Editorial: November 2003

Bethany McLean and Peter Elkind’s The Smartest Guys in the Room, a real page-turner of a history on the rise and fall of Enron Corp. and an all-inclusive instruction manual on how not to run a company, analyzes with great care former Enron CEO Jeff Skilling’s “asset-light” business strategy. The idea involved selling off Enron’s hard, old-economy assets such as the natural gas pipeline business on which the company was founded, and concentrating on trading energy—and anything else they could make a market in—because trading, in theory, no longer needed to depend on a physical connection to what’s being traded. Given the highly volatile nature of trading profits, however, Enron found it more and more difficult to keep the promises it made to Wall Street of smoothly rising earnings—thus its increasing reliance on accounting chicanery to meet Wall Street expectations.

We all know how the story ends. Indeed, the post-dot-com era has been characterized in part by a “retreat” to more asset-intensive, old- economy businesses. Yet that hasn’t been true in the world of corporate information technology. Judging from this month’s CIO Insight research on outsourcing, more and more companies, both large and small, are moving to an asset-light tech strategy, in which the capital cost of tech assets—and presumably the risk—is being laid off on outside firms. Meanwhile, Amazon.com, which in the beginning was an asset-light play if there ever was one, is betting that the technology assets that run its Web site will contribute significantly to its future revenues—as much as 50 percent if all goes right, according to some analysts—through sales of its back-end e-tailing services and Web site space to other retailers. Other companies are turning to innovative new technologies such as blogging to increase their return on other kinds of assets, such as knowledge.

The issue here is return on IT assets. There are only two ways to improve that number: either reduce the assets, like those who are embracing outsourcing, or boost the benefit from those assets, as Amazon is trying to do. Our prediction: Most of the corporate world will choose the first method, consolidating servers and platforms when they aren’t outsourcing, and eventually moving to some variety of utility computing. Perhaps, eventually, some young post-Enron genius will figure out how to profit from the trading of computing power. And perhaps, eventually, companies will even be outsourcing their blogging.

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