Summary Report

HBR AT LARGE

Doesn't Matter

by Nicholas C.Carr

As information technology's power and ubiquity have

grown, its strategic importance has diminished. The

way you approach IT investment and management will

need to change dramatically

I N 1968, ayoung Intel engineernamedTed Hoff found a way to put the cir-cuits necessary for computer process- ing onto a tiny piece of silicon. His in- vention of the microprocessor spurred a series of technological breakthroughs- desktop computers, local and wide area networks, enterprise software, and the I n t e r n e t - t h a t have transformed the business world. Today, no one would dis- pute that information technology has become the backbone of commerce. It underpins the operations of individual companies, ties together far-flung sup- ply chains, and, increasingly, links busi- nesses to the customers they serve. Hardly a dollar or a euro changes hands anymore without the aid of computer systems.

As IT'S power and presence have ex- panded, companies have come to view it as a resource ever more critical to their

success, a fact clearly reflected in their spending habits. In 1965, according to a study by the U.S. Department of Com- merce's Bureau of Economic Analysis, less than 5% of the capital expenditures of American companies went to infor- mation technology. After the introduc- tion of the persona] computer in the early 1980s, that percentage rose to 15%. By the early 1990s, it had reached more than 30%, and by the end of the decade it had hit nearly 50%. Even with the re- cent sluggishness in technology spend- ing, businesses around the world con- tinue to spend well over $2 trillion a year on IT.

But the veneration of IT goes much deeper than dollars. It is evident as well in the shifting attitudes of top manag- ers. TXventy years ago, most executives looked down on computers as prole- tarian tools - glorified typewriters and

MAY 2003 41

HBR AT LARGE • IT Doesn't Matter

calculators-best relegated to low level employees like secretaries, analysts, and technicians. It was the rare executive who would let his fingers touch a key- board, much less incorporate informa- tion technology into his strategic think- ing. Today, that has changed completely. Chief executives now routinely talk aboutthe strategic value of information technology, about how they can use IT to gain a competitive edge, about the "digitization" of their business models. Most have appointed chief information officers to their senior management teams, and many bave hired strategy consulting firms to provide fresh ideas on how to leverage their IT investments for differentiation and advantage.

Behind the change in thinking lies a simple assumption: that as lT's potency and ubiquity have increased, so too has its strategic value. It's a reasonable as- sumption, even an intuitive one. But it's mistaken. What makes a resource truly strategic - what gives it the capacity to be the basis for a sustained competitive advantage-is not ubiquity but scarcity. You only gain an edge over rivals by having or doing something that they can't bave or do. By now, tbe core func- tions of IT - data storage, data process- ing, and data transport - have become available and affordable to all.̂ Tbeir very power and presence have begun to transform them from potentially strate- gic resources into commodity factors of production. They are becoming costs of doing business that must be paid by all but provide distinction to none.

IT is best seen as the latest in a series of broadly adopted technologies that have reshaped industry over the past two centuries - from the steam engine and the railroad to the telegraph and the telephone to the electric generator and the internal combustion engine. Eor a brief period, as they were being built into the infrastructure of com- merce, all tbese technologies opened opportunities for forward-looking com-

panies to gain real advantages. But as tbeir availability increased and their cost decreased-as they became ubiqui- tous-they became commodity inputs. From a strategic standpoint, they be- came invisible; they no longer mattered. Tbat is exactly what is happening to in- formation technology today, and the implications for corporate IT manage- ment are profound.

Vanishing Advantage Many commentators have drawn paral- lels between the expansion of IT, par- ticularly the Internet, and the rollouts of earlier technologies. Most of the comparisons, though, have focused on either the investment pattern associ- ated with the technologies-the boom- to-bust cycle-or tbe tecbnologies' roles in resbaping the operations of entire in- dustries or even economies. Little has

rights to a new packaging material that gives its product a longer shelf life than competing brands. As long as they re- main protected, proprietary technolo- gies can be the foundations for long- term strategic advantages, enabling companies to reap higher profits than tbeir rivals.

