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To overcome the current crisis, innovation comes first

FACE-TO-FACE

Didier Lamouche, Chairman and CEO of Bull, Duncan Stewart, Director of Research at Deloitte, and Deloitte Partner Albert Aidan discuss the current global financial crisis, its causes, effects and ways to overcome it.

Deloitte   DL

Doesn’t the current global financial crisis cast doubt on some of the economic practices we have witnessed over recent years?

Duncan Stewart – Just a few months ago, we were living in a world where money was freely available. Many players in the economy – companies, governments, households... – took advantage of this to finance ambitious projects. But now, many of them are faced with looming deadlines that they may not be able to meet, and they may pay a heavy price for policies that had no solid or durable foundations.

Didier Lamouche – What’s more, when it came to valuing companies, increasingly sophisticated financial models were being used during this period, which took the availability of these abundant liquid assets for granted. Now these models have been blown apart, and we are seeing just how difficult it is for investors to value companies. Too much importance was given to value created ‘virtually’, by a series of accounting entries, compared with value actually created by delivering tangible products and services. The latter needs to be given the priority it deserves once again. We probably went too far when it came to financial engineering, and I think that entrepreneurs, business managers and engineers have now to regain control over businesses.

Albert Aidan – Absolutely. But the problem is that decision-makers are always looking towards their next set of quarterly results. One thing this crisis has really highlighted is just how far our world is driven by short-termism. Whereas real innovation demands a much more long-term vision. You run a real risk by ignoring long-term investment, and it would be good if this were taken into account, one way or another, in company results.

More specifically, what impact might this crisis have on the high-tech sector?

DS – Albert has just been talking about innovation. I believe that, during this difficult period, one of the main risks companies in the high-tech sector will face is that they will under-invest in innovation. Even when times are hard, it is essential to prepare for the future.

DL – Especially since the underlying trends that depend on innovation are still there and are not likely to get any weaker. The growth of networks around the Internet will continue, particularly as the number of connected objects is growing so fast. As a result of this, computing resources will become increasingly concentrated; something that has already begun, with the advent of ‘IT power plants’ and more widespread availability of High-Performance Computing (HPC). HPC itself is a catalyst for innovation across all sectors of the economy, which is why Bull welcomes the launch of a Europe-wide computer simulation development plan. Finally, we must not forget security. This risks being one of the victims of the crisis, because there is rarely an immediate return on investment. And yet everything points towards the fact that we need much greater security, much more confidence in our transactions and our systems. Emphasizing that your operations are secure and transparent will, in my opinion, be one of the key competitive differentiators over the next few years.

DS – Most of what we have talked about so far concerns business computing, and that seems to me to be very significant. Revenues from the hi-tech industry have always been fairly evenly split between the consumer and business markets. But in recent years, too much attention has been paid to the consumer market, which doesn’t have infinite capacity to absorb new gadgets. The whole sector has been weakened as a result, and it’s important to restore the balance.

Under these conditions, what strategies can businesses adopt to overcome the crisis?

DS – If customers are running out of money, they need to find every way of avoiding unnecessary spending. Price will become the number one criteria. The extraordinary growth in Netbooks – with sales set to rise from almost nothing in 2007 to around 30 million in 2009 – shows just how interested the market is in basic, efficient and low-cost, or even free, solutions such as Netbooks with the Internet.

DL – Those are just the same characteristics that describe Open Source! Indeed, many Netbooks are based on Linux. Open Source – like Software-as-a-Service (SaaS) and virtualization technology – exactly matches what organizations now expect from their IT suppliers: reliable, open, flexible solutions, which you really only pay for as you use them. Buying a four or five-year software license is neither cost-effective nor appropriate in a constantly evolving environment. What’s needed are solutions that offer a great deal of flexibility.

So is more environmentally-friendly ‘green computing’ another approach that you could take?

DL – Definitely. Thanks to energy-efficient technologies, environmental issues will not be the forgotten victims of the financial crisis. What we call ‘green computing’ has to respond not only to longer-term environmental issues, but also increasingly to short-term economic challenges. Return on investment has to be very rapid: around 12 months. But by understanding the situation in this way, businesses can combine environmental responsibility with a response to the economic crisis. Nevertheless, I believe that some kind of incentives from governments will also be needed if we want to see a rapid, widespread growth of green computing.

OK, so what role should the State play in accelerating the return to more favorable economic conditions?

DL – The State has two forms of leverage: regulation and stimulation. During the early days of the crisis, it was largely a question of regulation. Once the various rescue plans for the banks were adopted, there has not really been a consensus on this subject. That’s a pity, but I hope that the G20 summit will speed things up in this area. I also believe it’s very important to introduce a European Small Business Act, as well as a Europe-wide ‘local value-added’ clause in public tenders, as they have on other continents. This would be a very pragmatic way of supporting our SMEs. When it comes to stimulation, it’s at the heart of the various economic recovery plans in France, the UK, the USA... But I would like to have seen more focus on support for innovation in the French proposals. For example, encouraging SMEs to access computer simulation by making computing power available to them, which could benefit from the resources provided through tax research credits, to help them protect their intellectual capital... The proposals put forward by Bull as part of the thinking behind the ‘Digital France 2012’ plan are more topical than ever. It’s also interesting that the measures envisaged by Barack Obama in the USA are focused on similar points: the environment, Internet access, on-line healthcare services…

AA – Governments can provide immediate support for innovation, for example by backing venture capital, which in turn results in employment and dynamism. But above all, they have the power to create a new kind of momentum, a new energy. They must help to re-educate the market towards a more long-term vision.

DS – For example, in the 1950s, the economy was driven by families buying homes, electrical appliances, cars... After the recession of the 1970s, it was the emergence of consumer electronics, from video-cassette recorders to Hi-Fi, that kick-started growth. What enabled us to move from one economic phase to another was Kennedy’s visionary idea of putting a man on the moon. This made a major contribution to the remarkable growth in many technologies, lasers, electronics, miniaturization... and opened the way to the innovations of the 1980s. Today, we’re searching for the next big idea that will help boost research and the economy. We believe we need to look towards environmental issues for this; but what is the big project that will bring us all together and encourage innovation to such an extent that it forces us into a new world order? I believe the answer lies in the way we produce, transport and consume electricity.

DL – Another idea that we have put forward for France (which also features in the Obama plan) is to launch a major program around access to healthcare services, and to make this a pioneering, central pillar of our digital age. Such a measure would have a real and fundamental impact – political, social and economic – both in the short and medium terms.