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H B R

A T

A R G E

IT Doesn’t Matter

by Nicholas G. Carr

With Letters to the Editor

•

Included with this full-text

Harvard Business Review

article:

The Idea in Brief—the core idea

The Idea in Practice—putting the idea to work

Article Summary

IT Doesn’t Matter

A list of related materials, with annotations to guide further

exploration of the article’s ideas and applications

Further Reading

Does IT Matter? An HBR Debate

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.

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H B R

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IT Doesn’t Matter

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The Idea in Brief The Idea in Practice

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To beat your competitors, are you devoting more than 50% of your capital expenditures to information technology? If so, you’re not alone. Businesses worldwide pump $2 tril- lion a year into IT. But like many broadly adopted technologies—such as railways and electrical power—IT has become a commodity. Affordable and accessible to everyone, it no longer offers strategic value to anyone.

Scarcity—not ubiquity—makes a business resource truly strategic. Companies gain an edge by having or doing something others can’t have or do. In IT’s earlier days, forward- looking firms trumped competitors through innovative deployment of IT; for example, Federal Express’s package-track- ing system and American Airlines’ Sabre reservation system.

Now that IT is ubiquitous, however, we must focus on its risks more than its poten- tial strategic advantages. Consider electric- ity. No company builds its strategy on its electrical usage—but even a brief lapse in supply can be devastating. Today, an IT dis- ruption can prove equally paralyzing to your company’s ability to make products, deliver services, and satisfy customers.

But the greatest IT risk is overspending— putting your company at a cost disadvan- tage. The lesson? Make IT management boring. Instead of aggressively seeking an edge through IT, manage IT’s costs and risks with a frugal hand and pragmatic eye—de- spite any renewed hype about its strategic value. Worrying about what might go wrong isn’t glamorous, but it’s smart busi- ness now.

To avoid overinvesting in IT:

SPEND LESS.

Rigorously evaluate expected returns from IT investments. Separate essential investments from discretionary, unnecessary, or counter- productive ones. Explore simpler and cheaper alternatives, and eliminate waste.

Example:

Businesses buy 100 million+ PCs annu- ally—yet most workers use PCs for simple applications that require a fraction of their computing power. Start imposing hard lim- its on upgrade costs—rather than buying new computers and applications every time suppliers roll out new features. Negoti- ate contracts ensuring long-term useful- ness of your PC investments. If vendors balk, explore cheaper solutions, including bare-bones network PCs.

Also assess your data storage, which ac- counts for 50%+ of many companies’ IT ex- penditures—even though most saved data consists of employees’ e-mails and files that have little relevance to making products or serving customers.

FOLLOW, DON’T LEAD.

Delay IT investments to significantly cut costs

and

decrease your risk of buying flawed or soon-to-be obsolete equipment or applica- tions. Today, smart IT users hang back from the cutting edge, buying only after standards and best practices solidify. They let more im- patient rivals shoulder the high costs of exper- imentation. Then they sweep past them, pay- ing less while getting more.

FOCUS ON RISKS, NOT OPPORTUNITIES.

Many corporations are ceding control over their IT applications and networks to vendors and other third parties. The consequences of moving from tightly controlled, proprietary systems to open, shared ones? More and more threats in the form of technical glitches, service outages, and security breaches. Focus IT resources on preparing for such disrup- tions—not deploying IT in radical new ways.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

H B R

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A R G E

IT Doesn’t Matter

With Letters to the Editor

harvard business review • may 2003 page 2

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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.

In 1968, a young Intel engineer named Ted Hoff found a way to put the circuits necessary for computer processing onto a tiny piece of silicon. His invention of the microprocessor spurred a series of technological break- throughs—desktop computers, local and wide area networks, enterprise software, and the In- ternet—that have transformed the business world. Today, no one would dispute that infor- mation technology has become the backbone of commerce. It underpins the operations of individual companies, ties together far-flung supply chains, and, increasingly, links busi- nesses to the customers they serve. Hardly a dollar or a euro changes hands anymore with- out the aid of computer systems.

As IT’s power and presence have expanded, 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, ac- cording to a study by the U.S. Department of Commerce’s Bureau of Economic Analysis, less than 5% of the capital expenditures of Ameri- can companies went to information technol-

ogy. After the introduction of the personal 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 recent sluggishness in technology spending, busi- nesses around the world continue 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 managers. Twenty years ago, most executives looked down on computers as proletarian tools—glorified typewriters and calculators—best relegated to low level em- ployees like secretaries, analysts, and techni- cians. It was the rare executive who would let his fingers touch a keyboard, much less incor- porate information technology into his strate- gic thinking. Today, that has changed com- pletely. Chief executives now routinely talk about the strategic value of information tech- nology, about how they can use IT to gain a competitive edge, about the “digitization” of their business models. Most have appointed

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

IT Doesn’t Matter

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harvard business review • may 2003 page 3

chief information officers to their senior man- agement teams, and many have hired strategy consulting firms to provide fresh ideas on how to leverage their IT investments for differentia- tion and advantage.

Behind the change in thinking lies a simple assumption: that as IT’s potency and ubiquity have increased, so too has its strategic value. It’s a reasonable assumption, 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 advan- tage—is not ubiquity but scarcity. You only gain an edge over rivals by having or doing something that they can’t have or do. By now, the core functions of IT—data storage, data processing, and data transport—have become available and affordable to all.

Their very power and presence have begun to transform them from potentially strategic resources into commodity factors of production. They are be- coming 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 re- shaped 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. For a brief period, as they were being built into the infrastructure of commerce, all these tech- nologies opened opportunities for forward- looking companies to gain real advantages. But as their availability increased and their cost decreased—as they became ubiquitous— they became commodity inputs. From a strate- gic standpoint, they became invisible; they no longer mattered. That is exactly what is hap- pening to information technology today, and the implications for corporate IT management are profound.

Vanishing Advantage

Many commentators have drawn parallels be- tween the expansion of IT, particularly the In- ternet, and the rollouts of earlier technologies. Most of the comparisons, though, have fo- cused on either the investment pattern associ- ated with the technologies—the boom-to-bust cycle—or the technologies’ roles in reshaping the operations of entire industries or even economies. Little has been said about the way the technologies influence, or fail to influence, competition at the firm level. Yet it is here that

history offers some of its most important les- sons to managers.

A distinction needs to be made between pro- prietary technologies and what might be called infrastructural technologies. Proprietary tech- nologies can be owned, actually or effectively, by a single company. A pharmaceutical firm, for example, may hold a patent on a particular compound that serves as the basis for a family of drugs. An industrial manufacturer may dis- cover an innovative way to employ a process technology that competitors find hard to repli- cate. A company that produces consumer goods may acquire exclusive rights to a new packaging material that gives its product a longer shelf life than competing brands. As long as they remain protected, proprietary technologies can be the foundations for long- term strategic advantages, enabling compa- nies to reap higher profits than their rivals.

Infrastructural technologies, in contrast, offer far more value when shared than when used in isolation. Imagine yourself in the early nine- teenth century, and suppose that one manufac- turing 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 suppliers, its factories, and its distributors and run its own locomotives and railcars on the tracks. And it might well operate more efficiently as a result. But, for the broader economy, the value produced by such an ar- rangement would be trivial compared with the value that would be produced by building an open rail network connecting many companies and many buyers. The characteristics and eco- nomics of infrastructural technologies, whether railroads or telegraph lines or power generators, make it inevitable that they will be broadly shared—that they will become part of the gen- eral business infrastructure.

In the earliest phases of its buildout, how- ever, an infrastructural technology can take the form of a proprietary technology. As long as access to the technology is restricted— through physical limitations, intellectual prop- erty rights, high costs, or a lack of standards—a company can use it to gain advantages over ri- vals. Consider the period between the con- struction of the first electric power stations, around 1880, and the wiring of the electric grid early in the twentieth century. Electricity re- mained a scarce resource during this time, and those manufacturers able to tap into it—by, for

Nicholas G. Carr

is HBR’s editor-at- large. He edited

The Digital Enterprise

, a collection of HBR articles published by Harvard Business School Press in 2001, and has written for the

Financial Times, Business 2.0

, and the

Industry Standard

in addition to HBR. He can be reached at [email protected].

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

mailto:[email protected]

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harvard business review • may 2003 page 4

example, building their plants near generating stations—often gained an important edge. It was no coincidence that the largest U.S. manu- facturer of nuts and bolts at the 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 hydroelec- tric power plants.

Companies can also steal a march on their competitors by having superior insight 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 manufacturers 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 elaborate system of pulleys and gears to distribute it to individual worksta- tions throughout the plant. When electric gen- erators first became available, many manufac- turers 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 advantages of electric power is that it is easily distributable—that it can be brought di- rectly to workstations. By wiring their plants and installing electric motors in their ma- chines, they were able to dispense with the cumbersome, inflexible, and costly gearing sys- tems, gaining an important efficiency advan- tage over their slower-moving competitors.

In addition to enabling new, more efficient operating methods, infrastructural technolo- gies 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- 1800s, when America started to lay down rail lines in earnest, it was already possible to transport goods over long distances—hun- dreds of steamships plied the country’s rivers. Businessmen probably assumed that rail trans- port would essentially follow the steamship model, with some incremental enhancements. In fact, the greater speed, capacity, and reach of the railroads fundamentally changed the structure of American industry. It suddenly be- came economical to ship finished products, rather than just raw materials and industrial components, over great distances, and the mass consumer market came into being. Com- panies that were quick to recognize the broader opportunity rushed to build large-

scale, mass-production factories. The resulting economies of scale allowed them to crush the small, local plants that until then had domi- nated manufacturing.