InfrastiTJctural technologies, in con- trast, offer far more value when shared than when used in isolation. Imagine yourself in the early nineteenth century, and suppose that one manufacturing company held the rights to all the tech- nology required to create a railroad. If it wanted to, that company could just build proprietary lines between its sup- pliers, its factories, and its distributors and run its own locomotives and railcars on tbe tracks. And it might well operate more efficientiy as a result. But, for tbe broader economy, the value produced

When a resource becomes essential to competition but

inconsequential to strategy, the risks it creates become

more important than the advantages it provides.

been said about the way the technolo- gies influence, or fail to influence, com- petition at the firm level. Yet it is here that history offers some of its most im- portant lessons to managers.

A distinction needs to be made be- tween proprietary technologies and what might be called infrastructural technologies. Proprietary technologies can be owned, actually or effectively, by a single company. A pbarmaceutical firm, for example, may hold a patent on a particular compound that serves as the basis for a family of drugs. An in- dustrial manufacturer may discover an innovative way to employ a process technology that competitors find hard to replicate. A company tbat produces consumer goods may acquire exclusive

Nicholas G. Carr is HBR's editor-at-large. He edited The Digital Enterprise, a collec- tion of HBR articles published by Harvard Business School Press in 2001, and has written for the Einancial Times, Business 2.0, and the Industry Standard in addition to HBR. He can be reached at [email protected].

by such an arrangement would be triv- ial compared with the value that would he produced by building an open rail network connecting many companies and many buyers. The characteristics and economics of infrastructural tech- nologies, whether railroads or telegraph lines or power generators, make it inev- itable tbat they will be broadly shared- that they will become part of the gen- eral business infrastructure.

In the earliest phases of its buildout, however, an infrastructural technology can take the form of a proprietary tech- nology. As long as access to the technol- ogy is restricted-through physical lim- itations, intellectual property rights, high costs,or a lack of standards-a com- pany can use it to gain advantages over rivals. Consider the period between the construction of the first electric power stations, around 1880, and the wiring of the electric grid early in the twentieth century. Electricity remained a scarce

42 HARVARD BUSINESS REVIEW

IT Doesn't Matter • HBR AT LARGE

resource during this time, and those manufacturers able to tap into it - by, for example, building their plants near generating stations - often gained an important edge. It was no coincidence that the largest U.S. manufacturer of nuts and bolts at tbe turn of the century. Plumb, Burdict, and Barnard, located its factory near Niagara Falls in New York, the site of one of the earliest large-scale bydroelectiic power plants.

Companies can also steal a march on their competitors by baving superior in- sight into the use of a new technology. The introduction of electric power again provides a good example. Until the end of the nineteenth century, most man- ufacturers relied on water pressure or steam to operate their machinery. Power in those days came from a single, fixed source - a waterwheel at the side of a mill, for instance-and required an elab- orate system of pulleys and gears to distribute it to individual workstations throughout the plant. When electric generators first became available, many manufacturers simply adopted them as a replacement single-point source, using them to power the existing system of pulleys and gears. Smart manufacturers, however, saw that one of the great ad- vantages of electiic power is that it is eas- ily distributable-tbat it can be brought directly to workstations. By wiring tbeir plants and installing electric motors in tiieir machines, they were able to dis- pense with tbe cumbersome, inflexible, and costly gearing systems, gaining an important efficiency advantage over their slower-moving competitors.

In addition to enabling new, more ef- ficient operating metbods, infrastruc- tural technologies often lead to broader market changes. Here, too, a company that sees what's coming can gain a step on myopic rivals. In the mid-i8oos, wben America started to lay down rail lines in earnest, it was already possible to trans- port goods over long distances - bun- dreds of steamships plied the country's rivers. Businessmen probably assumed that rail transport would essentially fol- low the steamship model, with some in- cremental enhancements. In fact, the greater speed, capacity, and reach of

the railroads fundamentally changed the structure of American industry. It sud- denly became economical to ship fin- ished products, rather than just raw materials and industrial components, over great distances, and the mass con- sumer market came into being. Compa- nies that were quick to recognize the broader opportunity rushed to build large-scale, mass-production factories. Tbe resulting economies of scale al- lowed them to crush the small, local plants that until tben had dominated manufacturing.

