A Wave Theory of Spending

The technology industry has benefited from several waves of spending. Between 1997 and 2000, these waves converged to create a giant wave of spending. This was triggered by Year 2000 conversion, widespread acceptance of Internet technologies, introduction of wireless and mobile technologies, optical telecommunication technologies, and general increase in bandwidth of communication links worldwide. Such increased spending is not new. In the past too, when new technologies were introduced, certain regulatory changes occurred, or product defects were found, spending increased to take advantage of new technologies, conform to the new regulations, or fix defects. But the convergence and scale of spending in the last three years is unique.

Of these, the Year 2000 bug was different as it did not add functionality to systems or increase the productivity of businesses. But the spending had to be done.

Examples of spending to meet regulatory changes are Euro currency conversion and the healthcare regulatory changes in the US (HIPAA). These also have specific compliance dates; hence the spending had to be complete by that date. When the US postal zip codes were changed from five to nine digits, changes needed to be made to systems. But there was no compliance date in this case.

In the past, when minicomputers were introduced to challenge mainframes, and later when PCs challenged minicomputers, new companies were created. When the Internet became popular, new companies again emerged. Some of these are new product companies, but many like Amazon.com and Priceline.com emerged as alternatives to existing businesses. These were talked about as the new business models of the future. But, by the time the incumbent businesses understood the power of the new technology and got into the act, many of them were in financial trouble and had ceased to exist. And unlike the Year 2000 problem or the Euro Currency conversion, there is no time limit by which companies had to embrace this new technology. Spending was driven only by the competition factor.

In telecom too, a similar phenomenon happened. There were huge investments in building the infrastructure, buying licenses, and developing new products. Infrastructure spending was also done by the new companies which were set up as alternate businesses. When these companies died, the spending stopped. The need for further increase in bandwidth was also reduced for the time being.

Another factor determines the size of spending–the scope or impact of the wave. The Internet wave, Year 2000 spending, and telecom spending were all global in nature. Euro conversion affects systems in or dealing with Europe. Healthcare regulatory changes in US affect healthcare-related industries and systems in the US. These are examples of smaller waves.

Waves of spending will continue in the future too, as technology changes and evolves. But the current downturn will have helped us better understand the nature of these waves, and be better prepared. Hopefully, the lessons will not be forgotten when the next spending rush happens.

S Gopalakrishnan is the deputy managing director,

Infosys Technologies. The views expressed here are the author’s views