The trap that executives often fall into, how- ever, is assuming that opportunities for advan- tage will be available indefinitely. In actuality, the window for gaining advantage from an in- frastructural technology is open only briefly. When the technology’s commercial potential begins to be broadly appreciated, huge amounts of cash are inevitably invested in it, and its buildout proceeds with extreme speed. Rail- road 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 that it cost hundreds of laborers their 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 kilo- meters to 309,641 kilometers. During this same period, total steamship tonnage also exploded, from 139,973 to 3,293,072 tons. The telegraph system spread even more swiftly. In Continen- tal Europe, there were just 2,000 miles of tele- graph wires in 1849; 20 years later, there were 110,000. The pattern continued with electrical power. The number of central stations oper- ated by utilities grew from 468 in 1889 to 4,364 in 1917, and the average capacity of each in- creased more than tenfold. (For a discussion of the dangers of overinvestment, see the sidebar “Too Much of a Good Thing.”)

By the end of the buildout phase, the oppor- tunities for individual advantage are largely gone. The rush to invest leads to more compe- tition, greater capacity, and falling prices, mak- ing the technology broadly accessible and af- fordable. At the same time, the buildout forces users to adopt universal technical standards, rendering proprietary systems obsolete. Even the way the technology is used begins to be- come standardized, as best practices come to be widely understood and emulated. Often, in fact, the best practices end up being built into the infrastructure itself; after electrification, for example, all new factories were constructed with many well-distributed power outlets. Both the technology and its modes of use be- come, in effect, commoditized. The only mean- ingful advantage most companies can hope to gain from an infrastructural technology after its buildout is a cost advantage—and even that tends to be very hard to sustain.

When a resource

becomes essential to

competition but

inconsequential to

strategy, the risks it

creates become more

important than the

advantages it provides.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

IT Doesn’t Matter

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harvard business review • may 2003 page 5

That’s not to say that infrastructural technol- ogies don’t continue to influence competition. They do, but their influence is felt at the mac- roeconomic level, not at the level of the indi- vidual company. If a particular country, for in- stance, lags in installing the technology— whether it’s a national rail network, a power grid, or a communication infrastructure—its domestic industries will suffer heavily. Simi- larly, if an industry lags in harnessing the power of the technology, 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 potential for differentiating one company from the pack—its strategic poten- tial—inexorably declines as it becomes accessi- ble and affordable to all.

The Commoditization of IT

Although more complex and malleable than its predecessors, IT has all the hallmarks of an infrastructural technology. In fact, its mix of characteristics guarantees particularly rapid commoditization. IT is, first of all, a transport mechanism—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 history of increased interconnectiv- ity and interoperability, from mainframe time- sharing to minicomputer-based local area net- works to broader Ethernet networks and on to the Internet. Each stage in that progression has involved greater standardization of the technology and, at least recently, greater ho- mogenization of its functionality. For most business applications today, the benefits of customization would be overwhelmed by the costs of isolation.

IT is also highly replicable. Indeed, it is hard to imagine a more perfect commodity than a byte of data—endlessly and perfectly reproduc- ible at virtually no cost. The near-infinite scal- ability of many IT functions, when combined with technical standardization, dooms most proprietary applications to economic obsoles- cence. Why 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 application for a fraction of the cost? But it’s not just the software that is replicable. Because most business activities and processes have come to be embedded in soft- ware, they become replicable, too. When com- panies buy a generic application, they buy a ge- neric process as well. Both the cost savings and the interoperability benefits make the sacrifice of distinctiveness unavoidable.

The arrival of the Internet has accelerated the commoditization of IT by providing a per- fect delivery channel for generic applications. More and more, companies will fulfill their IT requirements 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 Mi- crosoft to IBM, are trying to position them- selves as IT utilities, companies that will con- trol the provision of a diverse range of business applications over what is now called, tellingly, “the grid.” Again, the upshot is ever greater ho- mogenization of IT capabilities, as more com- panies replace customized applications with generic ones. (For more on the challenges fac- ing IT companies, see the sidebar “What About the Vendors?”)

Finally, and for all the reasons already dis- cussed, IT is subject to rapid price deflation.

Too Much of a Good Thing

As many experts have pointed out, the overinvestment in information technol- ogy in the 1990s echoes the overinvest- ment in railroads in the 1860s. In both cases, companies and individuals, daz- zled by the seemingly unlimited com- mercial possibilities of the technolo- gies, threw large quantities of money away on half-baked businesses and prod- ucts. 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 of the steam engine and the telegraph) helped produce not only wide- spread industrial overcapacity but a surge in productivity. The combination set the stage for two solid decades of de- flation. Although worldwide economic

production continued to grow strongly between the mid-1870s and the mid- 1890s, prices collapsed—in England, the dominant economic power of the time, price levels dropped 40%. In turn, busi- ness profits evaporated. Companies watched the value of their products erode while they were in the very process of making them. As the first worldwide de- pression took hold, economic malaise covered much of the 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 as- sume that history will repeat itself. But with companies struggling to boost prof- its and the entire world economy flirting with deflation, it would also be danger- ous to assume it can’t.

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harvard business review • may 2003 page 6

When Gordon Moore made his famously pre- scient assertion that the density of circuits on a computer chip would double every two years, he was making 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 second (MIPS) in 1978 to $50 per MIPS in 1985 to $4 per MIPS in 1995, a trend that continues un- abated. Similar declines have occurred in the cost of data storage and transmission. The rap- idly increasing affordability of IT functionality has not only democratized the computer revo- lution, it has destroyed one of the most impor- tant potential barriers to competitors. Even the

most cutting-edge IT capabilities quickly be- come available to all.

It’s no surprise, given these characteristics, that IT’s evolution has closely mirrored that of earlier infrastructural technologies. Its buildout has been every bit as breathtaking as that of the railroads (albeit with considerably fewer fatali- ties). Consider some statistics. During the last quarter of the twentieth century, the computa- tional power of a microprocessor increased by a factor of 66,000. In the dozen years from 1989 to 2001, the number of host computers con- nected 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 has grown from zero to nearly 40 million. And since the 1980s, more than 280 million miles of fiber-optic cable have been installed—enough, as

BusinessWeek

recently noted, to “circle the earth 11,320 times.” (See the exhibit “The Sprint to Commoditization.”)

As with earlier infrastructural technologies, IT provided forward-looking companies many opportunities for competitive advantage early in its buildout, when it could still be “owned” like a proprietary technology. A classic exam- ple is American Hospital Supply. A leading dis- tributor of medical supplies, AHS introduced in 1976 an innovative system called Analytic Systems Automated Purchasing, or ASAP, that enabled hospitals to order goods electronically. Developed in-house, the innovative system used proprietary software running on a main- frame computer, and hospital purchasing agents accessed it through terminals at their sites. Because more efficient ordering enabled hospitals to reduce their inventories—and thus their costs—customers were quick to embrace the system. And because it was proprietary to AHS, it effectively locked out competitors. For several years, in fact, AHS was the only distrib- utor offering electronic ordering, a competi- tive advantage that led to years of superior fi- nancial results. From 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 advantage by capitalizing on characteristics of infrastructural technologies that are common in the early stages of their buildouts, in particular their high cost and lack of standardization. Within a decade, however, those barriers to competition were crumbling. The arrival of personal com- puters and packaged software, together with

What About the Vendors?

Just a few months ago, at the 2003 World Economic Forum in Davos, Swit- zerland, Bill Joy, the chief scientist and cofounder of Sun Microsystems, posed what for him must have been a painful question: “What if the reality is that peo- ple have already bought most of the stuff they want to own?” The people he was talking about are, of course, busi- nesspeople, and the stuff is information technology. With the end of the great buildout of the commercial IT infra- structure apparently at hand, Joy’s ques- tion is one that all IT vendors should be asking themselves. There is good reason to believe that companies’ existing IT ca- pabilities 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 phe- nomenon.

Even if that’s true, the picture may not be as bleak as it seems for vendors, at least those with the foresight and skill to adapt to the new environment. The im- portance of 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 elec- tricity and phone service, for example,

and many manufacturers continue to spend a lot on rail transport. Moreover, the standardized nature of infrastructural technologies often leads to the establish- ment of lucrative monopolies and oligop- olies.

Many technology vendors are already repositioning themselves and their prod- ucts 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 los- ing their need—and their appetite—for constant upgrades. Dell has succeeded by exploiting the commoditization of the PC market and is now extending that strat- egy to servers, storage, and even services. (Michael Dell’s essential genius has al- ways been his unsentimental trust in the commoditization of information technol- ogy.) And many of the 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 transfor- mation of IT into a commodity, will lead to the further consolidation of many sec- tors of the IT industry. The winners will do very well; the losers will be gone.

For the exclusive use of K. Vasseghi, 2017.

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harvard business review • may 2003 page 7

the emergence of networking standards, was rendering proprietary communication systems unattractive to their users and uneconomical to their owners. Indeed, in an ironic, if predict- able, twist, the closed nature and outdated technology of AHS’s system turned it from an asset to a liability. By the dawn of the 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,” according to a Harvard Business School case study.

Myriad other companies have gained impor- tant advantages through the innovative de- ployment of IT. Some, like American Airlines with its Sabre reservation system, Federal Ex- press with its package-tracking system, and Mobil Oil with its automated Speedpass pay- ment system, used IT to gain particular operat- ing or marketing advantages—to leapfrog the competition in one process or activity. Others, like Reuters with its 1970s financial informa- tion network or, more recently, eBay with its Internet auctions, had superior insight into the way IT would fundamentally change an indus- try and were able to stake out commanding positions. In a few cases, the dominance com- panies gained through IT innovation conferred additional advantages, such as scale economies and brand recognition, that have proved more durable than the original technological edge. Wal-Mart and Dell Computer are renowned ex- amples of firms that have been able to turn temporary technological advantages into en- during positioning advantages.