The trap tbat executives often fall into, however, is assuming that oppor- tunities for advantage will be available indefinitely. In actuality, the window for gaining advantage from an infrastruc- tural technology is open only briefly. Wben the technology's commercial po- tential begins to be broadly appreciated, huge amounts of cash are inevitably in- vested in it, and its buildout proceeds witb extreme speed. Railroad tracks, telegraph wires, power lines - all were laid or strung in a frenzy of activity (a frenzy so intense in the case of rail lines tbat it cost hundreds of laborers tbeir lives). In the 30 years between 1846 and 1876, reports Eric Hobsbawm in The Age of Capital, the world's total rail trackage increased from 17,424 kilome- ters to 309,641 kilometers. During tbis same period, total steamship tonnage also exploded, from 139,973 to 3,293,072 tons. The telegraph system spread even more swiftly. In Continental Europe, there were just 2,000 nules of telegraph wires in 1849; 20 years later, there were 110,000, The pattern continued witb electrical power. The number of central stations operated by utilities grew from 468 in 1889 to 4,364 in 1917, and the av- erage capacity of eacb increased more than tenfold. (Eor a discussion of the dangers of overinvestment, see the side- bar "Too Mucb of a Good Thing.")

By tbe end of the buildout phase, tbe opportunities for individual advantage are largely gone. The rush to invest leads to more competition, greater capacity, and falling prices, making the technol- ogy broadly accessible and affordable. At the same time, the buildout forces

MAY 2003

HBR AT LARGE • IT Doesn't Matter

users to adopt universal technical stan- dards, rendering proprietary systems obsolete. Even the way tbe tecbnology is used begins to become standardized, as best practices come to be widely un- derstood and emulated. Often, in fact, tbe best practices end up being built into the infrastructure itself; afrer elec- trification, for example, all new facto- ries were constructed witb many well- distributed power outlets. Both tbe technology and its modes of use he- come, in effect, commoditized. The only meaningful advantage most companies can hope to gain from an infrastructural tecbnology after its buildout is a cost advantage - and even that tends to be very hard to sustain.

That's not to say that infrastructural tecbnologies don't continue to influ- ence competition. They do, but their influence is felt at the macroeconomic level, not at the level of the individual ccjmpany. If a particular country, for in- stance, lags in installing the technol- ogy - whether it's a national rail net- work, a power grid, or a communication infrastructure - its domestic industries will suffer heavily. Similarly, if an in- dustry lags in harnessing the power of the tecbnology, it will be vulnerable to displacement. As always, a company's fate is tied to broader forces affecting its region and its industry. The point is, however, that the technology's poten- tial for differentiating one company from the pack-its strategic potential - inexorably declines as it becomes acces- sible and affordable to all.

The Commoditization of IT Although more complex and malleable than its predecessors, IT has all the hall- marks of an infrastructural technology. In fact, its mix of characteristics guar- antees particularly rapid commoditi- zation . IT is, first of all, a transport mech- anism-it carries digital information just as railroads carry goods and power grids carry electricity. And like any transport mechanism, it is far more valuable when shared than when used in isolation. The history of IT in business has been a his- tory of increased interconnectivity and interoperability, from mainframe time-

Too Much of a Good Thing As many experts have pointed out, the overinvestment in information

technology in the 1990s echoes the overinvestment in railroads in the

i86os. In both cases, companies and individuals, dazzled by the seem-

ingly unlimited commercial possibilities ofthe technologies, threw large

quantities of money away on half-baked businesses and products. Even

worse, the flood of capital led to enormous overcapacity, devastating

entire industries.

