Opinion: IT investments could flatten your supply curve, not your profit margins.
In a November 1999 column, I chastised the compilers of the Dow Jones Industrial Average for what I considered the misguided decision to put Microsoft and Intel on that list. Since that change was made, Intel (after adjusting for a stock split in July 2000) is down 39 percent. Microsoft (adjusted for a split in February 2003) is down 47 percent.
I know that these years have not been one long chorus of "Happy Days Are Here Again," but ChevronTexaco, removed from the Dow to make room for the high-tech newcomers, is up 27 percent (adjusted for a September 2004 split) since its expulsion. Dow Chemical, which has since merged with DJIA exile Union Carbide, is up 32 percent since the date of the Dow list change (after adjusting for a split in June 2000).
What-if games with the DJIA are an arcane pastime: To maintain continuity of the value, a divisor has to be adjusted when external events would otherwise kink the trend line. I can tell you, though, what the value would be if usurpers MSFT and INTC had performed as well as DOW (Chemical, not Jones) and CVX during the past five years. Wed have been sitting pretty on Good Friday (when the markets closed to let me work with static figures) at 10,889. Thats 446 points above the actual valuenot enough to change my retirement date but worth a respectful moment of silence as we think about the actual nature of IT as an economic good.
Oil in the ground is an asset. If you leave it in the ground today, you can pump it out and sell it tomorrow. On the other hand, if people want to burn more oil today, the price per barrel will go up as more difficult oil wells must be drilled by more aggressive methods. The supply curve, in short, slopes upward. Economics 101.
Microsofts coders, despite the label of "human capital," are an expense. Even if they dont write any marketable code today, Microsoft still has to pay them. Intels chip fabs are booked as capital, but theyre really perishable goods. If Intel doesnt make chips today, process technology moves onand Intel may not be able to sell the chips that its all-too-soon-obsolete equipment will be capable of making tomorrow.
On the other hand, if Microsoft can sell the same piece of software to more people, the company can sell it for a lower price per copyand it had better find a way to do that, since its fastest-growing competition is stuff thats given away. If Intel can sell a greater volume of chips before the next generation of process technology comes along, it can sell those chips at a lower unit price. The direct cost of goods sold is a tiny fraction of the price of a complex chip.
Whether were speaking of hardware or software, therefore, these supply curves slope downward. What does that make these goods? They dont behave like industrial outputs, and thats why I was immediately hostile to the go-go (or should I say "gaga"?) idea of putting them in the DJIA. I said at the time that these stocks prices were poorly chosen proxies for economic growth; events since then make me look more right than wrong.
That brings us to some interesting questions: What do you do? And why do people pay you to do it? And what makes your supply curve slope upward so that every unit of your output costs more than the one before? If you can flatten that slope, youll enjoy more demand at any given volume. Economics 101.
You dont want to make IT vendors rich by playing zero-sum games with your competitors. As I said in the aforementioned column, currency trading is a perfect example: After some adjustment as new tools emerge, the end state is that the same things happen more quickly and the IT vendors have more money. If someone wants to tell me how anyone else is better off, Im listening.
Your IT investments should be flattening your supply curve. They should be automating tasks so that doing twice as much requires less than, not more than, twice as much effort and expense. They should be leveling out the bumps in your supply chain to reduce the costs of high peak-to-average ratios in manufacturing and logistics.
And they should be making you, not IT vendors, richer every year. Invest IT into your company, not your money into IT stocks.
Technology Editor Peter Coffee can be reached at email@example.com.
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