But the opportunities for gaining IT-based advantages are already dwindling. Best prac- tices are now quickly built into software or oth- erwise replicated. And as for IT-spurred indus- try transformations, most of the ones that are going to happen have likely already happened or are in the process of happening. Industries and markets will continue to evolve, of course, and some will undergo fundamental changes—the future of the music business, for example, continues to be in doubt. But history shows that the power of an infrastructural technology to transform industries always di- minishes as its buildout nears completion.

While no one can say precisely when the buildout of an infrastructural technology has concluded, there are many signs that the IT buildout is much closer to its end than its be- ginning. First, IT’s power is outstripping most

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Railroad track worldwide, in thousands of kilometers

1841 1846 1851 1856 1861 1866 1871 1876

Railways

U.S. electric utility generating capacity, in megawatts

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150

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Number of host computers on the Internet (in millions)

Information Technology

1990 1992 1994 1996 1998 2000 2002

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9,000

12,000

15,000

1920191719121907190218991889

Electric Power

The Sprint to Commoditization One of the most salient characteristics of infrastructural technologies is

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

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

Sources: railways: Eric Hobsbawm, The Age of Capital (Vintage, 1996); electric power: Richard B. Duboff, Electric Power in Manufacturing, 1889–1958 (Arno, 1979); Internet hosts: Robert H. Zakon, Hobbes’ Internet Timeline (www.zakon.org/robert/internet/timeline/).

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harvard business review • may 2003 page 8

of the business 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 dis- tribution network (the Internet) has caught up with demand—indeed, we already have con- siderably more fiber-optic capacity than we need. Fourth, IT vendors are rushing to posi- tion themselves as commodity suppliers or even as utilities. Finally, and most definitively, the investment bubble has burst, which histori- cally has been a clear indication that an infra- structural technology is reaching the end of its buildout. A few companies may still be able to wrest advantages from highly specialized ap- plications that don’t offer strong economic in- centives for replication, but those firms will be the exceptions that prove the rule.

At the close of the 1990s, when Internet hype was at full boil, technologists offered grand visions of an emerging “digital future.” It may well be that, in terms of business strategy at least, the future has already arrived.

From Offense to Defense

So what should companies do? From a practi- cal standpoint, the most important lesson to be learned from earlier infrastructural tech-

nologies may be this: When a resource be- comes essential to competition but inconse- quential to strategy, the risks it creates become more important than the advantages it provides. Think of electricity. Today, no com- pany builds its business strategy around its electricity usage, but even a brief lapse in sup- ply can be devastating (as some California businesses discovered during the energy crisis of 2000). The operational risks associated with IT are many—technical glitches, obsolescence, service outages, unreliable vendors or part- ners, security breaches, even terrorism—and some have become magnified as companies have moved from tightly controlled, propri- etary systems 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 tem- pering their vulnerabilities. Worrying about what might go wrong may not be as glamor- ous a job as speculating about the future, but it is a more essential job right now. (See the sidebar “New Rules for IT Management.”)

In the long run, though, 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 en- twined with so many business functions means that it will continue to consume a large por- tion of corporate spending. For most compa- nies, just staying in business will require big outlays for IT. What’s important—and this holds true for any commodity input—is to be able to separate essential investments from ones that are discretionary, unnecessary, or even counterproductive.

At a high level, stronger cost management requires more rigor in evaluating expected re- turns from systems investments, more creativ- ity in exploring simpler and cheaper alterna- tives, and a greater openness to outsourcing and other partnerships. But most companies can also reap significant savings by simply cut- ting out waste. Personal computers are a good example. Every year, businesses purchase more than 100 million PCs, most of which replace older models. Yet the vast majority of workers who use PCs rely on only a few simple applica- tions—word processing, spreadsheets, e-mail,

New Rules for IT Management

With the opportunities for gaining stra- tegic advantage from information tech- nology rapidly disappearing, many com- panies will want to take a hard look at how they invest in IT and manage their systems. As a starting point, here are three guidelines for the future:

Spend less.

Studies show that the com- panies with the biggest IT investments 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 easier to put your business at a cost dis- advantage.

Follow, don’t lead.

Moore’s Law guar- antees 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 technolog- ically flawed or doomed to rapid obsoles- cence. In some cases, being on the cut- ting edge makes sense. But those cases are becoming rarer and rarer as IT capa- bilities become more homogenized.

Focus on vulnerabilities, not opportu-

nities.

It’s unusual for a company to gain a competitive advantage through the dis- tinctive 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 control over their IT applications and networks to vendors and other third parties, the threats they face will prolifer- ate. They need to prepare themselves for technical glitches, outages, and security breaches, shifting their attention from opportunities to vulnerabilities.

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IT Doesn’t Matter

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and Web browsing. These applications have been technologically mature for years; they re- quire only a fraction of the computing power provided by today’s microprocessors. Never- theless, companies continue to roll out across- the-board hardware and software upgrades.

Much of that 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 computers, 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 con- tracts that ensure the long-term usefulness of their PC investments and impose hard limits on upgrade costs. And if vendors balk, compa- nies should be willing to explore cheaper solu- tions, including open-source applications and bare-bones network PCs, even if it means sacri- ficing features. If a company 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 their purchas- ing, companies have been sloppy in their use of IT. That’s particularly true with data storage, which has come to account for more than half of many companies’ IT expenditures. The bulk of what’s being stored on corporate networks has little to do with making products or serv- ing customers—it consists of employees’ saved e-mails and files, including terabytes of spam, MP3s, and video clips.

Computerworld

esti- mates that as much as 70% of the storage ca- pacity of a typical Windows network is wasted—an enormous unnecessary expense. Restricting employees’ ability to save files in- discriminately and indefinitely may seem dis- tasteful to many managers, but it can have a real impact on the bottom line. Now that IT has become the dominant capital expense for most businesses, there’s no excuse for waste and sloppiness.

Given the rapid pace of technology’s ad- vance, delaying IT investments can be another powerful way to cut costs—while also reducing a firm’s chance of being saddled with buggy or soon-to-be-obsolete technology. Many compa- nies, particularly during the 1990s, rushed their IT investments either because they hoped to capture a first-mover advantage or because they feared being left behind. Except in very

rare cases, both the hope and the fear were un- warranted. The smartest users of technology— here again, Dell and Wal-Mart stand out—stay well back from the cutting edge, waiting to make purchases until standards and best prac- tices solidify. They let their impatient competi- tors shoulder the high costs of experimenta- tion, and then they sweep past them, spending less and getting more.

Some managers may worry that being stingy with IT dollars will damage their com- petitive positions. But studies of corporate IT spending consistently show that greater expen- ditures rarely translate into superior financial results. In fact, the opposite is usually true. In 2002, the consulting firm Alinean compared the IT expenditures and the financial results of 7,500 large U.S. companies and discovered that the top performers tended to be among the most tightfisted. The 25 companies that deliv- ered the highest economic returns, for exam- ple, spent on average just 0.8% of their reve- nues on IT, while the typical company spent 3.7%. A recent study by Forrester Research showed, similarly, that the most lavish spend- ers on IT rarely post the best results. Even Ora- cle’s Larry Ellison, one of the great technology salesmen, admitted in a recent interview that “most companies spend too much [on IT] and get very little in return.” As the opportunities for IT-based advantage continue to narrow, the penalties for overspending will only grow.

IT management should, frankly, become boring. The key to success, for the vast majority of companies, is no longer to seek advantage aggressively but to manage costs and risks me- ticulously. If, like many executives, you’ve begun to take a more defensive posture toward IT in the last two years, spending more frugally and thinking more pragmatically, you’re al- ready on the right course. The challenge will be to maintain that discipline when the busi- ness cycle strengthens and the chorus 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 denoting the tech- nologies used for processing, storing, and transporting in- formation in digital form.

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Letter from John Seely Brown and John Hagel III

John Seely Brown, Former Chief Scientist, Xerox, Palo Alto, California

John Hagel III, Management Consultant and Author, Burlingame, California

Nicholas Carr’s article “IT Doesn’t Mat- ter” (May 2003) is an important, per- haps even seminal, piece. It effectively captures the zeitgeist among senior managers of large enterprises and gives eloquent voice to the backlash that has swept through management suites re- garding IT’s business value.

As Carr’s article says, businesses have overestimated the strategic value of IT. They have significantly overspent on technology in the quest for business value. They need to manage large por- tions of their IT infrastructures more rigorously to reduce capital investment requirements and operating costs. As companies become more dependent on IT platforms for their day-to-day opera- tions, they must focus on potential vul- nerabilities and more aggressively man- age for reliability and security. But such ideas are not inconsistent with the view that IT remains a profound catalyst for the creation of strategic differentiation.

In capturing today’s management mood so effectively, Carr provides a valu- able service. And yet his article is poten- tially dangerous, for it appears to en- dorse the notion that businesses should manage IT as a commodity input be- cause the opportunities for strategic dif- ferentiation with IT have become so scarce. By giving voice to this perspective and making it so compelling, Carr is likely to perpetuate a misguided view.

The choice of article title is even more unfortunate. It may grab readers’ atten- tion, but it is misleading: Carr is not claiming that IT does not matter; rather, his main assertion is that IT is diminish- ing as a source of strategic differentiation. Unfortunately, given today’s business climate, many readers will remember the article’s title and forget its nuance.

The lesson to be learned from the past several decades is that IT by itself rarely, if ever, confers strategic differentiation.

Yet, IT is inherently strategic because of its indirect effects–it creates possibilities and options that did not exist before. Companies that see, and act on, these possibilities before others do will con- tinue to differentiate themselves in the marketplace and reap economic rewards. IT may become ubiquitous, but the in- sight required to harness its potential will not be so evenly distributed. Therein lies the opportunity for significant stra- tegic advantage.

