Business & Finance
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1/29/2004
12:12 PM
William Schaff
William Schaff
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Taking Stock: Visions Of The Year Ahead

Technology and business continue to work hand in hand.

In the past, the editors at InformationWeek have asked me for some fearless economic and IT-industry trend forecasts for the year. Given my uncanny accuracy in the past, I begged them to let me try once more. Fortunately, I promised to get some help this time around from more intelligent sources.

Cleary, most economists are forecasting a stronger U.S. and global economy in 2004. EMC's management recently stated on their earnings call that overall U.S. IT spending will be up about 3% to 4% this year. This is in line with expectations for the overall U.S. gross-domestic-product growth rate for the year of 4% to 5%. The biggest risk to the domestic economic expansion has been the lack of any visible job growth. However, given the rising strength in U.S. exports and manufacturing, it wouldn't surprise me to see faster job growth in 2004. Globalization has been one of the key drivers to the overall economic expansion process and has been a big driver of the productivity gains we have seen over the past few years. Significant advances in technologies tied with opening of trade borders have significantly reduced the worldwide cost of manufacturing and conducting transactions, and especially in the United States. Combine this with liberalization of emerging economies such as China, India, and many of the Latin American countries, and it isn't hard to see why productivity gains have far exceeded anyone's expectations.

The biggest global trend affecting business IT is outsourcing in all its forms. By outsourcing noncore competencies, a trend that has accelerated over the last decade, most businesses can generate higher returns on invested capital and focus on what they do best. Clearly, the profit motive is very strong. Whether it's outsourcing software development or call centers to India or manufacturing to Vietnam, the economic benefits are eventually transferred to the customer. We often see it in the form of lower prices on end products or more timely receipt of goods sold. Outsourcing used to be about incremental production for peak load demand, but now it's much more about strategic partnerships. For example, think about the potential $2 billion outsourcing deal being discussed between telecom equipment maker Nortel Networks and electronics contract manufacturer Flextronics. Remember that Nortel's total cost of goods was slightly more than $5 billion, so we're talking about 40% of Nortel's total manufacturing production cost. This is a significant outsourcing of Nortel's supply chain, which will likely include all of Nortel's optical, wireless, and manufacturing operations. When partnerships become this close, they better like each other.

We already know the Internet is more than just a passing fad. It really has changed the way businesses work. All one has to do is look at the eBay and Yahoo business models to know that money can be made from Internet-based businesses. This doesn't even address the transaction side of business processing: check payment, online banking, human-resources and payroll processing, merchant banking--the list goes on and on. The efficiencies achieved again show up in the productivity numbers each quarter.

But the bottom line remains that IT and technology in general, though critical to the overall business processes, are usually just important services and/or tools to be used as part of a greater business strategy. You see this in emerging technologies such as radio-frequency identification and all the many security applications that are such an integral part of business today. No doubt about it, technology and business go hand in hand.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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