Institute of Chartered Accountants Conference

Profit and Loss in the Information Economy:

what will determine who wins and who loses?

 

Dr Terry Cutler

Deputy Chairman, National Office for the Information Economy

Melbourne, 20 May 1998

 

I had thought of entitling today's talk: "Revolution and the image of accountants". Because that's really the theme of my main messages this morning.

Revolution. We glibly talk about the "information revolution" without really thinking about the implications of what we are saying. Revolutions are things that bring about fundamental change. And the shift from an industrial economy to an information economy is probably the greatest change process any of us here are going to live through.

Another characteristic of revolutions is that they are not discretionary. We cannot generally decide whether to participate or not: but we all live with the consequences. We can choose to opt out of change, but that generally means that we get run over by events.

The thing about revolutions is that there is usually a dramatic rearrangement of who is on top. The nasty reality about revolutions is that some people, some firms, some industries, some countries come out on top; other lose out. So let us be very clear about the fact that in the information economy there will be winners and losers.

Now the reason I am pleased to be here today is because the accounting profession has a central role to play in this revolution. You will be key change agents: not the stereotypical image of accountants. But if Australia is to carve out a future in the global information economy, and if Australian firms are to prosper in this new world, then we need accountants to get radical.

As a force for change you are in a powerful position. You are everywhere throughout the economy. Your influence infiltrates every Australian firm. You keep the books, you structure, you advise, you value and you audit. You also set the rules for how we work out profit and loss. Now the information revolution affects all those roles. Through these roles, and through the business rules you set, you are in a position to be one of the major catalysts for change within Australian business. Now is the time for you to get serious about being change agents.

Today I am not going to try and convince you about the realities of the information revolution. The realities are staring us in the face. The real challenge today is working out what we need to do, and rolling up our sleeves to make the necessary changes happen.

The new economy

Charles de Gaulle - the French resistance fighter and the shaper of post-war France - is reputed to have said: The art of statesmanship is to recognise the inevitable and to make it happen. I think we are well advised to apply this piece of wisdom to what is happening in our business environment.

The art of business survival in Cyberspace is to accept that the information revolution has happened, and to go on to work out how to re-engineer what we do for profit. Doing nothing is always an option: we can always choose to be losers.

The impacts of the information revolution are already showing up in national accounts. Already the information industries in themselves - the engine room of this revolution - account for over 10% of GDP. The information industries are now the key driver of economic growth - new wealth formation.

A recent report from the US Department of Commerce highlights what is happening to our national economies. This report shows that, even within the constraints of the existing and largely outmoded statistical frameworks for national accounts, at least one third of the United States' economic growth currently is driven directly by the IT&T sector. If the indirect impacts of the information industries are taken into account then I would guess, very conservatively, that already some two-thirds of net economic growth is being driven by the emerging information economy. No wonder that both the OECD, with its talk of "next generation economics", and Alan Greenspan of the Federal Reserve with his focus on new economic drivers, are telling us that the future is happening now. No wonder that the key agenda for Clinton's principal domestic policy adviser, Ira Magaziner, is electronic commerce.

Virtually every Government around the world has now woken up to the fact that this is a priority, and everyone has some sort of national agenda. In Australia virtually every State Government, and more recently the Federal Government, has taken steps to mobilise an action agenda. Last year the Australian Government established a new central agency, the National Office of the Information Economy, to coordinate government efforts. As I will outline later, there is a lot to do.

With some isolated exceptions, Australia's industry and business organisations have not been so fast to organise for revolutionary action. At the level of the individual firm, I believe that too many Australian businesses are continuing to live in a fool's paradise as if life will continue as normal.

If you think I am being extreme, just reflect on how hard it has been to get people to get serious about the Millennium Bug, the challenge of the Year 2000 for business systems. The Year 2000 challenge should remind us of the all pervasive role of information power and IT&T within our economy. The health of simple little computer ships and software code will determine whether, on a single day, planes fly, lifts work, cars function and money moves around. Fortunately task forces are multiplying, but we need to remember that this is not a one off event. The mobilisation to confront the Millennium bug should wake us up the magnitude of the challenge to shape up for the information economy.

Reengineering businesses

Every week we seem to be confronted by a new report forecasting the growth of electronic commerce. Once near term forecasts start to echo hundreds of billions our eyes tend to glaze over at debates over how many zeros we should be adding, and when. The macro picture and the trends are clear. What we now need to do is focus attention at the micro level, at the firm level.

At the firm level, we can identify new survival rules affecting organisational structures, the nature of competition, changed business process, the revaluation of assets, and a restructuring of balance sheets.

Whilst we look with wonder at BHP and the antics on the waterfront, a galaxy of new firms are grabbing the headlines. Firms like Amazon Books, Federal Express, Bloomberg Information, Microsoft, Dell Computers, Cisco and Worldcom. Just three years ago, the Internet was not a household word. All these firms share certain characteristics:

All this raises an interesting point. Are the valuations of these new companies crazy, and symptoms of a "South Seas Bubble"? I do not think so. What we are seeing is a profound shift in how we value firms that hasn't yet found its way into accounting standards or the format of balance sheets.

We are witnessing the emergence of a new breed of businesses. This is the phenomenon of new industries as part of the information revolution. Web businesses and multimedia firms; new IT&T suppliers; biotechnology; environmental management; tourism and personal services. Many of these new businesses are in the services sector.

But the most radical change is in the transformation of existing businesses.

The new balance sheet

The central changes that now influence the fortunes of individual firms can be identified fairly easily. How to handle these changes in practice remains the challenge. Here is one off-the-cuff checklist of the sort of changes we should be seeing in individual firms:

These changes have wide-ranging implications for:

A situation report: The Canberra Communique

Last month the National Office for the Information Economy convened an electronic commerce summit at parliament House in Canberra. At the conclusion of this summit we issued a communique. What we failed to achieve was to get this printed on the front page of every newspaper, where it needed to be. During the summit we talked about this as a Manifesto, and what we do need to take to business is a Manifesto for the information revolution. So let me take you through this working statement of a Manifesto for you as change agents.

Communique from the Canberra Summit on eCommerce

issued Friday 17 April 1998

 

Australian business and consumer leaders, meeting with Federal and State governments in Canberra, note that:

Summit participants call for the establishment of an action agenda, which should focus on:

Too many Australian businesses still regard the prospect of eCommerce as important but not urgent. Too much is at stake to wait and see: we need to build Australia's economic future now.

 

Parliament House Canberra, 17 April, 1998

Auditing eCommerce preparedness

Where do we go from here? We now have a situation where the Stock Exchange and insurers are demanding that firms conduct and sign off on a Year 2000 audit. What we should now do is to promote the idea of an "Information Economy" compliance audit. What might such an audit cover? Here are a few suggestions:

You, representing the accounting profession, will play a key role in ensuring firms "opt into" the new economic order and, in so doing, change the national balance sheet. We are living in times of revolutionary change, and we need you to go out as radical change agents.

The stakes are high, but so are the opportunities. Steve Case, the chief of America Online, was recently reported as saying that the information economy is now "big enough to matter, but still small enough to shape". This is not a bad slogan for our task of reinventing what accounting and business is all about in this new era.