The experiences of the past several decades suggest three broad lessons re- garding IT:

Extracting value from IT requires in- novations in business practices. Com- panies that mechanically insert IT into their businesses without changing their practices for exploiting the new capabil- ities will only destroy IT’s economic value. Unfortunately, all too many com- panies do this. For that reason, the re- search findings by Alinean and For- rester–that IT spending rarely correlates with superior financial results – are not surprising.

In October 2001, the McKinsey Global Institute published a study on “U.S. Pro- ductivity Growth, 1995–2000.” That study was the first disciplined attempt to look at the correlation between IT in- vestments and productivity by industry sector. The results were revealing. The study found a significant positive corre- lation between IT investments and pro- ductivity in only six out of 59 industries. The other 53 sectors, accounting for 70% of the economy, in aggregate saw negli- gible productivity improvements as a re- sult of their IT investments.

Why only six industries? In each of these sectors, one or more companies in- troduced significant innovations in busi- ness practices to leverage their IT capa- bilities. This set into motion competitive pressures that forced other companies

in the sector to implement comparable business practices. The classic example was retailing, where Wal-Mart innovated continuously around new generations of IT. Even as competitors adopted Wal- Mart’s practices, the retailing giant fo- cused on the next wave of innovations, preserving a significant productivity ad- vantage (on the order of 40%) relative to competitors.

Significant opportunities for innova- tion continue to occur because advances in IT create possibilities not previously economically available. With few excep- tions, companies have tended to think too narrowly about the possibilities. In particular, many companies have be- come locked into the view that IT can re- duce transaction costs but then think of transaction costs as encompassing only the transfer of bits and data from one place to another. Viewed more broadly, transaction costs encompass such chal- lenging business issues as the creation of meaning, the building of trust, and the development and dissemination of knowledge. These dimensions of trans- action costs often represent significant bottlenecks to performance improve- ments and competitive advantage. Com- panies like Cisco in their e-learning ini- tiatives are just beginning to explore the innovations in business practices re- quired to exploit IT’s potential for ad- dressing such business challenges.

Companies also think too narrowly about IT’s possibilities when they focus so heavily on business practices within the enterprise. In fact, many opportuni- ties for business-practice innovations ex- tend beyond the walls of the enterprise to include relationships with other com- panies. Rather than think in narrow transactional terms, as evidenced by the first wave of business-to-business mar- ketplaces, executives would be far better advised to think in terms of opportuni-

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ties to build long-term relationships with companies possessing complementary assets and capabilities. Companies like Li & Fung, with its orchestration model based on a loosely coupled approach to process management spanning thou- sands of companies, suggest opportuni- ties for redefining relationships among companies and, in the process, creating significant differentiation.

In short, many executives have started to view IT as a commodity because they have not thought aggressively enough about how IT can bring about new busi- ness practices. The differentiation is not in IT itself but in the new practices it en- ables. IT does indeed matter. Although IT may be ubiquitous and increasingly less expensive, the insight and ability re- quired for it to create economic value are in very short supply. It is far different from commodities like wheat and alu- minum, where the processing operations are well understood and the economic advantage lies in being able to source the commodity at lower cost.

IT’s economic impact comes from in- cremental innovations rather than “big bang”initiatives. In highlighting the sig- nificant opportunities for new business practices enabled by IT, we do not want to be misinterpreted as advocating big bang efforts to transform companies overnight. If we’ve learned one thing from the 1990s, it’s that big bang, IT- driven initiatives rarely produce ex- pected returns; they are complicated and expensive, take a long time to imple- ment, and are fraught with risk. Rather than create economic value, more often than not they destroy it.

The companies most successful in har- nessing IT’s power typically proceed in waves of relatively short-term (often six to 12 months) operating initiatives de- signed to test and refine specific innova- tions in business practices. Changing

business practices creates unintended consequences. By “chunking up” inno- vations in business practices and tying these initiatives to explicit operating per- formance metrics, management can cre- ate tighter feedback loops and accelerate the learning process. If done right, these

innovations can also reduce the finan- cial risks by generating near-term re- turns that can help fund subsequent waves of operating initiatives. Politically, this kind of incremental approach, with its relentless focus on tangible near-term returns, also helps deepen organiza- tional support for new business practices while neutralizing potential opposition.

The strategic impact of IT invest- ments comes from the cumulative ef- fect of sustained initiatives to innovate business practices in the near term. If IT’s economic value comes from very tac- tical near-term initiatives to innovate busi- ness practices, aren’t we in fact conceding that IT has lost its power to provide stra- tegic differentiation? Aren’t we just say- ing that IT can provide tactical advantage that will be quickly copied by competi- tors? Far from it. The strategic differen- tiation emerges over time, based less on the specific innovations in business prac- tices at any point in time and much more on the ability to continually innovate around IT’s evolving capabilities.

To understand this point, it is essential to differentiate the characteristics of IT as an infrastructure technology relative to the variety of other infrastructure tech- nologies cited by Carr – steam engines, railroads, electricity, and telephones. In each of those prior areas, the underlying technology burst forth in one relatively concentrated innovation. While the tech-

nology’s performance continued to im- prove after it was introduced, the rate of improvement was far more modest and reached a point of diminishing returns much sooner than we have seen in the decades since the introduction of digital technology. Thus, the ability to contin-

ually innovate business practices around these technologies also reached a pe- riod of diminishing returns. Another result was that these prior generations of technology produced a dominant de- sign or architecture relatively quickly – for example, the standardization of rail- way gauges or alternating-current spec- ifications. The emergence of these dom- inant designs or architectures catalyzed the various industry shakeouts and helped to further standardize the use of these technologies.

IT thus far has followed a very differ- ent path. Improvements in processing power, storage capacity, and bandwidth have continued at a rapid and sustained pace. Indeed, these performance im- provements have had a multiplicative effect, coming together, for example, to form entirely new ways of storing, dis- tributing, and accessing data. Not only are smart things getting smarter, but this technology is also being used to make dumb things smarter through such ex- tensions as MEMS, RFID, and telematics. IT is also extending its reach to biologi- cal organisms, redefining the ways we di- agnose, treat, and even design life forms.

This sustained pace and expanding range of digital technology innovation continues to precipitate fundamental new opportunities for thinking about how we organize such technology. We are now on the cusp of a shift to distrib-

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If we’ve learned one thing from the 1990s, it’s that big bang,

IT-driven initiatives rarely produce expected returns.

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uted service architectures that will un- leash entirely new capabilities at least as significant as the shift from proprietary and centralized mainframe architec- tures to more distributed client-server architectures. Far from settling down into a dominant design or architecture, IT has crashed through several genera- tions of architectures and continues to generate new ones. In fact, the emerging service-oriented architectures enable a kind of radical incrementalism that tran- scends what one might expect from sim- ple incrementalism. Coupled with a strat- egy focused on both short-term wins and long-term goals, this new incremental- ism is a source of competitive advantage.

The underlying technology compo- nents may be widely and cheaply avail- able, but the skills required to organize them into high-value architectures are still in very short supply, and a new gen- eration of skills must be developed with each new generation of architecture. These new architectures amplify the possibilities enabled by the perfor- mance improvements in the underlying technology components.

The gap between IT’s potential and business’s realization of that potential has not narrowed. Instead, it has steadily widened over the past several decades. This gap creates enormous instability in the business world. Wherever there is so much potential for instability, there is also fertile ground for new strategies.

To further amplify the effect of these performance improvements in terms of real business-practice innovation and to convert tactical advantage into strategic advantage, something else is required. Companies need to align themselves around a long-term view of the chal- lenges and opportunities brought about by IT. Senior managers need a shared but high-level view of the kinds of mar- kets they are likely to be operating in

and the kinds of companies they will need to become if they are to continue creating economic value. This long-term view helps to focus and prioritize near- term innovations in business practices, thereby helping to build a sustainable strategic advantage across multiple waves of initiatives. It is exactly this kind of long-term view that guides Dell and Wal-Mart in their ongoing use of IT to create strategic advantage.

Without this view, even the most ag- gressive near-term incremental initia- tives run the risk of becoming dispersed over too many fronts. The continuing performance improvements of IT create far more possibilities than any company can or should pursue. The temptation in this kind of environment is to launch too many initiatives. The result is that few, if any, of the near-term initiatives produce the expected results. Without focusing on the long-term, companies will have difficulty building momentum across multiple waves of operating ini- tiatives. Each new wave responds to the events of the moment rather than driv- ing toward a common destination. The focus remains entirely on near-term ini- tiatives rather than on building a more sustained capability to innovate and leverage IT’s new capabilities. Short-term tactical advantage remains just that–tac- tical and transitory. In such a world, it is easy to see why management could come to believe that IT does not pro- duce significant strategic differentiation.

Paradoxically, technology vendors themselves are somewhat responsible for the widespread belief that IT doesn’t produce significant strategic differentia- tion. For too long, they have built their businesses around big bang, IT-centric selling propositions. Rather than help companies understand that IT is only a tool, technology vendors have tended to present it as a panacea.“Buy this tech-

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Rather than help companies understand that IT is only a tool,

technology vendors have tended to present it as a panacea.

“Buy this technology and all your problems will be solved.”

nology and all your problems will be solved.” It is a seductive proposition. Rather than focusing on the enormous challenge of innovating in business prac- tices and creating the discipline required to generate economic value from these innovations, vendors have convinced many companies that signing a purchase order would deliver the required value. They even managed to convince compa- nies, for a while, that they needed to buy a lot of the technology because the only way to stay competitive was through massive IT implementations. When the anticipated results didn’t materialize, the backlash began to gather force in execu- tive suites. Executives swing from one extreme to the other. If IT doesn’t solve all their business problems, then it must not matter, at least in terms of strategic value. We still need it to run our busi- ness, but let’s buy as little as we can and squeeze the vendors as much as we can.