We can only hope that the analogy ends there. The mid-nineteenth-

century boom in railroads (and the closely related technologies ofthe

steam engine and the telegraph) helped produce notonly widespread

industrial overcapacity but a surge in productivity. The combination set

the stage for two solid decades of deflation. Although worldwide economic

production continued to grow strongly between the mid-i87osandthe

mid-i89os, prices collapsed - in England, tbe dominant economic power

oftbe time, price levels dropped 40%. In turn, business profits evaporated.

Companies watched the value of tbeir products erode while tbey were in

the very process of making them. As the first worldwide depression took

hold, economic malaise covered much ofthe globe. "Optimism about a

future of indefinite progress gave way to uncertainty and a sense of agony,"

wrote historian D.S. Landes.

It's a very different world today, of course, and it would be dangerous

to assume that history will repeat itself But with companies struggling to

boost profits and the entire world economy flirting with deflation, it would

also be dangerous to assume it can't.

sharing to minicomputer-based local area networks to broader Ethernet net- works and on to the Internet. Each stage in that progression has involved greater standardization of the technology and, at least recently, greater homogeniza- tion of its functionality. Eor most busi- ness applications today, the benefits of customization would be overwhelmed by tbe costs of isolation.

IT is also highly replicable. Indeed, it is hard to imagine a more perfect com- modity than a byte of data - endlessly and perfectly reproducible at virtually no cost. The near-infinite scalability of many IT functions, when combined with technical standardization, dooms mO5t proprietary applications to eco- nomic obsolescence. Wby write your own application for word processing or e-mail or, for that matter, supply- chain management when you can buy a ready-made, state-of-the-art applica-

tion for a fraction of the cost? But it's not just the software tbat is replicable. Because most business activities and processes have come to he embedded in software, they become replicable, too. When companies buy a generic appli- cation, they buy a generic process as well. Both the cost savings and the in- teroperability benefits make the sacri- fice of distinctiveness unavoidable.

The arrival of the Internet has accel- erated the commoditization of IT by providing a perfect delivery channel for generic applications. More and more, companies will fulfill their IT require- ments simply by purchasing fee-based "Web services" from third parties - similar to the way they currently buy electric power or telecommunications services. Most of the major business- technology vendors, from Microsoft to IBM, are trying to position themselves as IT utilities, companies that will con-

44 HARVARD BUSINESS REVIEW

IT Doesn't Matter • HBR AT LARGE

trol the provision of a diverse range of business applications over what is now called, tellingly, "the grid." Again, the upshot is ever greater homogenization of IT capabilities, as more companies replace customized applications with generic ones. (Eor more on the chal- lenges facing IT companies, see the side- bar "What About the Vendors?")

Finally, and for all tbe reasons already discussed, IT is subject to rapid price de- flation. Wben Gordon Moore made his famously prescient assertion that the density of circuits on a computer chip would double every two years, he was mailing a prediction about the coming explosion in processing power. But he was also making a prediction about the coming free fall in the price of computer functionality. The cost of processing power has dropped relentlessly, from $480 per million instructions per sec- ond (MIPS) in 1978 to $50 per MIPS in 1985 to $4 per MIPS in 1995, a trend tbat continues unabated. Similar declines have occurred in the cost of data storage and transmission. The rapidly increas- ing affordability of IT functionality has not only democratized the computer revolution, it has destroyed one of the most important potential barriers to competitors. Even the most cutting- edge IT capabilities quickly become available to all.

It's no surprise, given these charac- teristics, that IT'S evolution has closely mirrored that of earlier infrastructural tecbnologies. Its buildout has been every bit as breathtaking as tbat of the rail- roads (albeit with considerably fewer fatalities). Consider some statistics. Dur- ing the last quarter of the twentieth century, the computational power of a microprocessor increased by a factor of 66,000. In the dozen years from 1989 to 2001, the number of host computers connected to the Internet grew from 80,000 to more than 125 million. Over the last ten years, the number of sites on the World Wide Web bas grown from zero to nearly 40 million. And since the 1980s, more than 280 million miles of fiber-optic cable bave been in- stalled - enough, as BusinessWeek re- cently noted, to "circle the earth 11,320

times." (See the exhibit "The Sprint to Commoditization.")

