The graph (see below) conveys two insights that IT executives must comprehend to get a better perspective of what may happen next.

First, technology buyers managed to keep only level market valuations during what was claimed to be one of the biggest economic booms in U.S. history. They spent wildly on IT but couldn't demonstrate to investors that the technology-driven New Economy was delivering spectacular gains. Now that a prosperous decade is ending, it should be clear that IT buyers may become reluctant to keep investing in more technology at recent growth rates.

Second, technology stocks lagged behind the rest of the Standard & Poor's index until 1995, even though their revenues were growing faster than IT buyers' revenues. It appears that investors kept discounting the worth of volatile future earnings of firms that produced short-lived technologies. Now, with a possible recession looming, customers will resist making commitments to another round of rapidly obsolescent technologies on a scale comparable to that of 1999 and last year.

There are three plausible explanations for such differences in trends:

One is the casino gambler's greed. He knows that the house odds are always against him. But he keeps playing with the expectation of winning big, as other players lose enough money to make him rich.

The second is fear. Starting in 1997, the Y2k scare loosened every firm's purses for largely unrestrained spending.

The third explanation is intimidation. Sane economic restraints were thrown away when the frenzy to replace the $1 trillion that had been invested in client/server installations stimulated the rush to Internet-based systems. The Web, B2C and B2B e-commerce have been sold as survival games, forcing firms to participate without proof of payoffs. A parade of gurus preached that unless you rearmed with the latest technology, you'd die when global competition was unleashed. That scared enough CEOs and chief financial officers to allow spending and salaries to reach unprecedented levels.

Implications

The prudent IT executive should cut back on major spending that doesn't have much chance of delivering profits. When the budget analysts start scraping every IT expense item to boost already reduced earnings, they shouldn't find too much fat. The scarcity of funds doesn't mean to halt innovation. The beauty of our economy is that there are enough aspiring entrepreneurs who are willing to sweat long hours to invent and test new technologies. In the next few years, it will be advantageous - and surely less risky - for each corporation to buy, rather than create, new technologies.

To survive, IT executives will have to concentrate on getting costs, reliability and quality engineered to perfection. It's back to basics for a while, which means squeezing every penny out of ongoing operations. But it would be a fatal flaw to outsource operations, especially if existing staff can fix them. The prevailing fiction about how to run IT is to outsource bread-and-butter operations while keeping responsibility for resume-enhancing innovations. The results of such a policy, in every case I've examined, are higher corporate IT expenses and never having enough qualified talent to manage contractors and compete with increasingly hungry entrepreneurs.

The stock market is saying that the end of euphoria has arrived and that productivity results, rather than "visions," will probably prevail in the next few years.

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