It has never been true that IT matters in isolation. It only matters in the context of a concerted effort to innovate based on new possibilities and opportunities created by the technology. Then it mat- ters – and will continue to – a lot.

That’s a far more difficult message for IT vendors to communicate to custom- ers. It’s an even more difficult message for the vendors to execute against. It means changing their economic model, selling model, organizational model, and product strategies in fundamental and very painful ways. Yet, the alterna- tive for technology vendors is to cope with the growing belief that IT really doesn’t matter, at least in terms of its po- tential for strategic differentiation. In the end, that will be a far more painful world for them to confront. It will also be a tragedy for businesses that continue to miss the opportunities IT creates.

John Seely Brown and John Hagel III

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Letter from F. Warren McFarlan and Richard L. Nolan

F. Warren McFarlan, Albert H. Gordon Professor of Business Administration,

Harvard Business School, Boston

Richard L. Nolan, William Barclay Harding Professor of Business Administration,

Harvard Business School, Boston

In no other area is it more important to have a sense of what you don’t know than it is in IT management. The most dan- gerous advice to CEOs has come from people who either had no idea of what they did not know, or from those who pretended to know what they didn’t. Couple not knowing that you don’t know with fuzzy logic, and you have the makings of Nicholas Carr’s article.

Carr’s examples of railroads and elec- tric power played out over 80 years, (not 40, as he suggests), turning society, busi- ness organizations, and lifestyles inside out. The deeper societal impacts came during the second 40 years, as society’s insights on how to use the technology changed. It is worth noting that al- though these technologies mutated sig- nificantly (for trains, it meant moving from 15 miles an hour to 80 miles an hour), the mutation was on a totally dif- ferent and much smaller scale than IT’s.

The cost performance of IT technolo- gies over the first 40 years changed by roughly 10 to the seventh, and for the foreseeable future will continue to evolve at the same rate. That is in sharp contrast to a train, which after 80 years moved six times faster than it had in the earlier period. This is impressive, but not nearly as dramatic as a computer pro- duced in 2000, which runs 10 million times faster than a 1960s’ computer.

Carr’s graph on information technol- ogy stands as a subject lesson for Darrell Huff’s well-known book How to Lie with Statistics. Carr’s chart would look very different if he had tracked the number of MIPS or CPU cycles on the network from 1990 to 2002. Even using a log scale on the vertical axis would be barely enough to tilt a vertical straight line enough to create something resembling the curves of the other two schematics in

Carr’s article. With this explosion of cost- effectiveness has come the ability to do things truly differently. American Hospital Supply’s distribution software and American Airlines’ SABRE reserva- tion system are examples of victories in past technologies. The firms were the first in their industries to see technol- ogy’s transforming potential, they had the courage to invest in its performance, and they used it to gain a significant competitive edge. It is naive to assume that other sharply discontinuous tech- nologies will not offer similar transfor- mation opportunities in the future.

In our view, the most important thing that the CEO and senior management should understand about IT is its associ- ated economics. Driven by Moore’s Law, those evolving economics have enabled every industry’s transaction costs to de- crease continually, resulting in new eco- nomics for the firm and creating the fea- sibility of products and services not possible in the past. The economics of fi- nancial transactions have continually dropped from dollars to cents. New en- trants have joined many industries and have focused on taking strategic advan- tage of IT’s associated economics. Com- pany boundaries have become perme- able, organic, and global in scope through IT networks and the Internet.

As the pace of doing business in- creases, the CEO and senior manage- ment team must be aware of how IT can change rules and assumptions about competition. The economics of conduct- ing business will likewise continue to im- prove–providing opportunities for busi- nesses to expand the customer value proposition by providing more intangi- ble information-based services. For ex- ample, the automobile value proposition continues to expand with technology

that continuously senses road conditions and applies the appropriate wheel trac- tion and suspension system pressures.

CEO and senior management must understand that historical constraints of every kind continue to be knocked off IT because it is a “universal information- processing machine.” Before e-mail and the Internet, the cost of communica- tions was seen as limiting IT’s wider use. Packet switching was invented as a way to digitize voice, data, and video in a matter that enabled digital computers (and its associated economics) to com- municate, and the cost of communica- tion sharply and suddenly dropped. Sim- ilar situations have transpired with the advent of digitized photography, use of radio frequencies for various handheld IT appliances, and the development of such products as elevators that call in to the service center or to a computer that automatically dispatches collective soft- ware or people when a part or system is about to fail. Often, only the senior man- agement team’s imagination limits new IT-based opportunities.

Our research suggests the following: New technologies will continue to

give companies the chance to differenti- ate themselves by service, product fea- ture, and cost structure for some time to come. The first mover takes a risk and gains a temporary advantage (longer if there are follow-on possibilities). The fast follower is up against less risk but also has to recover lost ground. Charles Schwab versus Merrill Lynch and Wal- greens versus CVS are examples of this playing out over the past decade. Our advice to the CEO is to look at IT use through several different lenses. One lens should be focused on improving cost savings and efficiencies. Another should be focused on the incremental

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improvement of organizational struc- ture, products, and services. Still another should be focused on the creation of stra- tegic advantage through extending com-

petitive scope, partnerships (customers and other parties), the changing of the rules of competition, and the provision of new IT-based services to extend the customer value proposition.

Unless nurtured and evolved, IT- enabled competitive applications, like many competitive advantages, don’t en- dure. Even historic strategic systems like American Hospital Supply’s (after a de- cade of financial malnourishment) may wind up turning into a strategic liability. Others, however, like American Airlines’ SABRE have shown extraordinary ro- bustness and have permitted the survival of otherwise doomed organizations.

Evaluating these opportunities as well as thinking through their implications and timing, is vitally important, nonbor- ing work. The new technologies will allow new things to be transformed in nonlinear ways. Radio-frequency identi- fication devices for grocery stores, smart cards, and automated ordering systems for hospital physicians are all examples of new process targets that technologies will soon address. In the more distant fu- ture we will see the improved creation of drugs and treatments through the ability to rapidly and more deeply analyze huge databases. Understanding the potential and then deciding when the time is right to seize these transformative applica- tions will be neither routine nor boring for the CEO or CIO.

Letter from Jason Hittleman

Jason Hittleman, IT Director, RKA Petroleum Companies,

Romulus, Michigan

I largely agree with Nicholas Carr’s sug- gestions on how companies should re- spond to the unbearable reality that IT is becoming more of a commodity. But why does Carr suggest that IT manage- ment should become boring? Are lead- ership tasks such as managing risk and reining in costs any less engaging or challenging than seeking competitive advantage is?

Competitive advantage should never be the sole objective of IT. Rather, man- aging costs and assessing risk must be- come standard objectives as well. By fo- cusing on systems and processes, more so than on just technologies, and by cou- pling the suggestions outlined in the article with an approach that embraces the mission of the company, IT man- agement can remain challenging and rewarding.

IT will always matter–it will just mat- ter in different ways now. IT must con- tinue to support the business – not just through the logical application of tech- nologies but also through the logical ap- plication of common sense.

Jason Hittleman

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Grid computing, standardization of components, and open systems, far from stifling differentiation, provide a stable platform to build on and offer new ways

of differentiating, either by cost structure, product, or service. Just as literacy stimulated innovation, so do open systems and grids.

Outsourcing the commodity infrastructure is a great way to

control costs, build competence, and free up resources, which can be used to com- bine data bits in creative ways to add value. Relatively bulletproof operational reliability will be a key part of the price of success. Back-office or server farms, help desks, and network operations will be outsourced to specialists to attain this reliability (at rock-bottom costs). Pack- ages like SAP further help remove com- modity maintenance activities and allow firms to better analyze customer infor- mation and provide service at the sharp end. The package of skills needed inside an organization is changing very fast for competition in the information age.

The jobs of the CTO and CIO are and will be of unparalleled importance in the decades ahead. Max Hopper of Ameri- can Airlines and Paul Strassmann of Kraft and NASA are not the last of a dying breed of dinosaurs, but prototypes of the leadership skills needed for survival.

If you take 1955 (with the IBM 701) as the start date and use 80 years as a tech- nology cycle, 2035 may not be far off the mark for playing much of this out. Even then, the special recombinant nature of this technology makes us uncomfortable calling an end date. We wish Carr were right, because everyone’s golf handicap could then improve. Unfortunately, the evidence is all to the contrary.

F. Warren McFarlan and Richard L. Nolan

The jobs of CTO and CIO are and

will be of unparalleled importance

in the decades ahead.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

Letter from Paul A. Strassmann

Paul A. Strassmann, Executive Advisor, NASA; Former CIO of General Foods,

Kraft, Xerox, the Department of Defense,

and NASA

Nicholas Carr pronounces information technology strategically irrelevant to businesses and recommends adoption of the following policies: Cut IT bud- gets; do not invest in information tech- nology innovations; invest only after others have succeeded (follow, do not lead); delay IT investments because prices are dropping and everything will be less expensive later; refocus from seeking opportunities to managing vul- nerabilities and risks; disregard innova- tive offerings because vendors are seek- ing added revenues and are therefore suspect; and delay innovation as the pre- ferred way for cutting IT costs. These recommendations are a departure from policies that have been pursued for the past 50 years. Therefore, each of the as- sertions Carr makes to support them warrants a commentary.

