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.

This article was originally published on 11-01-2001
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