Battered Techs May Yet Retool the Economy

Federal Reserve Chairman Alan Greenspan’s April 18 interest rate cut may keep the ailing economy from going into shock, but it is not a cure.

Economic handyman Greenspan controls the temperature inside the building while heat waves, earthquakes or ice storms rage outside. His steady hand on the thermostat keeps us from getting too hot or too cold, but he cannot change forces of nature, including the centrality of technology to the economy.

Technology companies were injured in the dot-com crash, and the rest of us feel their pain--stock market decline and volatility, mounting layoffs and bankruptcies. It is tempting to blame our suffering on the failed promise of the Internet and to look to Washington for solutions. Both would be wrong. The economy will look healthier when the Internet’s potential is recognized and technology investment resumes.

Far from being in the critical-care unit, the Internet is still in the nursery. We face a period of adjustment now as companies tighten their belts and defer technology investments to improve earnings. But because of still-unrealized Internet potential, the economy will pick up again when spending on technology increases. Such spending will itself be a valuable investment in transforming the quality of the services Americans receive.

The biggest economic force unleashed by the Internet is not the side consumers see--media companies that can’t charge for their content, e-tailers that can’t make money--but rather the hidden Internet behind the screen. How many individual investors who rode Cisco up--and down--can define “routers,” “hubs” and “concentrators”? Yet this side of the Internet offers efficiencies in how companies run internal operations, link to suppliers and distributors and serve their customers.

Amazon is not the world’s largest e-commerce company. That distinction belongs to the technology leaders themselves. IBM projected sales of nearly $13 billion via the Internet, out of $88 billion in year 2000 revenue. Greater economic value comes from cost-savings. IBM’s Web site receives more than 99 million visits annually for self-service and technical support; IBM uses the Web itself for about $43 billion in procurement and has links to 14,000 business partners. Then there’s social value. Virtual IBM teams developed new database software in three weeks to help the International Rescue Committee reunite war-separated families in Kosovo. Other teams have created Web-based systems for teacher mentoring that have helped raise student achievement in public schools.

Bricks-and-mortar companies have been slow to use the Internet because of internal barriers to change. Some treated it as a superficial add-on, just another form of mail-order or a place to post corporate propaganda, without examining how the traditional business might learn new tricks. This kind of superficial change is like trying to put lipstick on a bulldog as a way to make the bulldog beautiful. The bulldog hasn’t changed, but now it is threatened and angry--a waste of time and money.

Smart companies have already realized multichannel profitably. Williams-Sonoma now derives 10% of its $2 billion in sales from the Internet. Its Internet division is well-integrated with its stores and catalogs. It was within $200,000 of breaking even in 1999 (its first full year on the Internet); became profitable in 2000; and foresees even higher profits ahead because the Internet does not stand alone, it supports the other channels.

Similarly, Staples recently reunited staples.com with its physical stores. Consumers will soon take it for granted that they can use stores, catalogs or the Internet interchangeably, just as they will choose whether to phone, fax, snail mail or e-mail friends, family, children’s teachers, home repair crews or lawmakers.

Many illusions died with failed dot-coms, but not the Internet’s potential. Network technologies are already raising productivity, as former Treasury Secretary and economist Lawrence Summers argued at the World Economic Forum in Davos, Switzerland. Higher productivity allows bricks-and-mortar companies to reduce costs and increase speed while offering higher levels of service and more choices to their customers.

Just as we came to expect instant wealth during the dot-com boom, we’ve come to expect quick fixes from Washington. Yet neither tax cuts nor interest rate changes can solve the investment problem. The economy will perk up when companies get smart about technology again and start investing again. Consumers will benefit from a healthier economy and from service improvements that technology brings.

Government can also invest in technology to improve its own performance and that of related institutions, such as education and health care. The Institute of Medicine has proposed a $1-billion federal innovation fund for health care. Imagine investments in technology to lower hospital administrative costs, speed prescriptions electronically to pharmacies or improve doctor-patient communication. That would be chicken soup for the economic soul, helping heal the tech sector while improving quality of life.