As with earlier infrastructural tecb- nologies, IT provided forward-looking companies many opportunities for com- petitive advantage early in its buildout, when it could still be "owned"like a pro- prietary technology. A classic example is American Hospital Supply. A leading distributor of medical supplies, AHS

introduced in 1976 an innovative system called Analytic Systems Automated Purcbasing, or ASAP, that enabled hos- pitals to order goods electronically. De- veloped in-house, the innovative system used proprietary software running on a mainframe computer, and hospital purchasing agents accessed it through terminals at their sites. Because more efficient ordering enabled hospitals to

What About the Vendors? Just a few months ago, at the 2003 World Economic Forum in Davos,

Swiuerland, Bill Joy, the chief scientist and cofounder of Sun Micro-

systems, posed what for him must have been a painful question: "What

if the reality is that people have already bought most ofthe stuff they want

to own?" The people he was talking about are, of course, businesspeople,

and the stuffis information technology. With the end ofthe great buildout

ofthe commercial IT infrastructure apparently at hand Joy's question is

one that all IT vendors should be asking themselves. There is good reason

to believe that companies'existing IT capabilities are largely sufficient for

their needs and, hence, that the recent and widespread sluggishness in

IT demand is as much a structural as a cyclical phenomenon.

Even if that's true, the picture may not be as bleak as it seems for ven-

dors, at least those with the foresight and skill to adapt to the new environ-

ment. The importanceof infrastructural technologies to the day-to-day

operations of business means that they continue to absorb large amounts

of corporate cash long after they have become commodities-indefinitely,

in many cases. Virtually all companies today continue to spend heavily

on electricity and phone service, for example, and many manufacturers

continue to spend a lot on rail transport. Moreover, the standardized

natureof infrastructural technologies often leads to the establishment

of lucrative monopolies and oligopolies.

Many technology vendors are already repositioning themselves and

their products in response to the changes in the market. Microsoft's

push to turn its Office software suite from a packaged good into an annual

subscription service is a tacit acknowledgment that companies are losing

their n e e d - a n d their a p p e t i t e - f o r constant upgrades. Dell has succeeded

by exploiting the commoditization ofthe PC market and is now extending

that strategy to servers, storage, and even services. (Michael Dell's essen-

tial genius has always been his unsentimental trust in the commoditiza-

tion of information technology.) And many ofthe major suppliers of

corporate IT, including Microsoft, IBM, Sun, and Oracle, are battling to

position themselves as dominant suppliers of "Web services" - to turn

themselves, in effect, into utilities. This war for scale, combined with the

continuing transformation of IT into a commodity, will lead to the further

consolidation of many sectors ofthe IT industry. The winners will do very

well; the losers will be gone.

MAY 2003 45

HBR AT LARGE • IT Doesn't Matter

reduce tbeir inventories-and thus their costs-customers were quick to embrace the system. And because it was propri- etary to AHS, it effectively locked out competitors. Eor several years, in fact, AHS was tbe only distributor offering electronic ordering, a competitive ad- vantage that led to years of superior financial results. Erom 1978 to 1983, AHS's sales and profits rose at annual rates of 13% and 18%, respectively-well above industry averages.

AHS gained a true competitive ad- vantage by capitalizing on cbaracteris- tics of infrastructural tecbnologies that are common in tbe early stages of their buildouts, in particular their high cost and lack of standardization. Within a decade, however, those barriers to com- petition were crumbling. The arrival of personal computers and packaged soft- ware, together with the emergence of networking standards, was rendering proprietary communication systems un- attractive to tbeir users and uneconom- ical to their owners. Indeed, in an ironic, if predictable, twist, tbe closed nature and outdated technology of AHS's sys- tem tumed it from an asset to a liabiiity. By the dawn oftbe 1990s, after AHS had merged with Baxter Travenol to form Baxter International, the company's se- nior executives had come to view ASAP as "a millstone around their necks," ac- cording to a Harvard Business School case study.

