The Consequences of Terrorism

By John Parkinson  |  Posted 11-01-2001

The Consequences of Terrorism


Click on a response above for further analysis of each scenario.

The four short-term political and economic scenarios—12 to 18 months out—presented here suggest a variety of potential consequences for business and IT.

For further analysis of each of these scenarios, including answers to the following questions, click on the response above.

  • What are the main economic and social consequences?
  • What would be the resulting business behaviors?
  • What impact will this have on the IT organization?
  • Who will be the winners and losers?
  • What will be the smartest response?

John Parkinson is chief technologist at Cap Gemini Ernst & Young

Erratic Response

Erratic Response—wandering in the wilderness
Weak Economy, Low Threat Level

The US-led global anti-terrorist alliance has succeeded in rooting out al Qaeda and other major terrorist networks and toppling the Taliban regime. A continuing international security cooperation effort and a well-organized Homefront security effort have succeeded in quelling most of the fears of continuing attacks, although "problem areas" in militant Islamic regions still persist and the Middle East situation remains fragile. Investment in essentially non-productive assets (for security and business continuity capability) have boosted some sectors, but have resulted in low to no productivity growth in the US and global economies as a whole. A lot of "good intentions" projects (security, data protection, public health) started by the government fizzle as funding issues lead to congressional infighting of budget priorities.

Partly as a result of low productivity, the broader economy has yet to respond positively. Two quarters of contraction in the US evolve into a low growth (under 1% annual rate with some negative quarters thrown in) in GDP and a continuing squeeze on corporate profits as increased infrastructure costs fail to be transferable to higher B2B or consumer prices.

The rest of the world mimics the US with a lag of about one quarter. Global trade contracts slightly (around 1% on an annual basis). Import and export flows grow faster regionally than globally and shift to match new patterns of trade amongst the Alliance participants. Central Asia and Pakistan benefit the most. There are no major defaults, but some marginal economies remain in a deep recession. IMF and World Bank restructuring efforts are hampered by the weak US economy.

What are the main economic and social consequences?

Regional trade patterns shift to reward those who helped win the war on terror, but access to capital remains tight. Only big projects that reinforce the new pattern of alliances or offer short-to-medium term payback get funded, with energy exploration and related transport infrastructure a priority, driven by steadily rising energy prices and the continuing perception of a threat to Middle East oil supplies.

Travel comes back slowly - too slowly to save one US airline and several European and third world national carriers. The commercial aircraft industry contracts as demand slumps and overcapacity is slowly worked out. Major consolidations occur in all industries as the strong survivors seek to acquire distressed assets at fire-sale prices.

Consumer confidence remains relatively low, but does not decline any further. Credit quality begins to dominate the Fed's thinking as corporate and consumer defaults continue to rise. Fiscal stimulus and monetary policy don't seem to help and room for maneuver is becoming limited.

Interest rates start back up as the Fed refocuses on the inflationary consequences of the war on terror. Unemployment reaches 6.75% in the US and stabilizes there. There is a slow but measurable return to retail investing on a sector basis. The Dow stabilizes at 9700 and establishes a narrow trading range. The Nasdaq hovers around 1800.

What would be the resulting business behaviors?

While most corporations continue to feel the need to rethink business recovery plans and reexamine market positioning, the capital or cash flow for a full-scale reorganization simply isn't there.

Many focus on improving balance sheets to look more attractive to lenders and acquirers. Working capital improvements are critical as are customer loyalty programs.

There is some selective rehiring as confidence slowly builds but corporations have developed a taste for a wider range of variable costs and contractors or outsourcers replace staff in many areas. Earnings return but growth is slow. Visibility remains poor. The capital markets are shut to all but the strongest businesses.

What impacts will this have on the IT organization?

Efforts to scale up or restart frozen strategic IT initiatives remain stalled by financial considerations as companies continue to retrench investment both at home and abroad. As tactical programs to simplify and standardize infrastructure begin to have an impact, IT hiring drops significantly.

Corporations routinely question the need for even maintaining the status quo in IT spending outside of CRM. Small tactical projects and emergency maintenance predominate. There is a steady shift to a more flexible asset base and outsourcing deals continue to be a preferred approach to cost containment.

What will be the smartest IT response?

Focus on selective outsourcing and infrastructure cost-sharing programs. Retire the oldest assets (they are the most expensive to maintain even if fully depreciated on an original cost basis). Look for incremental improvements in architecture and operational capability.

Simplify and standardize everything. Improve project management and efficiency. Learn the Zero Sum game (investments only get funded from the cost savings they create). Look for ways to share development and support costs with existing partners or through novel consortia. Focus on CRM and a flexible, low cost enterprise application integration strategy.

