Q: The University of Michigan's latest survey shows consumer confidence in October fell to its lowest level since 1993. What, if anything, does this mean for corporate IT spending? A: I don't think consumer confidence relates much to the economy, so I have a hard time figuring out how it would relate to IT spending. Consumers tend to form their expectations based on past experience and, often, noneconomic factors. A lot of the decline in confidence right now is around the uncertainty about when the United States is going to go to war in Iraq. If anything, [the war] will be a positive development for the U.S. economy, because the war itself will be over, I suspect, fairly quickly. And you'll see a pretty sharp drop in the price of oil following the war. So all of those would be favorable developments.

Q: What's wrong with watching consumer confidence as an indicator of the overall economy? A: Consumer confidence tends to lag what's going on in the economy. Consumers tend to look backward. They also remain very confident even as the economy is going down. But if you look at the '90s recovery, consumer spending began to turn up in the middle of 1992. We actually had the second-best holiday season of the decade in 1992, but consumer confidence didn't really recover until 1994. So there was an almost two-year lag in confidence behind the spending. You saw a similar phenomenon, though not quite as stretched out, in the early 1980s, when you had a recovery in spending in 1982—again, a very strong holiday season—but confidence didn't recover until early 1983.

Q: Business, in contrast with consumers, doesn't seem to be showing any great confidence—or spending. A: Well, the other piece of data that's just come out is orders for durable goods. One of the really surprising numbers is orders for computers and computer equipment. That number, according to the government, is up 20 percent from where it was a year ago. Now, it's up from a very depressed level, and it certainly isn't anywhere near the peak that we saw in 2000. But you are beginning to see somebody ordering this stuff!

Q: One gets the sense that there must be huge, pent-up demand for IT systems, based on projects that have been put on the back burner in the last year or so. Does that make sense to you? A: Absolutely. In the research we've done, the thing we look at as the driving factor behind business investment in general, and technology in particular, is corporate cash flow. There are some disconnects between the two—in the Y2K phenomenon, for example, you saw relatively weak cash flow and very strong spending—but we're seeing a pretty good recovery in corporate cash flow. So businesses have the cash to invest in technology. You also have a bit of a backlog in projects that I'm sure IT directors would like to move forward on.

Q: Just as there's a psychological aspect to consumer confidence, isn't there also a psychological aspect to IT spending? We hear the CRM horror stories, and that makes us less eager to try it ourselves? A: No question about it. Whereas confidence doesn't have that much of a role in consumer spending, it does have more of a role on the business side. The reason for that is that consumer spending doesn't have to look forward into the future. For the most part, consumers look at their cash flow and make decisions based on the cash that's in the house at the moment. But businesses do have to look forward. They must have some kind of expectation as to where the economy is going, because at some point in time, you have to come up with some rationalization of a return. That's based on some expectation of the future state of the world. And those expectations are formed both by individual business experiences with technology projects, as well as the experiences they see and read about among their peer group. Certainly, there was a lot of difficulty with a lot of the large enterprise projects.

Q: You've done research on CRM. Is the reality as dire as we hear? A There are certainly a lot of horror stories. In some ways CRM is a methodology in search of an application. In principle, it sounds great. But in a lot of businesses, the implementation of CRM is extremely difficult—particularly if you're trying to do it on a large-scale basis. Certainly for manufacturers where there's a relatively fixed set, and a relatively small set, of best customers, CRM makes a lot of sense. But when you get to more massed businesses, particularly retailers and other large consumer businesses, it's too difficult to do. The difficulty is really in making it meaningful to the customer. Even at the end of the day, that's the shortcoming of a lot of CRM systems: They were unable to make changes that were meaningful to the end consumer.