Myriad other companies bave gained important advantages through the in- novative deployment of IT. Some, like American Airlines with its Sabre reser- vation system, Eederal Express with its package-tracking system, and Mobil Oil with its automated Speedpass payment system, used IT to gain particular op- erating or marketing advantages - to leapfrog the competition in one process or activity. Others, like Reuters with its 1970S financial information network or, more recently, eBay with its Internet auctions, had superior insight into the way IT would fundamentally change an industry and were able to stake out com- manding positions. In a few cases, the dominance companies gained through IT innovation conferred additional ad-

The Sprint to Commoditization One ofthe most saiient characteristics of infrastructural technologies is

the rapidity of their installation. Spurred by massive investment, capacity

soon skyrockets, leading to falling prices and, quickly, commoditization.

Railv^ays

Railroad track worldwide. in thousands of kilometers

350

300

250

200

150

100

50

0

15,000

12,000

1841 1846 1851 1856 1861 1866 1871 1876

Electric Power

U.S. electric utility generating capacity, in megawatts 6 000

3,000

0

200

1889 18991902 1907 1912 1917 1920

Number of host computers on the Internet (in millions)

150

100

Infornnation Technology

1990 1992 1994 1996 1998 2000 2002

Sources: railway;: Eric Hobsbawm, Tfte^lgeo/Copto/(Vintage, 1996); electric power; Richard B. Dubofij Electric Power in Manufacturing, 1889-1958 {Amo,^97g); Internet hosts: Robert H.Zakon.Hodbei' Internet Timeline {www.zakon.org/robert/internet/timeline/).

HARVARD BUSINESS REVIEW

vantages, such as scale economies and brand recognition, that have proved more durable than tbe original techno- logical edge. Wal-Mart and E)ell Com- puter are renowned examples of firms that have been able to turn temporary technological advantages into enduring positioning advantages.

But the opportunities for gaining IT- based advantages are already dwin- dling. Best practices are now quickly built into software or otherwise repli- cated. And as for IT-spurred industry transformations, most of the ones that are going to happen have likely already happened or are in the process of hap- pening. Industries and markets will con- tinue to evolve, of course, and some will undergo fundamental changes-the fu- ture ofthe music business, for example, conrinues to be In doubt. But bistory shows that tbe power of an infrastruc- tural technology to transform industries always diminishes as its buildout nears completion.

While no one can say precisely wben the buildout of an infrastructural tech- nology has concluded, there are many signs that the IT buiidout is much closer to its end than its beginning. Eirst, IT's power is outstripping most of tbe busi- ness needs it fulfills. Second, the price of essential IT functionality has dropped to the point where it is more or less affordable to all. Third, the capacity of the universal distribution network (the Internet) has caught up with demand- indeed, we already have considerably more fiber-optic capacity than we need. Fourth, IT vendors are rushing to posi- tion themselves as commodity suppli- ers or even as utilities. Finally, and most definitively, the investment bubble bas burst, wbicb historically bas been a clear indication tbat an infrastructural tech- nology is reacbing the end of its build- out. A few companies may still be able to wrest advantages from bighly spe- cialized applications that don't offer strong economic incentives for repli- cation, but those firms will be the ex- ceptions that prove the rule.

At the close oftbe 1990s, when Inter- net hype was at full boil, technologists offered grand visions of an emerging

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HBR AT LARGE - IT Doesn't Matter

New Rules for IT Management With the opportunities for gaining strategic advantage from information

technology rapidlydisappearing.nnany companies will want to take a hard

look at how they invest in IT and manage their systems. Asa starting

point, here are three guidelines for the future:

Spend Ie5s. Studies show that the companies with the biggest IT invest-

ments rarely post the best financial results. As the commoditization of IT

continues, the penalties for wasteful spending will only grow larger. It is

getting much harder to achieve a competitive advantage through an IT

investment, but it is getting much easierto put your business at a cost

disadvantage.

