The current downturn is unique because it is happening in the midst of a rapid transformation of business by information technologies. This transformation has been driven most recently by the widespread adoption of broadband and Web 2.0 technologies, mobility enabled by increasingly powerful wireless devices, technological platforms of unprecedented functionality, and the emergence of commercially viable computing clouds and software services.
These turbulent economic times present new opportunities for companies that invest wisely in information technologies, and new threats for those without a sufficiently forward-looking IT investment strategy. Opportunities arise because downturns can change consumer preferences, making people experiment with new lower-cost products or modes of consumption that were not pursued seriously during more prosperous times. Dangers arise if IT spending is conducted without careful assessment of the long-term impact. This is more likely when executive attention is devoted excessively towards short-term earnings management and cost control.
IT investment strategies
So, what is the right IT investment strategy during this economic downturn? Our academic research frames three kinds of IT-related business decisions: those that react to or cause “industry transformation”, where business models are fundamentally altered by progress in information technologies; those that increase operating efficiency or productivity through the use of IT infrastructures, enterprise systems or transactional systems that enable economies of scale or complexity; and those that lead to acquiring and leveraging various kinds of “customer intelligence” enabled by technological systems that better connect customers to products and companies to consumers.
To find out more on how Prof Dhar and Prof Subdararajan think managers can engage with new technologies, visit http://w4.stern.nyu.edu/ emplibrary/techstrategy.pdf
Viewing IT investment strategy through this lens requires varying one’s recessionary reaction based on which kind of IT-related decisions one is contemplating. First, IT investments associated with pending or ongoing business model transformation should be continued or ramped up. The recession will not change the fact that the basic business models of numerous industries have been and will continue to be changed by IT over the coming years. Furthermore, such transformation persists in both good and bad times. For example, the financial brokerage industry was transformed by the widespread adoption of online consumer trading systems during the build-up to the dotcom boom of the mid to late 1990s.
In contrast, the wrenching digital transformation of the music business over the past few years was affected most critically by decisions made soon after the dotcom bust in 2000. While the roots of change were evident in the emergence of the MP3 digital music format and peer-to-peer file sharing, record labels failed to make intelligent decisions about their IT strategy, shifting market power dramatically to newer intermediaries such as Apple, which exploited emerging technology platforms and changing user preferences to become the world’s largest music retailer.
In industries characterised by business model transformation during downturns, it is especially important not to focus excessively on short-term IT cost control. Downturns can accelerate the pace of transformation, making it critical to think about the opportunities and threats engendered by the combination of changing preferences and technological change.
An example is video entertainment. Increasingly, consumers of conventional television and film content are also turning to alternative forms of video entertainment that are exclusively internet-based. The recession is likely to reduce spending on cinema tickets and DVDs, prompt consumers to reassess expensive cable subscriptions and shift consumption towards lower-cost online video content.
As more consumers make this switch, it is essential that film studios and TV networks invent a viable business model, rights management strategy and delivery infrastructure that supports revenue-generating digital consumption. Withdrawing their IT investments and business model development as a cost-cutting measure could have a disastrous long-term effect on the current market leaders.
Decisions about investments in infrastructures and systems that contribute towards operating efficiency can be made more conservatively. Returns from IT infrastructure investments tend to take years rather than months to materialise. Further, they do not show up unless augmented by substantial organisational and employee behaviour re-engineering, which may be hard to implement during a period of widespread hiring freezes.
Downturns induce innovative investments
In parallel, cost reduction pressures will catalyse the transition from proprietary to shared infrastructures that tap into cloud computing platforms and software as a service. These new models of corporate computing are likely to replace self-owned IT systems for non-mission-critical processes and applications. The current downturn may provide the impetus organisations need to invest in the assessment and transition planning necessary for successful migration to these lower-cost IT infrastructures.
Decisions relating to the use of information technologies to acquire and use customer intelligence are affected in various ways by the downturn. In a recessionary economy, customer retention is critical to a company’s survival.
At the same time, the internet has enabled an explosion in access to electronic data, which is becoming increasingly important to truly “understanding” people through their data trails. User-generated content is widely prevalent as people become increasingly connected and spread information about even the most obscure of topics.
Businesses can access this data relatively cheaply, thus creating the potential for IT investments that increase customer intelligence and improve the business intimacy of consumer contact. For companies that do not currently leverage electronic customer data as an asset, now might be the time to carefully assess how this could support current and future business strategy.
This assessment needs to recognise that the basic model of customer contact and marketing is being transformed by online advertising and Web 2.0 technologies, whereby companies move away from directly influencing their customers and towards either reacting to their customers’ electronic intent, or mediating the influence that consumers have on one another.
At the same time, companies are now positioned to use “crowdsourcing” technologies to obtain more complex intelligence from their customers. The richness of this intelligence is expanding substantially through the use of interactive product design that involves frequent and active electronic consumer input; from open research and innovation through the use of development contests; and from superior forecasting and business intelligence acquisition through the use of prediction markets. As customer preferences evolve in reaction to the recession, acquiring intelligence through aggressive Web 2.0 investment strategy is critical. The simple user-generated content we have seen substitute company-generated messages is just the tip of the iceberg.
We are analysing a unique point in history. Previous downturns occurred during times when our IT infrastructure was primitive relative to what exists today. Information has become plentiful and relatively cheap as a torrent of content flows from users to an increasingly interactive web while people simultaneously leave richer electronic data trails of their behaviour. Against this backdrop, missing the IT investment boat could set companies back more than it has done in the past.
Decisions about these investments need to be forward-looking in a way that includes an assessment of relevance to both current and anticipated future business models. Curbing spending with a short-term focus will eventually cost more than it saves, while IT investments based on an intelligent framework could generate long-term gain.
Vasant Dhar is professor of information systems, group head, IOMS-Information Systems and co-director, Center for Digital Economy Research, NYU Stern School of Business
Arun Sundararajan is associate professor of information, operations and management sciences and NEC Faculty Fellow, NYU Stern School of Business