Digital Matters - Issue 47

"Many things matter, and here's what matters most."

It's over and it's just begun. Those are the competing ideas that the modern economy requires you to balance simultaneously. It ended on April 14, 2000, when the dotcom stocks began their crash and burn. It began every day before that, continues every day since, and begins anew today: disruptive advanced information technology embedding itself ever deeper into the DNA of our economic, cultural, and personal lives.

The truth is in the contradiction, the paradox of an imploding and exploding transformation. Kurt Andersen wrote a great column in the December 2000 issue of Inside Magazine that captured this paradox with an almost exact metaphor. Christopher Columbus's business model, said Andersen, didn't really work out — no direct route to Asia, bad ROI on the venture when you do the math. But, as Andersen wrote, "He fucking discovered America." And that's what the techies did. They discovered a new world, and, in doing so, created what has come to be called the new economy.

We now find ourselves in a kind of suspended animation, unsure of what comes next. Our media — never keen on contradiction or paradox — is headlining doom and gloom with every turn of the page. Having ridden the wave of dotcom advertising dollars, they are now trash-talking all things Internet. If the conventional wisdom were a song, it would be the old Rolling Stones hit "Paint It Black." The media seems to be fueled by an almost manic-depressive rage.

The coverage matters because it affects the financial markets. Negative coverage begets negative news. Irrational despair replaces irrational exuberance. As Andersen pointed out, Wall Street analysts, journalists, and Internet entrepreneurs share the same adrenaline-addiction disorder, which fueled new-economy hype. When the economy crashed, they crashed, and a vicious down cycle began.

Meanwhile, digital technology keeps marching along, fueling discovery and invention. Global Crossing keeps laying fiber under the sea. Optical-networking companies keep riding the speed of light. Wireless technology advances by leaps and bounds. Astrophysics unveils new moons and planets in the universe. Celera Genomics helps to publish the first complete map of the human genome and begins the most important scientific project — proteomics — in history. The pace of change, lashed by supercomputers running at exabit speed, increases exponentially at each inflection point.

The problem, of course, is that there are no earnings yet. You can see the value creation's potential as it unfolds, but you can't count it. You look at the charts on these digital-technology and genomics companies, and the first thing you notice is the absence of a number in the price-earnings-ratio box. Celera Genomics, Global Crossing, company after company with no net — figuratively and financially.

And so, for the moment, the paradox begs the question: What matters in an imploding and exploding transformation? One answer is to listen to what the technology tells you. Another answer is that many things matter, and here's what matters most.

Understanding what doesn't matter matters. It doesn't matter that the dotcom frenzy was crazy and speculative. It doesn't matter that the techies were arrogant and smug. It doesn't matter that wireless doesn't really work yet. That broadband won't be in every home next year. Or that eToys is out of business. It doesn't matter what the chattering classes say. What matters is that advanced information technologies are the central concern of modern business.

Money matters. Venture-capital investment in the first three quarters of 2000 more than doubled the amount that was invested in all of 1999. As George Gilder wrote recently, "The huge surge of venture investments of the late 1990s and early 2000s ... will yield a steady flow of innovations reaching the market over the rest of the decade." Press coverage focuses on the NASDAQ: Yahoo! down 85%, Amazon on the ropes, biotech in the dumpster. But the money that matters is not the paper profit or loss. It's the money that's already at work. There's a ton of it, and there will be a ton more of it.

Strategy matters. Michael Porter, the Harvard Business School strategy guru, argues that business strategy is made more important by Internet technologies. He's right. What the Internet does is make every link in a company's value chain transparent (and therefore vulnerable). It shifts power to customers, who use Internet-enabled reverse auctions and aggregation to negotiate prices down. The net effect is that "price discipline" (a company's ability to maintain value-creating prices) becomes difficult, if not impossible. That's why it's so important to have a strategy that anticipates the impact of these technologies on the marketplace and on the competition.

Information technology is the central nervous system of strategy. No matter what business you are in, information technology is now a core function. If you look at the IT systems at leading companies around the world, they read like a map of past priorities. Ten years ago, finance had juice, so it got its system. Five years ago, marketing was riding high, so it got its system. Then manufacturing muscled in and got its system. And none of the systems are compatible. It's not that they don't work together. It's that they can't. As a result, valuable, real-time data regarding the operational whole is lost and can't be recovered. Vital information — about customers, inventories, and distribution — either hemorrhages out of the corporation or sits dormant, clogged, and unmoving. The question becomes, What's the point of a COO or a CEO if the operations data is a mess? The truth is that technology and operations are the same function.