Assertion: IT has lost its strategic value. Carr argues that IT is no longer strategic because it has ceased to be a scarce good, and he contends that profit margins on IT-related innovations will consequently disappear. He does not support this argument with research findings (except for a reference to my own research and a misunderstood ex- ample from the Alinean Corporation). He bases his conclusions entirely on his reasoning, by analogy, that IT must fol- low the patterns that arose as businesses adopted steam engines, railroads, tele- phones, electric generators, and inter- nal combustion motors. But any proof that rests entirely on analogies is flawed. This technique was used to uphold me- dieval dogma, and it delayed the ad- vancement of science by centuries.

Carr’s logic is defective because his examples deal exclusively with capital- intensive goods. Capital investments in machinery do indeed exhibit diminish- ing returns as markets saturate and the difference between marginal costs and marginal revenues disappears, but in-

formation goods are not subject to such effects. The marginal cost of information goods – especially of software, which now accounts for the dominant share of information technology costs – does not rise with increased scale. It drops as- ymptotically toward zero. Therefore, any firm that can steadily reduce marginal costs by deploying IT can make infor- mation technology investments enor- mously profitable and can generate a rising strategic value.

Assertion: IT is a commodity that does not offer a competitive distinc- tion and therefore does not provide a competitive advantage. It is true that Microsoft desktops running on Intel processors have become widespread, but they account for less than 12% of IT budgets, and that number is declining. Most IT products are diverse – they cer- tainly are not commodities. And while many business processes do rely on stan- dardized desktops, are those processes therefore doomed to uniformity? In other words, does partial standardiza- tion wipe out opportunities for gaining competitive advantage? The evidence does not support such a conclusion.

Competitive advantage is not the re- sult of personal computers. It is the result of effective management by skilled and highly motivated people. Since 1982 I have shown (in numerous publications) that firms using identical information technologies and spending comparable amounts on IT display an enormous variability in profitability. My research, now confirmed by other investigators, has demonstrated that profitability and IT spending are unrelated, even if iden- tical technologies are used.

Assertion: Because IT is an infra- structural technology that is easily ac- quired and copied, it cannot offer a competitive advantage. Easy availabil- ity of information technology makes it increasingly valuable. E-mail, fax, and

cell phones gain in utility as they be- come more widely used, because they can be acquired on attractive terms. I have spent 40 years of my career imple- menting information technologies; for the first 30 years, that was a great pain. The technology was expensive, faulty, insecure, hard to manage, and unstable. I finally see the advent of an era in which low-cost ownership of informa- tion technologies is possible. This will be accomplished through services in which the vendors assume most of the risks of failure while increasing ease of use for billions of people.

Carr’s advice to back off from infor- mation technologies just as they emerge from a long gestation period is mistimed and abortive. Information technology must be easily acquired and made avail- able to everyone so that the global com- munity can increase the standard of liv- ing through easier communications and lower-cost business transactions. Wide- spread availability creates new business opportunities.

Assertion: The influence of IT will henceforth be macroeconomic and not a means for competitive differen- tiation. The proposition that IT benefits will flow to consumers and not to firms is a contradiction. Sustainable profits materialize when benefits accrue to cus- tomers. There are as yet enormous gains in value to be delivered in health, edu- cation, entertainment, business services, and especially government. Extending the benefits of the global division of labor and the inclusion of billions of new consumers into the global market- place will generate trillions of dollars of new revenues. Enabling the global mar- ketplace to function effectively will re- quire enormous new IT investments by individual firms. Surely there will be millions of enterprises that will be able to take advantage of such opportuni- ties. The lower entry costs for using the

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power of information technologies will make that feasible. Carr completely dis- regards the explosive growth of small businesses, a development made possi- ble by the Internet. Information tech- nology is a killer of bureaucracies and a reducer of overhead expenses; those qualities increase its microeconomic vi- ability. Asserting that benefits will ac- crue only to the economy at large and not to individual firms is a prescription for opting out of the information-based competitive races in the years to come.

Assertion: IT is primarily a transport technology, and because it is open to everyone, it offers no advantage. This proposition is a misunderstanding of what IT is all about. Message transport is not the primary reason why organiza- tions deploy IT. Information technology adds value mainly by improving the management of information intelli- gence and collaboration among indi- viduals, groups, and organizations. The transport function is essential, but IT’s importance as a conduit is only tertiary. The value is in the message itself, not in the means of conveyance!

Information technologies now pro- vide the primary means for extending the value of a firm’s knowledge capital. They help companies manage the ex- ploding accumulation of scientific, re- search, customer, engineering, property, and intellectual assets. Computers are the repositories of intelligence about customers, suppliers, and products; those repositories constitute the most valu- able knowledge assets for any firm that realizes returns greater than its cost of financial capital. It is noteworthy that information technology is now recog- nized as the means for waging informa- tion warfare – a term that I apply not only to the military but also to com- mercial confrontations.

I have shown in published articles how and why firms’ knowledge capital is

now worth more than the assets re- ported on conventional financial state- ments. I have shown how people be- come enormously empowered when aided by information technologies be- cause these tools magnify their ability to perform complex tasks. By trivializing information technologies as electronic

messengers, Carr would prevent organi- zations from understanding how to de- ploy IT in such a way that it can be the weapon of choice in competitive con- tests.

Assertion: IT functions will be ho- mogenized, and proprietary applica- tions are therefore doomed. Citing the proliferation of off-the-shelf, standard applications, such as Microsoft Office, Carr predicts that information practices will march inexorably toward homo- geneity. In such an environment of sameness, he says, no companies will be able to realize competitive gains.

The use of a standard software pack- age does not doom an organization to homogeneity that destroys value. I sus- pect that Carr used the same software to write his essay that I did to write this cri- tique, yet we have arrived at opposite conclusions! I consider the standardiza- tion of communication protocols, Web services, database languages, and appli- cations to be a value-enhancing devel- opment, not a value detractor. I am par- ticularly in favor of open systems that will make systems integration – now an enormous, resource-sapping burden – easy and financially attractive. Stan- dards spare IT executives from unceas- ing difficulties in assuring the interop- erability of routine business processes.

With standards in place, the IT staff can finally concentrate on what is indeed value enhancing for the enterprise, such as applications that reflect the firm’s dis- tinctive characteristics and allow it to share information easily with customers and suppliers. Applications that were completely custom-designed in the

past – and that Carr praises – inhibited the economic contributions of IT.

Assertion: Corporations will adopt generic applications; business pro- cesses will therefore be uniform and without competitive advantage. This assertion can be contradicted by anyone who has had experience with one-code- fits-all “enterprise” software suites that claim to deliver answers to most busi- ness-systems problems. Even the most tightly controlled generic application suite (SAP’s enterprise resource plan- ning application) can deliver completely different results for look-alike firms.

For routine business processes, ge- neric applications can be useful in re- ducing the total cost of ownership of computer systems. But such applica- tions have also been known to destroy firms that have attempted to squeeze unique company processes into generic molds. Carr’s prediction that generic ap- plications will take over is not supported by firms’ rising reluctance to install com- prehensive enterprise solutions. In fact, by insisting on data and protocol inter- operability, firms are seeking greater freedom to combine applications from a growing diversity of software offerings.

Assertion: Existing IT capabilities are largely sufficient for corporate needs. It is hubris to assert that we have

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After 50 years of cyclical growth, there is not a shred

of evidence that IT developments have reached a plateau,

as did innovations in industrial-age machinery.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

already attained the pinnacle of what is ultimately achievable. The history of that assertion is a history of failures. The Chinese burned their fleet when they thought nothing further could be gained from overseas trade. The leaders of the Soviet Union retained their bankrupt central planning system because they considered it perfect for managing the economy.

Corporations are confronting in- creased uncertainty about markets, com- petition, resources, employee attitudes, and the impact of legislation. The cor- porate environment requires more com- plex coordination than ever before, and there is less time for taking corrective measures. As a result, there is a need for

more and better information technolo- gies. Carr’s view that the time has come to arrest further IT developments and take a static posture is a prescription for inaction as challenges keep rising.

Assertion: Widespread adoption of best-practices software makes IT-based advantages disappear for everyone. The dissemination of information about best business practices is indeed gain- ing, and competitors are therefore get- ting smarter and faster. But Carr’s view– that wins cannot be sustainable if every- one has access to the same means for engaging in contests – disregards the dynamics of competition. The prolifera- tion of knowledge about how to design ever faster sailing boats has jacked up the cost of participating and increased the difficulty of winning, but it has not discouraged races. The dissemination of business best practices means survival today requires speed and innovation –

and greater adoption of information technologies. The arrival of a new in- formation-based best practice is usually seen by the more aggressive leaders as a signal to commence yet another round of more expensive competition with more, not less, IT.

Assertion: IT is arriving at the end of its growth cycle and is reaching satu- ration. After 50 years of cyclical growth, there is not a shred of evidence that IT developments have reached a plateau, as did innovations in industrial-age machinery. Physical mechanics impose limits on the size and performance of lo- comotives, turbines, airplanes, refriger- ators, and trucks; there are no such con- finements to information technologies,

as far as we can tell. Software can endow computing devices with unrestricted variability in features and functions. The capability of a software-enriched global network has no boundaries. The current cyclical correction to the excesses of the past decade is a crucible for generating more and better innovation.

Assertion: IT risks now exceed ad- vantages, requiring shifts in executive attention. The need to pay more atten- tion to IT risks is indisputable, but I do not agree that the risks exceed the ad- vantages. Carr advises executives to adopt a reclusive posture – to withdraw from the search for new opportunities. He recommends pursuing cost reduc- tions through cutting off IT instead of searching for opportunities in the steady stream of new ideas.