Follow, don't lead. Moore's Law guarantees that the longer you wait to

make an IT purchase, the more you'll get for your money. And waiting

will decrease your risk of buying something technologically fiawed or

doomed to rapid obsolescence. In some cases, being on the cutting edge

makes sense. But those cases are becoming rarer and rarer as IT capabili-

ties become more homogenized.

Focus on vulnerabilities, not opportunities. It's unusual for a company

to gain a competitive advantage through the distinctive use of a mature

infrastructural technology, but even a brief disruption in the availability of

the technology can be devastating. As corporations continue to cede con-

trol over their IT applications and networks to vendors and other third par-

ties, the threats they face will proliferate. They need to prepare themselves

for technical glitches, outages, and security breaches, shifting their atten-

tion from opportunities to vulnerabilities.

"digital ftiture." It may well be that, in terms of business strategy at least, the future has already arrived.

From Offense to Defense So what sbould companies do? From a practical standpoint, the most impor- tant lesson to be leamed from earlier infrastructural technologies may be this: When a resource becomes essen- tial to competition but inconsequential to strategy, tbe risks it creates become more important than the advantages it provides. Think of electricity. Today, no company builds its business strategy around its electricity usage, but even a brief lapse in supply can be devastating (as some Califomia businesses discov- ered during the energy crisis of 2000). The operational risks associated with n are many - technical glitches, obso-

lescence, service outages, unreliable vendors or partners, security breacbes, even terrorism-and some have become magnified as companies bave moved from tightly controlled, proprietary sys- tems to open, shared ones. Today, an IT disruption can paralyze a company's ability to make its products, deliver its services, and connect with its customers, not to mention foul its reputation. Yet few companies have done a thorough job of identifying and tempering their vulnerabilities. Worrying about what might go wrong may not be as glam- orous a job as speculating about the fu- ture, but it is a more essential job right now. (See the sidebar "New Rules for IT Management")

In tbe long run, tbough, the greatest IT risk facing most companies is more prosaic than a catastrophe. It is, simply,

overspending. IT may be a commodity, and its costs may fall rapidly enough to ensure that any new capabilities are quickly shared, but the very fact that it is entwined with so many business functions means that it will continue to consume a large portion of corporate spending. For most companies, just stay- ing in business will require big outlays for IT. Wbat's important-and this holds tme for any commodity input-is to be able to separate essential investments from ones tbat are discretionary, un- necessary, or even counterproductive.

At a high level, stronger cost man- agement requires more rigor in evalu- ating expected returns from systems in- vestments, more creativity in exploring simpler and cheaper altematives, and a greater openness to outsourcing and other partnerships. But most companies can also reap significant savings by sim- ply cutting out waste. Personal comput- ers are a good example. Every year, busi- nesses purchase more than lOO million PCs, most of which replace older mod- els. Yet tbe vast majority of workers who use PCs rely on only a few simple appli- cations-word processing, spreadsheets, e-mail, and Web browsing. These appli- cations have been technologically ma- ture for years; they require only a frac- tion of the computing power provided by today's microprocessors. Neverthe- less, companies continue to roll out across-the-board hardware and software upgrades.

Much of tbat spending, if truth be told, is driven by vendors' strategies. Big hardware and software suppliers have become very good at parceling out new features and capabilities in ways that force companies into buying new com- puters, applications, and networking equipment much more frequently than they need to. The time has come for IT buyers to throw their weight around, to negotiate contracts that ensure tbe long- term usefulness of their PC investments and impose hard limits on upgrade costs. And if vendors balk, companies should be willing to explore cheaper so- lutions, including open-source applica- tions and bare-bones network PCs, even if it means sacrificing features. If a com-

HARVARD BUSINESS REVIEW

pany needs evidence of the kind of money that might be saved, it need only look at Microsoft's profit margin.