Worry about ways to link more effectively to the business.


Click on a response above for further analysis of each scenario.

Full Speed Ahead

Full Speed Ahead
Strong Economy, Low Threat Level

With the economy surging ahead, and the terrorist threat reduced at home and abroad, companies are pulling out all the stops in hopes of recovering any ground they lost over the past year. Central to this is the recognition that a robust global economy in which all nations and regions can participate is the strongest long-term antidote to the forces that create terrorists. All major governments are behind this and there is a new spirit of cooperation between the UN, major governments and corporations to make the rhetoric reality. With everyone wanting to look good, not all of these efforts are well though out or well executed so anti-globalization sentiment continues in many areas, but overall, innovative new government/private sector alliances are proving to be effective.

The US is the clear leader of this effort and is struggling to balance its economic influence with the need to accommodate the growing voices of other regional economic blocs, particularly the emerging Alliance of Islamic States (lead by Saudi Arabia, Pakistan and a newly rehabilitated Iran) and China.

US GDP is expected to grow at a sustainable 2.5% to 3% annually. Global trade is growing at around 6% as more national economies recover and join the new global economic initiatives. Global GDP grows at around 4.5%.

What are the main economic and social consequences?

With over $3 trillion back in the global equities markets and looking for productive investments, there is a moderate economic boom underway, tempered by memories of the tech bubble and a little less irrational than last time. Strong Fed and ECB action is keeping interest rates low and lenders are relaxing credit risks as new areas of economic activity open up and are shown to generate worthwhile returns. The Dow is at 12,500 and the Nasdaq at 3,000. The broad economy is also up.

Global leisure travel has yet to come back strongly (and airlines are reconfiguring their planes for the new business traveler), but regional leisure travel is back and the US economy is giving itself a prolonged party thanks to resurgent consumer confidence, low interest rates and hot new products. Inflation may be on the way back.

Somewhat un-noticed, the governments of the leading economies have implemented additional security controls and information monitoring protocols on their citizens and are negotiating closer security and law enforcement links. So far there have been no challenges and no obvious abuses. Businesses are being encouraged to participate in these efforts and the linkage of the largest governmental and commercial databases is underway.

The Aerospace and Defense industries remain strong as local and regional security remains an issue. Conventional defense industries are beginning to consider how to prosper in a world of cooperation rather than conflict.

Public health systems are major beneficiaries of new investment as governments respond to concerns about future terrorist use of biological or other weapons of mass destruction.

What would be the resulting business behaviors?

Businesses look to expand rapidly along the newly emerging "trade routes" the will define global trade for the next decade. There is a re-evaluation of global commercial capacity and a redirection of investment as new areas open up for raw material development, low cost manufacturing and the development of consumer markets.

Because of the new "climate of global improvement", innovative new consortia arise to respond to these development opportunities.

Businesses in general struggle to identify, hire and retain managers with the right blend of international, NGO and commercial skills.

What impacts will this have on the IT organization?

IT is "in" in a big way, and companies that once saw IT just as a cost to be managed now understand that it is a key business tool, powering their ability to respond in a agile and effective manner to the new landscape of global opportunity.

IT organizations are moving forward on technologies of all kinds as business units are given the green light to grab market share where and while the grabbing is good, although in the new context of sustainable growth.

CIOs are increasingly required to participate in key business strategy conversations and are consequently being forced to restructure their own management teams to align with the new level of business expectation.

In the new scramble to support the business, a lot of IT organizations fail to complete the clean up and reorganization that started in the post Y2K austerity cycle - a failure for which they may pay dearly in the future, but which doesn't seem like such a big deal now. The core platform vendors are in heaven and everything infrastructure is in short supply and/or subject to premium pricing. Whole sectors of the IT supply chain come back from the dead, including some whom probably should have died out.

What will be the smartest IT response?

While the good times roll, there will be a temptation to roll with them and avoid tough restructuring decisions. Nevertheless, this up-cycle portends and even more brutal selection process than the down cycle that proceeded it, as IT finally enters the mainstream of corporate influence on a broad front.

If the IT organization can't become as agile and efficient as the business it supports, the increasingly interconnected world of technology services, shared service consortia and utility service providers will rapidly marginalize it.

Smart IT organizations will try to adapt ahead of demand so that they can maintain a strong position as providers of critical business automation capabilities, however these capabilities are developed or delivered.


Click on a response above for further analysis of each scenario.

Ongoing Vulnerability

Ongoing or Increasing Vulnerability
Weak Economy, High Threat Level

U.S. efforts to quell the terrorist threat at home and abroad are unsuccessful, as terrorists remain elusive and the homeland security effort bogs down in bureaucratic infighting and confusion about what measures can be effective. Additional terrorist actions around the world maintain or increase business and individual concerns over safety.

