for a year 2000 problem that in most cases failed to materialise. At the same time businesses rushed towards the internet, setting up websites and e-commerce projects in fear that they would be overtaken by upstart dotcoms.

As a result, when the dotcommers ran out of cash and Y2K was over IT spending settled down to normal levels – a huge readjustment from the budget splurges of preceding years.

These observations do not go deep enough, however. Leaving aside the effects of the late 1990s bubble, and the contraction that followed, we need to examine whether companies have really had enough technology.

First, a certain amount of saturation has been reached. More than half of UK households have a PC, and so do very small firms. Among medium-sized businesses computers are the norm for white collar staff. And larger businesses have invested heavily over the years so IT has penetrated throughout manufacturing industries, with enterprise resource planning and supply chain management systems, while service industries have their customer relationship management (CRM) software, and areas like accounts and human resources are automated.

All this leads IT commentator Richard Holway to the opinion that the industry has matured. Growth expectations among hardware and software firms, and the high margins and elevated salary expectations among consultancies, will come down permanently, and IT will join older disciplines like more traditional forms of engineering in lower growth rates, lower prospects and a less sexy image. And no bad thing either.

Second, some IT projects, especially in larger businesses, do not produce the results expected. Myriad reports have found that IT projects are prone to failure, with budget overruns and late delivery the norm. This has led many companies to adopt a ‘make-do and mend’ attitude to IT, striving to fix the products and systems they have in place rather than buying new ones.

Yet if we were to conclude that we have had enough IT, we would be wrong. Take, for instance, the failed CRM projects. Many fail to deliver much return on investment because they are essentially sticking plaster to cover old systems that are breaking down, argues Robert Kaplan, a professor at Harvard Business School.

He believes companies need to perform much clearer analysis on their systems to count the true cost of IT. Investment must be accompanied by clear targets, of course, but businesses should also count the cost of not investing – the cost of main-taining old and creaky systems.

Technology in its broadest sense is one of the ways UK businesses can successfully compete with firms in eastern Europe or the Far East that have much lower labour costs than the UK. By improving their methods and increasing their output and productivity through technology UK businesses can strive to maintain a competitive edge.

Failure to invest in the future is dangerous. There are already too many conservative forces in UK business that stifle innovation with bean counting. Certainly, it’s stupid to be profligate. But today’s reluctance to commit investment to R&D, to capital expenditure in better equipment and to new projects that may yield a future return, threatens to strangle expansion among UK industries.

How can it be that although interest rates remain at a 40-year low UK industries still refuse to invest? Business investment in the UK has fallen by the steepest rate in more than three decades – investment fell by 12.4 per cent in the third quarter of 2002 compared with the previous year. Investment as a share of GDP is less than 10 per cent, lower than it was in the recessions of the early 1980s or 1990s, lower than at any time in the past 30 years.

The CBI called the figures ‘deeply worrying’ – and it was right. Caution is understandable in today’s gloomy conditions, but companies need to consider that without investment future growth will falter. It’s too simple to say we have had enough technology – we need to re-examine our existing systems and improve them, but also count the cost of failing to grasp new technologies as they arrive in 2003 and beyond.

Fiona Harvey is technology writer for the Financial Times