Switch from oil to silicon

Smaller firms that still see technology as a cost ripe for pruning are making a big mistake. Now's the time they should be swapping their dependency on oil for a focus on silicon, says Rob Bamforth.

When the economy starts to slide, the easy option is to cut back, rather than invest. After all, every cost saved goes straight to the bottom line and every sum invested will be subject to tighter scrutiny. Even new revenues generated will benefit from decisions on acceptable margins.

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That approach makes sense when the changes in the world economy are evenly spread or relatively predictable. But that's not the situation.

Some markets are booming while others are tanking. Investing in a sector that looked great one year - by recruiting, opening offices and facilities - might look foolish 12 months later.

Many costs with this sort of investment vary wildly from energy and transportation, to commercial property values, currency fluctuations and interest rates.

One area that has not increased but has fallen dramatically is the direct cost of IT and comms, at least in terms of processing power, storage capacity or transmission speeds.

Yes, of course, service or human costs have increased and businesses use more technology and associated electricity than they ever did. But the capabilities have grown dramatically, including those within the global digital marketplace - the internet.

Fifteen years ago, it was a challenge to sell a business internet connection for serious commercial use. It was the domain of research, academia, geeks and cool Californians who would surf, send flame emails and use quirky tools like Gopher, Mosaic and Veronica.

Today, it is fundamental and vital, even for the smallest of businesses. According to recent Quocirca research almost two-thirds of small and medium-sized enterprises (SMEs) have been connected for more than five years.

Fewer than one-third of SMEs can cope without a connection for longer than a day and around a quarter will not accept a drop in connection for longer than one hour.

As well as connecting to communicate, many SMEs are going further, with more than a third using their internet connections for ecommerce.

This approach is most effective when the raw product or service can be digitised and distributed to the point of use, as Nicholas Negroponte noted in his book Being Digital, shipping bits, not atoms.

Many services and products have been digitised for delivery over the network - even formerly physical goods, such as the delivery of media or software.

The recurring cost of manufacturing CDs, shipping them to shops and selling them, with all its dependencies on the price of raw materials, transportation, fuel, retail space and shop assistant wages, disappears when digitised.

Not all products can be replaced with bits, and many physical goods still need to be manufactured, assembled and delivered.

For them the internet offers worldwide distribution, a low-cost sales channel and even access to the untapped potential of creative suppliers if you follow the model through to web 2.0 and user-generated content.

The sale of physical goods online has soared, from browse-able items such as books to costly white goods and perishable food.

Although many SMEs are already using ecommerce to sell online, they should now go further and look at other aspects of their business processes, and move them online to reduce dependence on location and transportation.

Anything connected with information, workflows, processes, specialist expertise, even the interaction of people - much of the service industry - can be turned into a digital deliverable form, saving the cost, time, inconvenience and environmental impact of moving things and people.

For any business this process is not simply about making incremental improvements but architectural step changes anywhere the financial model is directly affected by transportation costs - of people or goods - to diminish the impact and variability of those costs.

Some products or elements of business processes are easier to digitise than others but knowledge sharing, or the interaction with other people in decision making processes, or getting input from those with particular domain expertise is something that affects most industries.

Conducting this interaction at a distance is now far simpler and can include simply sharing screen content or full conferencing with web, audio and video.

These developments mean business dependence on the reliability and quality of the network increases. Nationally it means that governments and regulators need to encourage the industry to gear up for a substantial infrastructure investment to support international competitiveness.

But some businesses also have to change. Despite significant use of the internet by SMEs for ecommerce, IP telephony and even video conferencing, more than a third of SMEs have no strategy for their commercial use of the internet.

Worse still, over half of them see spending on IT as short-term cost covering, rather than a long-term investment.

These companies may simply react to the downturn by applying cuts across all cost centres and might thus be missing an opportunity to save money and create flexibility elsewhere in the business by not switching their dependency on oil for one on silicon.

Further consideration of the business impact of internet connectivity on SMEs can be found in this free to download report Soaring not Surfing.

A leading user-facing analyst house known for its focus on the big picture, Quocirca is made up of a team of experts in technology and its business implications. The team includes Clive Longbottom, Bob Tarzey, Rob Bamforth, Dennis Szubert, Louella Fernandes and Fran Howarth. Their series of columns for silicon.com seeks to demystify the latest jargon and business thinking. For a full summary of the consultancy's activities, see www.quocirca.com.