February 19, 2009

The Puritan's Guide to Investing in Technology

Community

The Puritan approach to business, on which much of US and Western European wealth is based, is all about building good products, charging a fair price and not spending beyond the means of the business. What would the Puritans have made of the current economic situation we face or of debt financing, leveraged buy-outs and credit default swaps?

In truth, many of the current economic troubles are about businesses using debt to fund growth rather than revenue and profit, then struggling when their credit lines are cut.

Companies that have followed the Puritan approach are out there, but they are unlikely to be feeling smug. In today's interconnected world, there's a good chance that somewhere in their supplier or customer base lurks one or two firms who are in financial difficulties.

Like many other industries, IT is made up of myriad ISVs and OEMs on which the commercial backbones of many companies rely. Though, at the time of writing, the industry has not reported too many casualties, how can end-user organisations spot potential time bombs from the suppliers of the technology on which they may rely?

One obvious approach may be to call up their account manager, or even get a copy of their supplier's latest annual accounts. But, as we've seen with a number of recent failures, creative accounting or poor regulatory oversight can sometimes obfuscate matters. Bernie Madoff, anyone?

Those of you who rely on Open Source tools can breathe a collective sigh of relief, can't you? Maybe not. Many Open Source Software (OSS) projects rely on the largesse of commercial entities to keep them alive. Whether it's in the hosting of the source code, provision of developer time or access to bandwidth, someone somewhere is paying for this. Such corporate philanthropy may be in short supply if things continue to get worse.

A return to plain and simple business dealings may be the best way to weather this storm:

  • Avoid confusing supply chain - who's on the hook for support if your supplier goes bust?
  • Be clear about what you are buying, who you are buying from and how much you are paying
  • Look for companies with a track record of careful and consistent investment in their people and products
  • Undertake due diligence so that what you are buying is what you are being sold.

The world is a very confusing and uncertain place right now and it pays to be careful (as the Puritans used to say!)