I favor cost cutting, especially for any bloated computing capacity that was acquired in a frenzy of hype without

an enterprise architecture or alignment with a strategic plan. And I share Carr’s concerns about information security, network reliability, and systems corrup- tion. But cutting off innovative invest- ments is not the way to address those problems. The cure for most of the so- called “legacy” systems is radical inno- vation, such as shifting the accountabil- ity for systems performance to vendors, who will then have to face up to the re- sponsibility of delivering reliable and robust applications. I have examined such options. An examination of a large collection of applications shows that the most financially attractive way of deal- ing with existing risks is to replace the systems. Instead of feeding the increas- ingly costly IT infrastructure and throw- ing money at rising software mainte- nance costs, companies should be ready to engage in yet another IT investment cycle to replace old systems.

• • • Carr’s assertions and recommendations could inhibit the most innovative and value-creating means available for in- creasing the economic benefits to en- terprises and customers. Information technologies are too important to be pronounced irrelevant.

Paul A. Strassmann

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D o e s I T M a t t e r? A n H B R D e b a t e • W E B E X C L U S I V E

The dissemination of business best practices means

survival today requires speed and innovation – and

greater adoption of information technologies.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

Letter from Marianne Broadbent, Mark McDonald, and Richard Hunter

Marianne Broadbent, Group Vice Presi- dent and Gartner Fellow, Global Head

of Research, Executive Programs, Gartner

Mark McDonald, Vice President and Research Director, Executive Programs,

Gartner

Richard Hunter, Vice President and Gart- ner Fellow, Executive Programs, Gartner

Nicholas Carr’s well-written article takes the view that IT is now like other infra- structures and that, on average, the com- panies that are the biggest investors in IT are not the most successful in terms of business performance. He contends that firms should now focus on carefully managing costs and risks and not get carried away with IT’s strategic role.

Carr is correct that hardware and network connectivity are commodity businesses and that some IT infrastruc- ture services have evolved into com- modity services. But the article misses a big part of the story. IT does matter, but not because of hardware or even stan- dard commercial software. It is because the intelligent and innovative applica- tion of information solves business problems and creates customer value at high speed, low cost, and the right scale. To put it simply, it’s not about the box; it’s about what’s inside the box.

Carr is right that the simple posses- sion of infrastructure technology was for a time a source of competitive ad- vantage. In the 1970s, the Dallas Cow- boys’ Tex Schram used a computer to manage information on NFL draft choices, assess the strengths of other football teams, and perform additional tasks that increased the Cowboys’ abil- ity to use information competitively. But the advantage disappeared when other teams began using computers. The source of competitive advantage shifted from simply having a computer to knowing how to use it.

Carr’s examples are of companies looking for competitive advantage from the intrinsic performance characteris- tics of the hardware. In the case of

American Hospital Supply, the charac- teristic was connectivity; at American Airlines, it was management of large amounts of complex data. In high tech, whenever you rely on hardware capa- bility as a competitive technology, it’s only a matter of time before others catch up.

The differentiation is about informa- tion, business processes, and applica- tions. Sustainable advantage comes from consistently delivering greater value to customers. This comes from the “information” in information technol- ogy – that is, it comes from better un- derstanding the customer, applying that understanding to your products, ser- vices, and processes, and integrating these to deliver on an improved value proposition.

That’s what Wal-Mart and Dell have done. They have continuously used in- formation better and with greater align- ment to their value proposition. It’s true that these companies have also contin- uously reinvested in new hardware and software platforms. But the sheer scale of their investment in infrastructure isn’t the most important factor. Why have competitors been unable to copy Wal-Mart’s and Dell’s successes? The an- swer lies in large part in Wal-Mart’s and Dell’s ability to integrate IT into busi- ness processes – their “benefit conver- sion” ability.

It has been known for many years that the biggest investors in IT don’t get the most value from the technologies. It is a key message in the Weill and Broad- bent book Leveraging the New Infra- structure: How Market Leaders Capitalize on Information Technology (Harvard

Business School Press, 1998) and in much subsequent work. What makes the difference is a set of benefit conver- sion factors that influence how well in- vestments in IT-enabled business initia- tives are turned into real business value. These factors include clear decision rights, accountability for IT-related de- cisions, integrated business and tech- nology planning and execution, and the existence and reinforcement of strong collaborative behaviors. Many of these are not about IT as such but about ef- fective executive processes, effective accountabilities, and business focus.

The major messages we have been giving CIOs over the past two years have been that they should manage costs and risks aggressively and work with business colleagues to design IT governance thoughtfully. Beyond that, as in any business area, executives must understand the need for risk-managed innovation.

Innovation through electronically enabled services, processes, and prod- ucts has only just begun. As in the past, the benefits will go to firms where the business focus is clear and disciplined and where there is well-informed and integrated decision making across the organization. The danger is that by scanting the fantastic potential for in- novation that lies ahead in IT, Carr will lead executives to focus only on con- trolling IT costs. That is a necessary dis- cipline, but it is not the route to real business advantage.

Marianne Broadbent, Mark McDonald,

and Richard Hunter

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Letter from Bruce Skaistis

Bruce Skaistis, President, eGlobal CIO, Tulsa, Oklahoma

In “IT Doesn’t Matter,” Nicholas Carr is essentially issuing a warning: Organiza- tions need to get realistic about what IT can and cannot do for them. In spite of all the hype, wireless systems and other exciting new computer technologies aren’t going to create lasting strategic advantages.

I also think Carr is trying to help us learn from the mistakes we made during the late 1990s, when companies were making huge investments in e-business initiatives in an attempt to achieve com- petitive and strategic advantages. Many

of those investments never produced sig- nificant benefits–many of the initiatives were never completed. With the benefit of hindsight, Carr is telling us most of those gigantic efforts were never going to deliver real strategic advantage, even if they had been successful.

IT does matter, and organizations should do the following to make sure their IT efforts and resources continue to matter:

Aim your IT efforts and resources at helping the business achieve its strate- gic objectives. Use IT to optimize and streamline critical business processes; speed up access to accurate informa- tion about operations, customers, and competitors; and integrate systems with customers and suppliers. Establish an active, effective IT management or gov- ernance structure, so leaders company- wide can participate in establishing tech- nology priorities, allocating resources, and monitoring performance.

Focus on using IT to respond quickly to changing conditions and require- ments. Everything in business today has to be done faster than ever, and every-

Letter from Vladimir Zwass

Vladimir Zwass, Distinguished Professor of Computer Science and MIS, Fairleigh

Dickinson University, Teaneck, New Jersey,

[email protected]

Two of the other articles in your May 2003 issue best refute Nicholas Carr’s claim that “IT Doesn’t Matter.” As Gary Loveman describes in “Diamonds in the Data Mine,” Harrah’s Entertainment “has outplayed its competition” by bas- ing its deep service orientation on how valuable its different kinds of customers are. The firm determines this value by mining the multifaceted and volumi- nous transactional information in its database. This is a textbook example of the strategic deployment of informa- tion technology to gain competitive ad- vantage. Daniel Corsten and Nirmalya Kumar report in their Forethought ar- ticle,“Profits in the Pie of the Beholder,” that the suppliers that comprehensively adopt the IT-based “efficient consumer response” practices in their relationships with Sainsbury’s Supermarkets attain higher levels of economic performance than do their peers. This is an excellent example of the successful use of inter- organizational systems for competitive advantage.

The hardware and software compo- nents of information technology do in- deed provide the infrastructure for data storage, communication, and process- ing. This basic aspect of IT is certainly being commoditized. However, as these and other examples show, information systems can be embedded in a com- pany’s organizational and interorga- nizational processes and combined in- extricably with other capabilities and assets to produce superior performance. Dell’s pull-based order processing and Wal-Mart’s supplier-relationship man- agement come to mind. The implemen- tation of these IT-based systems does not come cheaply and requires contin- ual retargeting, yet it underlies the suc- cess of many firms.

Vladimir Zwass

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D o e s I T M a t t e r? A n H B R D e b a t e • W E B E X C L U S I V E

thing is subject to immediate change. Therefore, IT decisions have to be made more quickly. Put critical IT initiatives at the top of the priority list. And slot them on a fast track; they need to be com- pleted in the shortest time possible and updated frequently. (After all, your com- petitors are probably just a few steps behind.)

Focus on optimizing the cost effec- tiveness and performance of IT re- sources. Despite the fact that IT invest- ments are typically among the largest a company makes, IT resources haven’t

always been under the same pres- sure as other functional areas to improve overall corporate perfor- mance and reduce costs. Now that some of the IT mystique has been eliminated, corporate IT has to play by the same rules as everyone else. That means refocusing the entire

company on the importance of IT per- formance and cost effectiveness; creat- ing new IT management structures to monitor performance and cost effec- tiveness; consolidating resources; and streamlining processes.

Focus on minimizing IT risks. Carr rightfully concludes that minimizing IT risks is a critical issue for all companies. Almost every day there is a new story about a major company or government agency having their networks hacked or their Web sites attacked. Every company should have some of its most talented people worrying about how to manage its IT efforts and outsourcing relation- ships; protect its networks, systems, and information; and mitigate other IT risks.

In a very straightforward way, Carr has put a stake in the heart of the misdi- rected thinking about IT that flourished in the free-spending 1990s. It’s time for enterprises to be realistic about IT’s role in their future. IT can produce signifi- cant strategic and competitive benefits for an organization – but only when it is used effectively.

Bruce Skaistis

Now that some of the IT mystique

has been eliminated, corporate IT

has to play by the same rules as

everyone else.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

Letter from Mark S. Lewis

Mark S. Lewis, Executive Vice President of New Ventures, Chief Technology Officer, EMC

Corporation, Hopkinton, Massachusetts

I agree with Nicholas Carr that the com- petitive edge gained by companies through IT in the past was not due to the fact that they had IT and others did not. It was due to how they used it, to the innovative business processes and mod- els they created around new informa- tion technologies. Now, Carr tells us, best practices are being built into the infrastructure itself. He writes off any further strategic differentiation by ar- guing that IT is like other “infrastruc- ture technologies” that lost their com- petitive potential once they became “accessible and affordable to all.”

