Lou Gerstner of IBM addresses the responsibilities of industry and of government in the age of e-business
The networked world demands a self-regulatory framework
that is open, market-driven and competitive
Remarks
at Finance Conference 2000: The New Economy Boston College March 6, 2000
By
Louis V. Gerstner, Chairman and CEO of IBM
The issue of the Internet
and its role in future economic expansion is certainly worthy of our time,
our best thinking, and our best efforts. So I'm delighted to add my perspective
on what it's going to take to build workable public policy for this new
economy.
As a representative
of the information technology industry, I appreciate the connection Federal
Reserve Chairman Alan Greenspan makes between this technology and the
ever-lengthening cycle of American economic growth. It's often the case
that it takes a good long while before the impact of technical innovation
— the combustion engine, electric motor, and even the computer —
shows up in economic statistics.
Consider that if we'd
come together for this meeting 100 years ago today — at the beginning
of the last century — we might have discussed automobiles. But those
conversations would have taken place during the breaks, over meals, in
the hallways. Not as the centerpiece of a conference about the New Economy,
the catalyst for the restructuring of feeder industries like steel and
petroleum, or the driver of a near-total transformation of the nation's
economic and social fabric. All that was going to happen, but it was hidden
just beyond the horizon.
As recently as a year
or two ago, I might have suggested that's where we were with the Internet
and what we now know as "e-business." Today — no way. As has already
been discussed here, we have an exceptionally clear line of sight to a
shift that has moved large portions of our economy from a physical to
a digital basis, and given rise to the first truly global marketplace
of goods, services and ideas.
Before this day is over,
you're going to be saturated with eye-popping statistics, analysis, projections
and forecasts: hundreds of millions of connected users; trillions of dollars
in commerce volumes. All real, and all very compelling. But none of it
speaks as loudly to me as the way the Internet has arrived on the strategic
agenda of virtually every senior business executive, education leader
and government official I talk with. Three years ago, it wasn't on their
agenda — and to a certain extent — rightly so. After all, back
then most of the buzz was about browser wars, chat, "e-zines,"
and cool content. We used names like Information Superhighway or wired
world. The conversation was about the end-user consumer, and was taking
place light years from the offices of most CEOs.
That gave way to e-commerce.
Buying a book, booking a flight, paying a bill. Basic business-to-consumer
applications. And the Net began to creep up on the CEO agenda. Retail,
financial services and travel felt the early heat. But even then, it was
becoming pretty clear that the end game wasn't about simply e-commerce
— trading a stock at midnight or buying a set of golf clubs from the
other side of the world.
IBM coined the term
"e-business" to talk about a broader, more powerful set of changes. About
a new mandate: The requirement to explore — in every institution in
the world — new models, and either validate them, or discard them.
All kinds of models: business and financial models, new models for the
way ideas move across an enterprise, for marketing and distribution, for
the way governments deliver services, schools teach and doctors heal.
That's about where we are today. We're early — very early — in
a cycle of institutional transformation that will play out over the next
quarter century. Nobody sits this one out. Nobody plays a pat hand.
And the next step is
already upon us. In exactly the same way the Net overturns existing business
models, it is fundamentally changing basic market structures, and is going
to force all of us to rethink what markets are and how they operate. The
promise here is for entirely new kinds of markets that will dismantle
many of the inherent inefficiencies in any physical market — like
incomplete information about supply and demand and pricing.
It's happening already:
e-marketplaces for the exchange of goods and services, commodities, parts,
capital, healthcare services, even skilled labor. Today, a lot of this
activity is driven by a new business life form — cyber entities that
exist only on the Net and carve out a critical role in bringing buyers
and sellers together, qualifying the parties, facilitating transactions.
Names like e-steel. FreeMarkets. Healtheon. Monster.com. e-Chemicals,
and my new favorite, FishMonger.com.
In financial services,
electronic exchanges like Primex and Archipelago are taking aim at the
New York, Tokyo and Berlin stock exchanges — with the backing of Wall
Street icons that are making a bet on the Net's power to create a more
liquid and more efficient capital market.
I've seen estimates
that these e-markets will mediate 30 and 40 percent of all industrial
e-commerce by the year 2004. Thirty to 40 percent! Now you're talking
about getting the attention of CEOs. And guess what? They're wide awake,
and the wheels are turning. They understand that the technology has removed
virtually any barrier to the creation of improved market structures. And
they see that these new markets are going to exist in every industry.
There's no question about it. The open issue is: Who's going to gain this
powerful, and potentially controlling position?
A lot of the early action
is being driven by the pure Internet plays. But before they can actually
function as a working marketplace, they have to establish themselves and
build their credibility. They have to be taken seriously by all the participants.
That's a hill the world's entrenched brands don't have to climb. They're
already the center of a complex business solar system of suppliers, distributors
and customers — sitting at the nexus of millions of transactions.
So in the relative blink
of an eye, this e-market opportunity has shifted the mindset of a lot
of CEOs from: "This Internet thing could affect my business" to "Hey,
this Internet thing means I can IPO a piece of my business." There's a
land rush underway — a hyper-kinetic urge to strike fast and drive
market value up. My view: This will burn white hot for a little while
longer and then we're going to see this phase — like the others before
it — morph into something much more substantial. Because the Internet,
yes, is a powerful tool. And as I said, it will drive institutional change.