In addition to being passive in tbeir purcbasing, companies bave been sloppy in their use of IT. Tbat's particularly tme witb data storage, which has come to account for more than half of many companies' IT expenditures. The bulk of wbat's being stored on corporate net- works has little to do witb making prod- ucts or serving customers ~ it consists of employees' saved e-mails and files.

Some managers may worry that be- ing stingy witb IT dollars will damage tbeir competitive positions. But studies of corporate IT spending consistently show that greater expenditures rarely translate into superior financial results. In fact, tbe opposite is usually tme. In 2002, tbe consulting firm Alinean com- pared the IT expenditures and the fi- nancial results of 7,500 large U.S. com- panies and discovered that the top performers tended to be among tbe most tightfisted. The 25 companies that

Studies of corporate IT spending consistently show

that greater expenditures rarely translate into superior

financial results. In fact, the opposite is usually true.

including terabytes of spam, MP3s, and video clips. Computerworld estimates that as mucb as 70% of tbe storage ca- pacity of a typical Windows network is wasted - an enormous unnecessary ex- pense. Restricting employees' ability to save files indiscriminately and indefi- nitely may seem distasteful to many managers, but it can bave a real impact on tbe bottom Une. Now tbat IT bas become the dominant capital expense for most businesses, there's no excuse for waste and sloppiness.

Given the rapid pace of technology's advance, delaying IT investments can be another powerful way to cut costs - while also reducing a firm's chance of being saddled witb buggy or soon-to- be-obsolete tecbnology. Many compa- nies, particularly during tbe 1990s, mshed their IT investments either be- cause tbey hoped to capture a first- mover advantage or because tbey feared being left bebind. Except in very rare cases, both the hope and the fear were unwarranted. The smartest users of technology - here again. Dell and Wal- Mart stand out-stay well back from tbe cutting edge, waiting to make purchases until standards and best practices solid- ify. Tbey let their impatient competitors shoulder the bigh costs of experimenta- tion, and then tbey sweep past them, spending less and getting more.

delivered the highest economic retums, for example, spent on average just 0.8% of their revenues on IT, while the typical company spent 3.7%. A recent study by Forrester Researcb showed, similarly, tbat the most lavish spenders on IT rarely post the best results. Even Oracle's Larry Ellison, one of tbe great technol- ogy salesmen, admitted in a recent in- terview that "most companies spend too much [on IT] and get very little in re- tum." As the opportunities for IT-based advantage continue to narrow, the pen- alties for overspending will only grow.

IT management sbould, frankly, be- come boring. Tbe key to success, for the vast majority of companies, is no longer to seek advantage aggressively but to manage costs and risks meticulously. If, like many executives, you've begun to take a more defensive posture toward IT in the last two years, spending more fru- gally and thinking more pragmatically, you're already on the right course. The challenge will be to maintain that disci- pline when the business cycle strength- ens and the choms of hype about IT's strategic value rises anew. ^

1."Information technology" is a fuzzy term. In this article, it is used in its common current sense, as de- noting the technologies used for processing, storing, and transporting information in digital form.

Reprint R0305B; HBR OnPoint 3566 To order, see page 131.

A T B O O K S T O R E S E V E R Y W H E R E

IDEAS IN ACTION W H A T ' S

CREATING AND CAPITALIZING ON THE BEST

MANAGEMENT THINKING !

rHOMAS H. DAVENPORr LAURENCE PRUSAK

WITH H JAMtS WILSON

The secrets of successful idea practitioners.

B N A S H I I C H U R A V G R T I

Bringing Innouatidritn rtptinarotdWld

An innovator's playbook for shaping the market endgame.

HENRY CHE5BR0UGH

OPEN The New Imperative

For Creating and ProFiting From Technology

How to ieverage ideas from inside and out.

H A R V A R D B U S I N E S S

S C H O O L P R E S S

MAY 2003 w w w . H B S P r e ' s s . o r

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