Leadership matters. Leadership always matters, but it matters most when technology disrupts and fear kicks in. Any fool can hand out stock options and keep his team together when the market is hot. But real leadership means keeping the team focused when fear is a force. If you walk through the U.S. Military Academy at West Point, you see the statues and portraits of great military leaders — Eisenhower, MacArthur, Patton, Washington. Those leaders were, first and foremost, commanders. The ability to command is still important, but the ability to build unit cohesion among team members is what matters most. In a networked world, the edge goes to the most cohesive team. Building those teams and leading them by leveraging their skills is the key to success in the fast economy.

Values matter. There's a company called Smythe Dorward Lambert in Boston that helps companies communicate with their employees. Smythe Dorward Lambert conducts focus groups and asks what the workforce most dislikes about their corporate superiors. The answer that Smythe Dorward Lambert gets back over and over again is this: "The company says one thing and does another." I can remember sitting in a meeting room once and listening to the chief executive of a company announce that the man running his New York office was "my guy — yesterday, today, and tomorrow." The instantaneous interpretation of this statement by virtually every person in that room was that the New York office chief would be fired within 30 days. As it happened, it took a bit longer. He was fired in 45 days. The truth matters. Loyalty matters. Lies matter. Values matter. You know a Dilbert company the minute you walk into it. Dilbert-company employees know the exact calibration of corporate dishonesty. It's what they most dislike. Experience teaches them that politics matter most. So they play along, or they retreat into a kind of sullen invisibility. In the networked world, everyone else knows what the Dilbert employees know.

The network really matters. The most dramatic effect of advanced information technologies is networking. Everyone is part of a network, and now all of the networks are interconnected. It's not six degrees of separation anymore. It's exponential connection. The Internet is global. The economy is global. The network is global. Your neighborhood is the network.

Peer-to-peer computing matters. It's no accident that the three killer Internet apps are email, instant messaging, and Napster. All three are, in practice if not in technical fact, peer-to-peer technologies. And now a wave of P2P-technology platforms and applications is coming to market that gives users at the edge of an organization — any organization — unprecedented power. Understanding the influence of P2P technology will soon become a management obsession. Only companies that harness the power of the edge will thrive.

Lest you think that P2P computing is some weird Silicon Valley fad, consider the death of Dale Earnhardt, which became an enormous P2P event. Millions of people rushed to the Web to post notices and to exchange messages and letters of condolence after his death. The traffic was so thick that major ISPs could barely handle the load. Consider Napster, which had no users in 1997 and 40 million users in 2000. The tool that empowers the edge as never before is P2P.

Reengineering matters. Advanced information technologies enable vast restructuring of what are called human resources. Consider the banking industry: There are millions of people who work in the banking industry. Most of what those people do can be done by advanced technology. Indeed, on an asset-based loan, there is no need for a banker to be involved at all. A car is worth $20,000. A buyer has the wherewithal to buy or to lease it. If payment is not forthcoming, the bank repossesses the asset. The same holds true for a home, a second home, even a college-education loan measured against future earnings. There's no need for human beings. The only remaining purpose of a banker in the traditional sense is to provide psychological insight into an uncollateralized enterprise. The rest is process.

Companies that master those advanced information-technology processes will enjoy a significant competitive advantage. Tom Peters predicts that in the next 10 to 15 years, 90% of white-collar jobs will be reinvented or disappear. He may be understating the facts.

Profits matter. Value creation, simply stated, is selling something at a price greater than the cost of producing it. Thousands of dotcom companies did not do that, they aggregated eyeballs, they sold themselves as "first movers." They touted their "business models." None of that matters. Profits or a clear path to profitability is required.

A sense of possibility matters. Before the wave broke, a huge sense of possibility surrounded the Internet-enabled new economy. That sense of possibility has given way to an uneasy (and unattractive) feeling of victimization: We've all been had. But the truth is, we haven't been had. We're just beginning to glimpse what we have. And it makes feasible a world of possibility. That's where value creation lives. That's the trajectory to the future. And getting to the future is what it's all about.

John Ellis (jellis@fastcompany.com) is a writer and consultant based in New York.

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