It will enable new models. But it does not free us from the fundamentals
of running a business or the laws of economics. The pendulum will swing
again — back toward some of the more time-honored management challenges.
Boring stuff: Like managing the infrastructure, integration, implementation;
like building sustainable competitive advantage; like driving expense
out of a supply chain.
For CEOs, this isn't
as sexy as trying to get your stock price up through dot.com alchemy —
but it is more realistic — and there's something reassuring about
all this. Yes, this is a period of discontinuity. Yes, we're forced to
examine the fundamentals of our strategy, and our competitive position.
But those are all things that fall into our job description. This is what
business, education and government leaders are supposed to do: establish
strategy, ensure the execution and stand accountable for the results.
The biggest issues here
aren't about technology. The biggest issues are issues of leadership.
So the decisions, and the resources to address them, remain intensely
human. That's why I've been troubled — very troubled — by how
many of the leaders in my industry fail to recognize our responsibility
to engage on the very serious societal and economic issues raked up by
this transformation.
They assert that we
can have a working, stable e-business economy whether or not we go through
the process of thoughtful, intelligent development of the appropriate
public policy framework.
A little over a year
ago, the CEO of a fairly well-known Silicon Valley computer company dismissed
issues of consumer privacy as a "red herring" and went on to say, "You
have zero privacy anyway. Get over it."
Look, modern history
shows that when a new technology changes society in fundamental ways,
the industry that pioneered it — telecommunications, energy, transportation
or broadcasting — is always called on to take responsibility for those
changes, for their impact on people and on the planet.
If the industry doesn't
step up, government will. And that's no good. Unilateral action imposed
on this most dynamic, global, restless, never-closed marketplace isn't
the answer. That doesn't mean we shun government involvement or pretend,
as some in the information technology industry have, that there is simply
no role for government. This isn't time for "Live free or die" bravado.
There's too much at stake.
We need government working
side by side with business, with educational establishments, with the
information technology industry, and with active, concerned citizens.
But I must repeat that this work must start with the conviction that market
forces and market players should lead — that all policy and regulation
must be surgically precise in its scope, and must be enabling — not
rigid, heavy and prescriptive. I'd like personally to express my appreciation
to FCC Chairman Kennard for what I call his policy of "vigilant forbearance"
in overseeing Internet policy issues. It's an approach I think serves
as a worthy model.
Before we discuss the
individual issues — privacy in a networked world, security, digital
trade — I'll offer this observation: We're misleading ourselves —
and we will botch this opportunity — if we think we can simply transplant
a pre-existing policy framework from the physical world to the e-business
world. It won't work. Like everything else that's valid and sustainable
in the networked world, the work of policy development has to be done
in the context of this search for new models — models that are more
global than less, more market-driven than regulated, more open than closed,
and more cooperative than confrontational.
I'll start with privacy
because it's the issue where the open, global and free attributes of the
Net collide with you, and me, and our families, and our customers. Privacy
is about all those people's ability to do something fundamentally important
— and essential if this e-business economy is going to make it. That
is: determine for him or herself how, and to what extent, information
about them is collected and communicated to others. The issue isn't whether
or not we want to afford people the ability to stroll through the networked
world cloaked in complete anonymity. You can't get much done that way
in a civilized society.
Privacy is about being
able to make a choice about your relationships with others and the value
you derive from your engagement with them. And it's about sometimes not
having a choice, as when a hacker breaks the law. I think we can agree
that it's in all of our interests that society have some ability to find
the lawbreaker.
So far, our partners
in government have been patient on this one. Government wants industry
to lead, to get the protections in place, and prove self-regulation works.
The window is open for business — not just the information technology
industry, but across the entire private sector — to step up and provide
some much needed direction and leadership. But if any of us think that
window is going to be open forever, we're just not paying attention.
Last Thursday Commerce
Secretary Daley fired a shot across industry's bow, and he was right.
Business is not doing enough to build consumer confidence. On Friday,
President Clinton followed up with a simple question to every business
executive in the United States: "Do you have privacy policies you'd be
proud to have reported by the media." The clock is ticking on this one.
I'd urge every CEO in this country personally to inspect his or her company's
privacy policies, find out where they stand, and get on with it.
Because privacy is above
all a question of behavior, not of technology. For those organizations
that handle personal information, it's a question of proving to people
that their privacy is being respected.
Of course, doing this
right gets exponentially more complex in the networked world. Yahoo, for
example, collects 400 billion bytes of information every day, the equivalent
of a library of 800,000 books. That's one site. The mind-bending scope
and range of the Net is, in and of itself, one important message: That
no simple, sweeping solution will work.
At IBM, we believe that
a new policy framework for privacy — a flexible, protective, and potentially
global framework — is urgently required, and we are prepared to work
with any interested party to bring it to life. I won't be so presumptuous
to assert we have all of the elements of that framework wrapped up in
a neat little package. No one company or government does, or should. But
I do have a point of view on some of the basic elements that should be
part of any privacy framework.
