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1998-05-21 12:40:05


Stanford Economist Is Not Concerned



Garth Saloner teaches at the Stanford Graduate Business School, regarded as one of the best, if not the best, in the world. He holds an endowed chair. He is at the top of the academic heap.

As a good economist, he looks at the margin and discounts anything so big that the free market cannot deal with it.

I agree. The free market can deal with it. But, sad say, at some price. What price? There Dr. Saloner and I part company -- by about 2,000 miles and three 10kw natural gas-powered electricity generators.

When he says the biggest effect of y2k is in IT [information technology] departmental budgets -- a marginal shifting of resources to y2k repair -- I conclude that he has not considered the possibility of a breakdown in the worldwide division of labor. He needs to re-read Chapter 1 of Adam Smith's WEALTH OF NATIONS, with this question in mind: "If we take away the machinery, how many newly produced pins will we be able to buy?" Or newly produced anything else? The answer is: not many.

This is from the CIO (Chief Information Officer) site (May 15).

* * * * * * * * *

Garth Saloner is a Robert. A. Magowan Professor of Strategic Management and Economics, Graduate School of Business, Stanford University. He is currently one of the principal researchers on a major study of the worldwide computer industry funded by the Sloan Foundation.

CIO: Our readers are CIOs and other senior business executives. To help them understand the economic impact of Y2K, tell us how it will affect us economically and sociologically (as opposed to technologically)?

Saloner: Economically, the biggest effect is that it is distracting many large organizations from making strategic IT investment that would they would otherwise be making. In-house IT organizations are focused not totally, but significantly, on solving this problem and not putting resources to bear on using the newer technologies, like the Internet [and the Web], and so on to really make dramatic improvements in the way they're doing business and to gain competitive advantage. We won't really know what we're missing. This doesn't have a negative effect in terms of depressing other sectors because indeed we're putting more resources into Y2K than we would have been putting into IT resources before. The dramatic high rates that are being paid for COBOL programmers, for example.

But it does mean we're going to seeing the slowing of the impact of IT. If you take a longer-term perspective, one of the interesting things about the adoption of strategic IT technology is how long it takes to implement. We examined the adoption of client/server technology as part of an overall strategic plan of the organization, and what's interesting is how long it takes for it to be adopted in a way that has a significant impact on the way the firm does business or gives the firm competitive advantage. Successfully adopting information technology, more than buying boxes and cable, requires strategic vision and organization change to change the way the firm does business. Given that that is a different and slow diffusion process, having that interrupted for 4-5 years while people are distracted by this other problem, it means that adoption and productivity improvement will be slowed. . . .

CIO: What's the worst case scenario? What's the best case scenario?

Saloner: I'm not a member of the catastrophe camp here. This is not a discrete event where people come to work and half the world shuts down. Most of the processes for which Y2K is involved start to invoke long before the year 2000. The inventory system integrates events in its future; in systems that plan inventory 3-4 years out, people have already hit the glitches. As you get closer [to the year 2000], you start to encounter more of the problems. That smooths the effect on the economy. I don't think we're in for a dislocation. I think a recession caused by this is extremely unlikely. I quite look forward to the year 2000 because when the distraction is out of the way, we're going to see those resources refocused on using this amazing amount of technology available every day. A lot of attention and inventory and we'll start to see the payoff from and it and that will be an exciting period.

CIO: Do you expect to see a self-fulfilling prophecy -- that is, economic problems occur not because of computer problems but because the public anticipates computer problems, withdraws its money from banks, and stops flying or shopping?

Saloner: I think that for the most part consumers will be willing to rely on these systems continuing to run. Computers have become so much a part of our lives, I don't think the computer phobia we were used to in the 60s is prevalent. People are immunized to it. The worst that happens, the bank will forget to credit you for something they should have. They'll realize it and fix it. I don't see any psychology of mass fear or shift in consumer behavior. Most of the economy is based on business-to-business transactions. Most businesses will know that their partners will be on top of this problem. . . .

I must say for the most part, there are huge institutions that are totally on top of this problem. You're not relying on mom and pops to get it right. These are areas that for the most part are not extremely time-sensitive. If your insurance company is a few weeks late in processing your payment, it's not catastrophic. There's a paper trail. It's not that a machine stops running at a witching hour. There may be a few examples of that [like elevators on New Years Eve]. The people who are lucky enough to have that experience will have a story to tell at cocktail parties for years to come. . . .

Saloner: Defensive measures are well documented. Any public firm will have gotten advice from its auditors that they ought to be doing. This is like airline safety. You're better off not talking about it, because you just engender too much concern. Me fear though [thou] dost protect too much. . . .

CIO: How will problems in other countries affect the U.S. economy?

Saloner: I don't agree with the premise. My sense from talking to folks in Europe is that they're on top of it too. They're at an advantage because of changes in their industry structure, going to having a national champion in the mainframe world. Those competitors like Groupe Bull and Olivetti did not do terribly well when alternative technologies became available. European countries were the first really feel it. There has been a more rapid transition from the legacy systems in some of those countries onto architectures that didn't have a Y2K problem. Many of them have less need to be concerned.


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