Technology Economics: A Market Index (Experimental, of course) of Technology Leaders – the “Rubin 300″

Traditional indices such as the Dow Jones Industrial Average (DJIA) or the Fortune 500 focus on top performers without any considerations other than their market capitalization, share price, revenue, or other 20th-century measures of business performance.

But in a “Technology Economy” technology is a strategic lever, a tool to drive new business growth, protect revenue, reduce business costs, and manage risk. So let’s do an experiment and look at a “new age” Dow Jones Industrial Average – a market index of firms that have been identified as technology leaders. Let’s call it the Technology Leaders Index (TLI). And by building and observing the behavior of the TLI we can test the hypothesis that has gone unspoken and unexplored — Information Technology is a strategic investment and firms that make the best use of it should demonstrate superior market performance.

It is definitely an interesting time to do such an experiment. Between 2008 and 2009, IT investment suffered a global slowdown. The recession led many CEOs to believe IT was one of the main cost pools that could safely be reduced without impacting a firm’s overall performance. As a result, IT spending decreased by 2.6% between 2008 and 2009 in the US (Gartner Report: IT Spending 2010). However, the Technology Leadership Index demonstrates that firms which adopted a different approach seem to have fared better than their peers.

So what is a technology leader (you ask)? Well, technology leaders are not only limited to companies that produce and commercialize technology products and services but also include companies that position technology as a strategic asset and rely on technology to improve business efficiency. The TLI tracks the indexed market capitalization of more than 300 leading technology firms (hence we can also call this the Rubin 300) in 21 different sectors, vis a vis their original 2006 value and the Dow Jones Industrial Average, the Standard & Poor’s 500 (S&P500), and the Fortune 500.

Results of the Grand Experiment

From January 2006 to December 31, 2010, the TLI has consistently outperformed the S&P500 and, since the beginning of 2010, has begun to surpass the DJIA. Since the beginning of the study, the TLI has averaged a 1.2% difference in value from the DJIA, 6.7% from the S&P500, and -2.3% from the Fortune 500. These results highlight the importance of strategic technology investment in business performance and imply that technology leaders have overcome the hardships of the economic crisis faster.

Finding 1: The Rubin 300 consistently outperformed the S&P500 and outpaced the DJIA in 2010

The TLI has outperformed the S&P500 by, on average, 0.6% in 2006, 9.8% in 2007, 5.2% in 2008, 5.8% in 2009, and 14.5% in 2010. In addition, the TLI gained the upper hand on the DJIA in 2010 by 3%. These results can be explained by two trends that are closely correlated to the impact IT investment has had on the performances of technology leaders.

First, technology leaders seem to have shown a greater resistance to the economic crisis than the S&P500, with a difference of -22.2% compared to -27% for the S&P500.

Second, the TLI seems to be overcoming the crisis faster, showing a 5.6% growth in 2010, while the DJIA achieved 2.4% growth and the SP500 decreased by -8.6%. The F500 is the only index which performed better, with 7% growth. This demonstrates that in times of economic downturn, the competitive advantage obtained by technology leaders enables them to be more agile than their peers. Firms that have maintained a constant level of IT investment are rebounding faster than their peers, and are thus better positioned to grab the opportunities of the recovery.

Figure 1: Change in Index Values: 2006-2010

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Finding 2: The Rubin 300 outperformed the F500 in technology and non-technology related sectors

In some sectors, the TLI has steadily managed to outperform or be on par with the F500. Predictably, between 2006 and 2010, the TLI has generated, on average, more value than the F500 in technical sectors, such as information technology (+6.7%) and construction and engineering (+36%). In addition, the TLI and F500 have been on par in the manufacturing sector with an overall difference of 0.3% in favor of the TLI, as well as in energy and utility (-2%).

The TLI has been particularly strong in the financial domain, outperforming the F500 by 5.2% in the insurance sector and by 4.1% in consulting, and has demonstrated equivalent performance in the banking and financial sector (-0.4% difference). This indicates that IT investment provides an enhanced competitive advantage in sectors that are particularly data intensive and require tailored, customer-centered services. Even more interesting is the fact that in the heart of the economic recession this sector was under considerable pressure to reduce IT spending. However, the TLI demonstrates that firms that decided to maintain a greater level of IT investment have not only remained competitive but even outperformed, and continue to outperform their more conservative peers. This helps demonstrate that IT is more than a cost to be cut down during difficult times. IT is a key driver of business success, even when the economy has slowed. Sustained IT investment generates competitive strengths such as an enhanced customer relationship via effective database management, which can be critical both when times require caution regarding costs and when new opportunities arise.

Figure 2: Index performance vs. TLI, 2006-2010

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Finding 3: We Need to Explore this Further

The Technology Leadership Index’s findings provide significant evidence of a relationship between technology investment and business results, but the true dynamics of this relationship are unclear. To fully understand and communicate IT´s role in creating change within businesses, the field of Technology Economics must continue to develop.

Conclusion

To date the field of technology economics has relied largely on datasets created with traditional technology performance and financial measures in mind. However, to clearly understand and communicate the value that technology creates for businesses, organizations, and nations alike, several elements must be improved:

  1. Awareness of the potential of such information – measures such as the Technology Leadership Index and the Tech Intensity Curve clearly demonstrate that there is a relationship between technology and business results, but much more work is required to provide better insight into that relationship.
  2. Tools and methodologies to analyze the information: while many organizations are awash with data, they often do not have the tools or methodologies to use the information to make informed decisions. Firms should identify what kinds of information they have to assist them in determining their own technology economics.
  3. Measures and processes – Organizations should develop business cases with quantitative goals to establish the value of each project – their potential to reduce costs, grow revenues, manage risk, avoid costs, and protect revenue. All significant projects should be measured against these goals to determine their effectiveness.
  4. Communication of performance – transparent communication of ongoing performance and results will likely provide clear evidence of the strong impact of technology, but most certainly will provide the ability to make effective business decisions.

But beyond these improvements it does seem clear (and obvious) from this experiment that it is time for markets to recognize and reward those firms that best leverage information technology. Evidence of the ever elusive “Value of IT” is right there in the TLI behavior versus the markets for all to observe and comment on.

It is time for new market indices; it is time to toss out industrial-age market relics; it is time for a new view of IT value. Perhaps this experiment is the right start.

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    What is the asvantage of this concept?

  • Howard Rubin

    This concept provides insights into the dynamics of the economy that are missed by current industrial age models that do not explicitly consider the impact of technology.These results have major implications for job creation policy.    These ideas have been used in India, Canada, the Philippines, and in the Clinton Administration with great succecss