First, this framework
must be grounded on the idea that the marketplace, public sector, and
individuals have a responsibility to model good privacy behavior and exhort
all others to do the same.
Then, quality, market-led
self-regulation has to be allowed to play out more fully. A great example
of self-regulation at work came just last week. Intuit's Web site may
have been disclosing some of its customers' financial information —
not intentionally, but because of a design quirk in the way some e-commerce
sites communicate with third parties who place Web advertising. When Intuit
realized this may have been happening, the company took immediate action.
This kind of sensible, market-based reaction is far in a way preferred
and the most effective approach. It operates without overlaying a rigid
regulatory mandate that could choke off new models before they can be
judged by customers and the marketplace itself. This approach will create
millions of monitors concerned with privacy, rather than the focus of
a single Government agency. That said, I acknowledge that this self-regulatory
approach must be accountable for its behavior.
Next, this privacy framework
must deal with the "outliers," those that violate the existing laws or
self-regulatory code — either outright or indirectly. We need government,
privacy advocates and independent watchdogs like the Better Business Bureau
Online to remain vigilant and aggressive. And a quick scan of recent media
reports indicates they have been.
Finally, where privacy
protection isn't working well, we need to explore what other policy approaches
need to be put in place. As I said earlier, I don't believe that an all-or-nothing
legislative approach is the answer. I cordially invite all of you to join
with those of us who are working for effective, market-led policies.
Next, Security. Obviously,
security is intimately linked to privacy. We can't have good privacy without
good security, but they're not the same thing. While privacy relates to
the rights of individuals, security means safeguarding that information
in all phases of the flow as well as the pipes and plumbing of the system.
And in this area, the
model of open communication and cooperation has begun to pay off. One
huge piece of the issue, the strength of encryption standards, is now
apparently being resolved cooperatively and globally rather than through
unrealistic attempts to regulate country by country.
But security is more
than encryption. It includes personal and financial security, national
and global security, industrial espionage, theft, and fraud. Many of you
are already into this one up to your hips. You know that no brick and
mortar company would ever consider opening without locks on the doors,
video cameras, alarm systems and a security staff. Yet every day, hundreds
of Web enterprises do just that.
The solution starts
with a change in awareness and a recognition of the darker side of human
nature. My IBM colleagues would be glad to talk to any of you about a
security checklist we have developed for our customers: From how to implement
a valid security policy to conducting internal security awareness campaigns;
firewalls and intrusion detection systems; and having a clear security
policy when an employee leaves for any reason.
We're investing heavily
in security technologies, and we're also working with governments around
the world: with FEMA, the President's Information Technology Advisory
Committee, and Secretary Daley's Partnership for Critical Information
Protection, among others to identify the problems and develop the solutions
to make the Net more secure.
Finally, digital trade
policy. Global e-commerce stretches traditional trade agreements negotiated
via the World Trade Organization and its predecessor the GATT. Existing
trade agreements were primarily built on notions of physical presence
and national borders. As this new economy expands, we've got to see trade
policy through a new lens. In fact, in this new economy, we must start
with the conviction that electronic access to markets and to customers
is as important as physical access is today.
We've got to make sure
policy decisions aren't a drag on a new marketplace that is already generating
significant wealth, efficiency and productivity. What kinds of questions
must we resolve?
Questions like: How
important is physical presence? The right to establish operations has
been a major focus of past trade negotiations. However, in e-commerce,
physical presence may range from unimportant to irrelevant.
In a networked world
many of you will increasingly deliver your products to the marketplace
— in insurance, telecommunications, healthcare, financial services
— via the Net. Are your customers then buying a good, or a service?
That may seem like an arcane question. But it's life or death in the world
of trade. Because depending on which answer you give, you get very different
policy in our trade regime.
What are the implications
for licensing requirements in regulated fields like law or medicine, when
those services can be delivered across state lines? What about the digital
cross-border flows of music, movies, broadcast content or any intellectual
property? Will content restrictions be sustainable or used as digital
non-tariff barriers? We need to make sure they aren't.
I've asked a lot of
questions. Many more than I've answered. That's OK. There's time for us
to put the right issues on the table, and reach the right conclusions.
In fact, the single
worst thing we can do is act before we have enough information to reach
informed, thoughtful decisions. Or act because we think we know what has
worked in the past. Again, the pre-existing models do not apply. Or we
might rush to act because it's expedient, because somebody is screaming
"do something" or because action might suit the agenda of some special
interest. Trite as it may sound, we're all in this one together.
And it's no overstatement
to call it one of the boldest undertakings in history — the creation
of nothing less than a new economy, and a safe, secure, global medium
of human and institutional interaction.
Only if we work together
— with the information technology industry leading on some issues,
commercial enterprises on others, with educational and health-care institutions
on others, and government on others still can we be confident that this
great promise will be realized. That we'll capitalize on the opportunity
to allow this new economy to yield the greatest good for the greatest
number, build new competitive advantage, generate new growth, create real
wealth, and ultimately improve the quality of life on this planet.
That's an agenda worthy
of all our best efforts. Working together, we can make it happen. Thank
you.