Meanwhile, the economy continues to struggle, keeping corporations skittish on a variety of fronts. Interest rates remain low, but lending continues to contract. The US economy experiences a third consecutive quarter of negative to no growth and unemployment passes 8.5%. The rest of the developed world enters recession with two consecutive quarters of negative growth. Second and third world economies stagnate as US and European imports from the third world drop dramatically. Global trade decreases by 3% - 5%. Global GDP growth goes to zero.

Several countries default on their sovereign debt. IMF and World Bank efforts keep the global financial system intact, but the US is too weak economically to support major bailouts and severe local economic contractions occur in Eastern Europe, South America and South East Asia.

What are the main economic and social consequences?

Regional trade is preferred over global trade. US multinationals begin to pull out of the most troubled areas (Indonesia, SE Asia and some parts of Africa) and re-deploy to more attractive areas (Russia, Baltic States, Central Asia). Major capital investment projects are abandoned or delayed. Government spending (on defense, infrastructure and security) helps offset corporate investment declines, but at the cost of budget deficits that threaten to cause inflation sooner rather than later.

There is a marked shift from consumption to savings and investment, but via insurance and fixed income products or debt reduction. Retail investing in equities essentially vanishes. Few people travel, even on business. A sense of "local is best and safest" affects travel, leisure and retail behavior. Energy costs rise as OPEC cuts production. One major US airline goes out of business and the survivors continue to contract. Commercial banking, badly hurt by the national defaults in South America and South East Asia, retrenches and lending remains weak.

Costs for basics (food, fuel, transportation, housing, clothing) start to rise. Costs for everything else fall, but sales stay flat or decline. Steady declines in all major indices reinforce/drive the drop in confidence. Dow hits 6000. Nasdaq hits 1200.

What would be the resulting business behaviors?

Corporate investment by all but a few companies dries up as margins and business volume shrink. Although interest rates are low, borrowing is expensive as lenders demand significant risk premiums from all but a few companies. Business focus is on maximizing returns from available assets and on maintaining customer loyalty.

There are a few acquisitions by financially strong players and a few unsuccessful merger attempts amongst struggling businesses, but most distressed businesses enter Chapter 11 from which few emerge. Marginally capitalized or high-debt-burdened infrastructure businesses collapse. Private Capital funds begin to look for LBO and rollup opportunities.

Brand focus shifts to local markets and patriotic/austerity themes. There is a sharp drop off in luxury and near-luxury products and services, which are seen as unnecessary and self-indulgent. Stabilize and survive strategies replace growth. Zero visibility reports replace earnings forecasts.

Businesses begin to look at how to be self-sufficient as public infrastructure is seen as increasingly vulnerable to destruction or interruption.

What impacts will this have on the IT organization?

There is a major retrenchment in IT spending and a slowing down of software development efforts. Emphasis is placed on managing costs down as fast as possible. "Simplify and streamline" is the core strategy - made easier in many cases as large numbers of recently emerged technology vendors shrink or disappear altogether. EAI products and portals are especially hard hit.

Contractors and consultants are laid off first, them in house staff are cut, then contractors and consultants are back but at lower rates and in smaller numbers. "Show me the money" deals and aggressive risk sharing with vendors become the norm. Size matters (because depth of talent and bench strength are still important), but so does efficiency and flexibility.

One stop shopping (justified by the need for simplification) replaces best of breed strategies. Experimentation is severely curtailed. Outsource deals dry up except in a few specific industries where economics overcome risk.

What will be the smartest IT response?

Batten down the hatches. Simplify everything. Outsource selectively with strong business continuity guarantees. Focus on results-weighted risk and success sharing. Balance the costs of ownership and need for diversification in operational infrastructure. Find others to share infrastructure risks and pool critical resources. Make as many fixed costs as possible into variable costs. Pick the one stop shop of choice - probably determined as much by cost and ease of resource management as technical capability.


Click on a response above for further analysis of each scenario.

Meeting the Challenge

Meeting the Challenge
Strong Economy, High Threat Level

U.S. and alliance efforts to root out terrorist organizations and their supporters abroad, and to reassure citizens at home that the threat has subsided have not yet succeeded. Additional incidents occur regularly, although the most dramatic are abroad and focused on the Middle East situation or major international assets, both government and commercial in Islamic regions. However, a swiftly recovering domestic economy is lifting spirits nationwide and to some extent worldwide as US appetite for imports reappears.

Investment in non-productive assets (for security and business continuity capability) have boosted many sectors, and have proven to be the engine for a surprising resurgence in productivity growth as innovation creates ways to get around otherwise productivity sapping processes.

