Guest Article, submitted by Werner Reisacher
There are as many opinions about the reasons behind the present economic crisis as there are personal interest groups. However, the factors leading up to the present economic situation go beyond opinions and personal interests. They are by far more complex and can be traced back to the 1990’s.
During those years, cost reduction exercises were routine. The legacy software systems in place could not support these activities and provide the integrated solutions needed to improve productivity. The slogan “work smarter not harder” did not reflect the situation in the work place. Employees worked harder then ever. Lay offs were an ongoing concern and loyalty to employers reached an all-time low.
Digital technologies and the Internet offered solutions. The possibilities to access global markets, without increasing working capital and incremental costs could have created a boost to the economy comparable to that of The Industrial Revolution.
Brick and mortar companies were unable to embrace such an opportunity. However, the inflexibility of their systems was only part of the problem. The main roadblock was management’s attitude. Their lack of digital skills and the “not invented here” syndrome made changes look like threats rather than challenges.
Entrepreneurial individuals, technically skilled and frustrated with the constraints of the legacy systems realized the potential. They became the leaders of “The New Economy”. Ironically, their focus on software also caused their downfall. They used the technological innovations as solutions in themselves and not as tools to create better solutions. The creation of a large customer base, marketable for advertising purposes, became their core business. To accelerate the build up of these databases, products were given away or sold below cost. Traditional companies started to add e-commerce to their existing businesses without taking the time to break down the roadblocks to productivity. To them, the result was mainly a shifting of existing retail revenues to e-commerce and an increase in costs for the new infrastructures.
The investments of the dotcom companies became powerful drivers for the entire economy. Nobody was prepared to miss “the opportunities of the millennium”. Companies increased their capacities. Growth rates were accelerated through acquisitions. The Media cheered the boom. It increased their advertising income and provided daily breaking news. Overly optimistic estimates and promises for future earnings replaced established financial ratios. This created the kind of euphoria comparable to the times of the Gold Rush.
Changes in employee’s dress code became the visual sign of the new trend. A less obvious but more devastating change took place in business and ethical behaviors. Common sense and accountability went out of style and share prices became the ultimate yardstick in measuring success. This development took proportions of mass hysteria, affecting the entire population. It is important that we understand and acknowledge this fact so that we can draw conclusions find solutions, instead of simply blaming the blunder on singled out groups.
The bubble of the New Economy burst when advertising capacities of Internet companies exceeded demand. Databases being their only substance, most of these businesses imploded and caused an abrupt halt to the growth of traditional businesses. Those were faced with excessive infrastructures and complex business structures. Losses resulting from past errors could no longer be rolled into increased profits. The moment of truth had come.
Understandably, investors became disappointed and shocked about their decision to participate in the frenzy. Financial markets overreacted. Shares of solid companies dropped below their real values.
Nevertheless, the US economy is still the most powerful on this planet. Historically financial markets always overcome difficulties and the economy returns to “business as usual”. Considering the opportunities inherent in the “New Economy”, returning to “business as usual” is a dangerous scenario that will stay with us for years to come. Corporate America missed the opportunity to understand and therefore benefit from the original concept of the “New Economy”. Unable to eliminate incremental costs, companies will continue to transfer their in-house costs to their business partners. Customers will spend hours on the phone waiting for the next available agent and retailers will declare self service check out counters as leading edge solutions.
Emerging countries, not burdened with heavy investments in legacy systems have already started to heavily invest in the education of digital specialists. It is only a question of time until they become economic rivals that need to be taken seriously. If this is not done, the situation experienced by Detroit during the 1970’s will reoccur. A real economic crisis could result if Corporate America does not take leadership and continues to remain ignorant as to the original concept of the “New Economy”: a revolutionary way of doing business that goes far beyond the “got mail” experience.
Copyright: Werner Reisacher. Werner Reisacher of Sammamish WA is a financial executive and hold senior financial positions with major U.S. and European Corporations. He is the inventor of the first integrated global e-commerce software application and has subject matter expertise in activity based costing, value based management, balanced scorecard and global supply chain management and logistics.