Q: What implications might these lowered expectations have for IT spending? A: It will change the pattern of how IT will be purchased in the future. Instead of large pieces, it's going to be more smaller pieces that may ultimately add up to a larger project. They're going to be done in much smaller steps. It's a desire for control, particularly on the part of senior management. They, in a sense, let this large genie get out of the bottle and at the end of the day regretted it. So to have better accountability and control of the IT changes that are taking place, they're going to look for smaller, incremental changes.

Q: Will this likely change the way IT products are sold and marketed? A: I don't think it will be so much the vendors doing it. Vendors would still like to sell the $10 million project. But it will come from the customer side. Customers will say, "That's the vision of where we want to go, but here are five incremental steps we're going to take to get there. We're going to do this on a project-by-project basis and reassess it at the end of each project." This also gives the buyer flexibility in case the economy turns down—they can temporarily halt a project.

Q: What would it take for IT spending to really pick up in a way that we could say the industry has regained its health? A: The expectations of the industry were formed in the late '90s, and that was an unusual occurrence of different factors that are not likely to be repeated any time soon. So until we get beyond the expectations of what's healthy, people are going to continue feeling that business is tough.

Q: So our tough business climate for IT is largely a matter of perception? A: Yes. I can still remember a presentation I gave in the spring of '99 in which I was looking at the boom in IT spending and the consulting business. My forecast said, "This is not going to continue like this. You're going to see this slow down pretty dramatically." And there was disbelief that this could possibly happen. Once expectations are formed, they're very difficult to change. People have a lot of faith and confidence in their own experiences. And the experience of the late '90s is the core experience that a lot of the technology industry holds. So that becomes their expectation of what good times are.

Q: In your article for Optimize magazine this month, you mention the deflationary cycle, in which companies try to boost falling sales by cutting prices, ad infinitum. What does it take to break out of such a cycle?

A: It's the same way as inflation occurs—these cycles tend to run for long periods of time, because they do tend to be self-reinforcing. Breaking out is possible, but it requires institutional change—changes in the supply or demand sides of the global economy. What it's going to take is for the Chinese middle class to start demanding the same standard of living that the Americans enjoy.

Q: What does the lifestyle of the Chinese middle class have to do with the U.S. economy? A: What's overwhelming the global supply chain right now is manufactured products coming out of China. They set the cost of goods sold on a global basis. That's because they produce goods so cheaply. That's putting downward pressure on prices globally. So you've got this huge increase in supply. Now to offset that, you need a corresponding increase in demand. We're not having that. So if you could get Internet and television service throughout China and create expectations on the part of Chinese workers—everyone should have a large house, two cars in the garage, kids going off to college, travel around the world, dinner out once a week, a nice wardrobe, and all the other things that go with middle-class and upper-middle-class lifestyles—then you'll see a shift in global demand. So that's what it's going to take. That eventually will happen. People get tired of just working and putting stuff out; they want some sense of reward, too. You've seen that everywhere economic development has taken place.

Q: One explanation of the current slowdown in IT spending has been the effect of Moore's Law—that as computer technology has grown so powerful without getting more expensive, business users simply have all the computer power they could possibly need. What do you make of that? A: While Moore's Law applies to hardware, it doesn't apply to software. Software is more of a sociological function. Software over time gets more bloated and decadent. The reason you don't need any more hardware is that you don't have the applications to soak up those extra cycles.

Q: But our everyday business applications are already so huge. To use a common example, Microsoft Word takes up many megabytes on its own, and no one could possibly use all its features. How could we handle even more? A: The challenge is to find other things to use this technology for. Microsoft Word, when it was new, was probably sufficient for 95 percent of the population who used it. But the thing I use my computer for that I didn't when Microsoft Word was that small is visuals. You can put pictures in presentations. For example, I have something like 100 megabytes of images that I use.

Q: So new apps would drive demand for new hardware? A: That's always what drives it. People don't buy this stuff because it's cute. They buy it because it has some functionality to it. Part of the challenge is to find new things to do with this stuff.

Read Carl Steidtmann's Optimize article on "Deflation and the Oversupply of Everything."