Attention shifts from travel and threats against the public, that are largely controlled in the US and Europe, to threats against major areas of infrastructure (power generation, ports, communications centers and information flows). After an initial jump, energy prices have stabilized about 10% higher as threats to supply from OPEC are offset by higher domestic production and additional capacity in Russia and Central Asia coming online ahead of schedule

Global trade resumes growth at about 4% annually, but there have been significant shifts in trading blocks as the Alliance members gain and the problem areas lose out on investment and trade.

What are the main economic and social consequences?

Consumer confidence returns and with it broad economic activity restarts. There are no major corporate failures, although some sectors shed over-capacity and there is considerable consequential restructuring. Travel, entertainment and leisure industries realign themselves with the new world order, although all are now 20%-25% smaller than in 2000. The resurgence in confidence is reflected in a resurgence of equity investment, especially in sectors where earnings growth is quick to reappear. Unemployment stays around 6% and some skills are once again becoming difficult to find.

Capital flows improves as regional (if not global) credit risk is seen to be under control. Interest rates stay low, although they are expected to begin to rise in the near term if signs of inflation recur. The Dow climbs back to 10,000 and the Nasdaq to 2700. A mini-bubble is recreated in biotech and some technology stocks that are active in public health and security-related areas. The expectation of a prolonged and somewhat conventional anti-terrorist campaign keeps defense stocks up, but not by more than the market as a whole. Environmental concerns are steadily over-ridden in resource exploration and transport infrastructure.

In response to threats of bio-terrorism, the US government sponsors a major rebuilding of the US public health infrastructure, on a par with the investment in transportation infrastructure made in the 1950s. Other leading economies follow suit. There are several high profile court cases on issues of civil liberty and privacy, but the US Supreme Court sides with the government and an EU-like data protection bill covering cross border data flows is passed.

What would be the resulting business behaviors?

Business investment centers on creating a safe workplace, on robust business continuity capabilities and on continuing productivity enhancements. Work from home and telecommuting arrangements proliferate. There is also a major new demand to be in compliance with anti-terrorist operational measures that target money flows and other suspicious behavior patterns and to comply with or gain exemption from the new dataflow bill.

Businesses resume hiring, but a larger proportion of resources are contractors or supplied via outsourcers to maintain flexibility in volatile grow/shrink scenarios.

Businesses seek to build more comprehensive customer databases in order to run targeted customer service programs, broad-based loyalty and reward programs and to comply with security and notification rules. Such databases are increasingly linked (both overtly and covertly) to create comprehensive consumer profiles.

Profile-linked products and services become hot items with mixed consumer reaction to the first generation attempts to balance convenience with privacy and intrusion issues. Brands are rebuilt to add an prominent element of "trust" to both the product and the corporation behind it.

What impacts will this have on the IT organization?

Corporations are moving forward on a variety of technology fronts, the most public of which is the ongoing effort to increase security and reliability of infrastructure, reassess business continuity plans and reorganize accordingly. Behind the scenes, however, large, complex inter-corporate and corporate-to-government database linkage projects are also common.

These projects spawn a new generation of inter-corporate infrastructure and information architectures and the utilities that operate and maintain them. Learning to work with these new capability providers is an evolving challenge for the IT organization.

IT hiring is strong, as IT departments respond to business-unit plans to resurrect and move forward on plans to harness such technologies as CRM, PKI, KM and XML to their longer-term strategic goals. As the focus shifts to inter-corporate collaboration, IT departments aggressively outsource large-scale application maintenance and data remediation projects.

Some skill sets (both legacy and emerging) are again in short supply and the services industry restructures rapidly in response. Off shore efforts are generally being replaced by near shore and on shore providers as global risk factors are reevaluated.

Technologies requiring tighter bonds with business partners, such as supply-chain management, are moving more slowly on a global scale, as companies remain reluctant to extend themselves much further beyond their own regional blocs than they already are, but are accelerating in local and regional efforts to build strong and secure economic networks that can resist terrorist interruption.

New rules for global data exchange between the major trading blocks are emerging slowly as governments and businesses struggle to reconcile differing points of view.

What will be the smartest IT response?

Clean house. Simplify where possible and outsource where not. Learn the new rules of inter-corporate life and, even more critical, of comprehensive compliance with the new reporting standards (and you thought HIPPA was tough).

Refocus key resources on the new critical areas of data quality, security, collaboration and customer service. Identify key employees and work on ways to keep them happy as hiring pressure from outsourcers grows.

While the good times continue, avoid getting lazy. Invest in continuing productivity, speed and agility capabilities, but try to keep the cost of fixed assets as low as possible.


Click on a response above for further analysis of each scenario.