Sunday, July 06, 2008

IT - The bulwark against economic downturns - an opportunity again.

A wise man once said, that in the middle of every difficulty, lies an opportunity - and there cannot be a better start to the analysis presented here - than this famous statement from the wise man.

The recent economic downturn exhibits once again that we haven't tamed the economic cycle yet. And it wouldn't be egregious to say, that we possibly wouldn't be able to tame this big cat for decades to come. Economic cycles exhibit the expansion and contraction of economic activity - which in turn is a complex function of parameters such as consumer spending, interest rates, inflation and a multitude of other parameters, along with the assumption that we humans are rational beings who act based on the information available to them. While we have been successful; partially though, in taming the economic cycles, the critical component of that success lies in making information available, for the rational beings to take judicious decisions. It is well known fact, that we have avoided severe downturns over the last decade - primarily due to improvements in Information Technology, which deliver the right information at the right place and time, to allow judicious decisions to be taken.

To give you a background, most of the recessions over the last fifty years have originated from the manufacturing sector. The reason is simple - Manufacturing industry has a value-chain, from the raw material producer to the end consumer. The raw material producer, supplies to the manufactures, who in turn supplies to the wholesaler and then the retailer, from where we customers buy products. At each stage in the chain, they have to keep some inventory of stock to cater to the variation in the demand. In early days, due to poor speed of information flow (about the inventory of the end retailer) the level of inventory maintained at each stage was relatively very high. Therefore, when a recession triggered in the - the retailer was the first to know about it - but it was very late in the cycle, that the raw material producer and the manufacturer learn't about it. This meant - huge overstock of finished goods and big-time lay-offs.

Over the past decade - with tremendous improvements in Information Technology - all members of the value-chain are able to keep a tab on the end consumption and therefore have managed to relatively reduce their inventory/stock. As a result, if the consumption goes down, they can immediately scale down production , and since they do not have huge overstock of finished goods - there are fewer layoffs.

While most of the industries have taken a huge leap in technological terms, it has allowed Fed's across the world - better quality of information and thus better decisions. Wouldn't be an exaggeration to say that Information Technology has been our bulwark against severe recessions.

Having said that, we are in the middle of a severe downturn! Well, so now - how is that possible? In every recession, there is an industry which triggers the fall- not always, but mostly. In the days-gone-by it was the manufacturing industry. But with deployments of ERPs across the globe; good on them, they aren't the culprits this time on. From the articles world-over - there is significant analysis which proves that poor financial management in banking (read- bad credit checks) and housing led to this current downturn.

Is it not time, then, for better application of Information Technology in Housing and Banking?

Like the wise man said - in every difficulty lies an opportunity. And the wise man was Einstein.

1 comment:

Sidharth said...

good article, good insights, however it's not the middle of recession yet, it's the start.. and well you can manage recession somewhat but you can't eradicate recession.., same way you can't eradicate human greed and stupidity :)