Carr’s historical analogies to other infrastructure technologies are not convincing. Information technology has infinite and constantly expanding functionality, while Carr’s other tech- nologies – steam engines, railroads, electricity, telephones – have narrow functionality.

Electricity, for example, is simply a source of energy; it hasn’t changed much since we found a way to harness it. And it can, and probably will, be re- placed by another source of energy. Un- like electricity, IT is very different from what it was 30 or even ten years ago. The technologies used for processing, storing, and transporting information continue to expand. Also growing is the demand for IT, with more businesses and types of organizations, more pro- cesses and activities, and more and more consumers at home and on the go in need of its productivity-enhancing func- tions. Should we believe Carr, who says that the buildout is over, or should we listen to Alan Greenspan, who argues that “there are still significant opportu- nities for firms to upgrade the quality of their technology and with it the level of productivity”? Or perhaps we should lis- ten to genomics expert Craig Venter, who says that at least a decade or two will go by before computing can catch up with the current needs of biological

investigation. Or maybe we should ob- serve the millions of businesses and peo- ple around the world who are currently without affordable access to IT.

The key difference between IT and Carr’s other “infrastructure technolo- gies” is that the latter perform functions that lie outside human capabilities. By contrast, much of IT mirrors and ampli- fies the brain’s key information-handling activities: processing, storage, and trans- mission. In addition, IT is a tool that au- tomates and facilitates activities that otherwise would be done manually. Strategic advantage comes from how we

apply IT, the unique and differentiating ways in which we marry information technologies with our intellectual capi- tal: our business models, our organiza- tional cultures, our creativity.

IT never mattered. What matters are the people who invent information technologies and who deploy and use them. Like any other human endeavor, IT has its share of failures, foibles, and fads. Computer scientist Michael Der- touzos reminded us that “IT acts like a magnifying lens, amplifying manage- ment’s strengths but also its weak- nesses.” Carr’s advice to avoid “waste and sloppiness” applies to any investment or purchase we make. A few years of over-investment followed by a few years of under-investment due to general eco- nomic and psychological conditions can- not change the nature of information technologies nor the industry built around them.

In my job, I talk with a lot of business executives and IT managers around the world. These conversations paint a very different future from the one Carr predicts. Rather than “ceding con- trol” to a few large IT utilities guaran-

teed to use their monopoly status to raise profits and squash innovation, the executives I’ve spoken with are de- manding more choice, more flexibility, and more advanced IT. They, unlike Carr, do not confuse the way they buy IT – increasingly moving toward a con- sumption-based model – with a lack of strategic importance.

In the next generation of IT, there can be no compromises. The use of IT is analogous to innovations in transporta- tion, not power utilities. Common stan- dards like roads and airports exist, but the cars we choose to drive and our

methods of travel are based on individ- ual preference. IT utilities will exist, but businesses will derive unique benefits from how they leverage specific tech- nologies.

The greatest improvements in IT eco- nomics have come when customers were able to take control from “full- solution” providers and utilize the most cost-effective technology applicable for their needs. There is no going back. In the foreseeable future, customers will require the simplicity and affordability of complete IT solutions but will still want to be creative and use their brains to do more with IT and, yes, gain com- petitive advantage. I just think of walk- ing into our living room and telling my kids that we now have a “TV utility” and the only channel we get is C-SPAN. I don’t think they would consider this a step forward.

Mark S. Lewis

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IT never mattered. What matters are the people who

invent technologies and who deploy and use them.

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Letter from Tom Pisello

Tom Pisello, CEO and Founder, Alinean Corporation, Orlando, Florida

How a company manages its informa- tion technology – aligning investments with core business goals – is more stra- tegic now than ever. Nicholas Carr’s article “IT Doesn’t Matter” draws atten- tion to the very heart of the question CIOs and CFOs struggle with most: “What’s most important when it comes to IT investments?” With dollars being scrutinized, the question merits closer examination.

In specific market segments and over the long term, it is true that companies

spending frugally on IT are demon- strating superior overall results. But dig deeper and you’ll find that there is no consistent correlation between IT spending levels and financial perfor- mance; two companies investing the same amounts in identical technologies will yield vastly different results.

What does this mean? What a com- pany invests in, and how well it is ap- plied to improve business practices, counts far more than how much is spent.

On the flip side, the worst-perform- ing companies – those delivering the lowest return on shareholder invest- ment – are equally penurious in their IT investment. Our research indicates that this laggardly group spends well below the industry average of 3.7% of revenue on IT (as do the top performers).

Examination of industry averages reveals certain best practices of compa- nies deriving strategic impact from IT investments; one of these is the ability to quickly adapt plans to shifting mar- ket conditions. Best-performing compa- nies have been able to scale back spend- ing in this slow economy. When and if a shift occurs back toward favoring inno- vation, these same companies are likely to be adept at scaling back up.

Unfortunately, commoditization of technologies does not translate into making the best IT implementations easily replicable. That’s because every organization has unique needs and pri- orities. However, one trend in particular holds great promise: Cheap, standards- based hardware and software are the single biggest driver of innovation, pre- cisely because the heavy lifting can now be focused on activities that deliver much more value. (From databases, for instance, has sprung the promise of

truly individualized customer contact; from the rudiments of factory planning come supply chains

that can shift production within days of changes in customer demand or of geopolitical turmoil.)

Information technology is expected to manage companies’ most vital and valuable intellectual assets and is the only tool companies have to turn this knowledge into the kind of competitive weapon that redefines industries – and its leaders. For this very reason, IT will continue to play an important role in our personal lives and in the companies that employ us. Those who recognize the importance of good management, not spending levels, will ultimately reap the rewards.

Tom Pisello

harvard business review • june 2003 13

D o e s I T M a t t e r? A n H B R D e b a t e • W E B E X C L U S I V E

There is no consistent correlation between IT

spending levels and financial performance.

Letter from Roy L. Pike

Roy L. Pike, Vice President of Information Technology and CIO, Millennium Chemi-

cals, Hunt Valley, Maryland

Everyone will agree with Nicholas Carr that the storage, transmission, and pro- cessing of digital information has be- come a utility service. We outsourced our global enterprise software data center in 1998. The problem is that since most executives think of IT in much broader terms, many readers may be misled unless they read the definition of IT he provides in the footnote.

In its broadest context, information technology is all about productivity. And nothing can be more strategic right now for manufacturing and service in- dustries than improving productivity. During the 1980s and 1990s, IT gave rise to huge improvements in productivity by changing the way individuals work – providing direct access to information and eliminating hordes of information gatherers and intermediaries who added no value to their businesses.

What Carr misses completely is that, after having improved the productivity of individual workers, IT still has the po- tential to improve productivity dramat- ically, this time by changing the way businesses work together. The new stra- tegic task for IT is all about creating in- tegrated business relationships in which suppliers, producers, and customers act as if they were in one company, sharing information on inventories, production, demand forecasts, lead times, and maybe costs and pricing. For decades, the solu- tion to supply chain inefficiencies was inventory. Today, inventory is the prob- lem. The savings in material inventories and streamlined delivery that IT can de- liver will dwarf the efficiencies that have already been achieved.

Linking intercompany business pro- cesses is not using IT as a utility. A few standards have emerged in some indus- tries, but there are practically no inter- industry standards. By linking business processes, IT is and will remain of stra- tegic importance for the next ten years.

Roy L. Pike

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

Letter from Vijay Gurbaxani

Vijay Gurbaxani, Faculty Chair, Professor of Information Systems, Director of the

Center for Research on IT and Organiza-

tions, Graduate School of Management,

University of California, Irvine

Nicholas Carr’s article makes many of the same points that Max Hopper made in HBR in 1990. In “Rattling SABRE – New Ways to Compete on Information” (May–June), he also argued that com- puting was becoming a utility. So these arguments aren’t new. Nevertheless, while many of Carr’s arguments are sound, the situation is subtler than he would like us to believe.

The scarce resource never was tech- nology, as Carr assumes; it was always the set of managerial capabilities needed

to create value with that technology. These capabilities involve more than just managing the technology itself. They also encompass the ability to un- derstand how investments in organiza- tional capital complement and magnify the payoffs from technology and the ability to produce relevant information from the systems through sophisticated decision-making techniques. Recent re- search has demonstrated that compa- nies spend five or ten times as much on management practices that accompany technology introductions as they do on the technology itself. What’s more, as technology evolves and becomes in- creasingly complex, these management skills become ever scarcer.

Most companies struggle to imple- ment a sophisticated information-based strategy. One has only to read two other articles in the May 2003 HBR – Gary Loveman’s insightful “Diamonds in the Data Mine,” which describes how Har- rah’s mined its customer information to dramatically improve its performance, and Eric Bonabeau’s “Don’t Trust Your

Gut,” which demonstrates the value of sophisticated decision-support tools–to understand why so much of what com- panies can do with information tech- nology will never be found in a stan- dard software package and why some companies will pull it off while others won’t.

Carr argues that companies don’t need to develop their own technology management capabilities: They can just buy computing services that embody best practices. But that assumes, first of

all, that such utilities exist. Check out the current utility-computing models of the technology service providers – they are a long way from being utilities.

And when they are developed, the economics of software dictates that such shared systems must focus on a com- mon denominator so they can be widely used. These common systems will not fit a company’s processes out of the box; the firm will either need to customize the systems or change its business pro- cesses to accommodate the software. Neither approach is straightforward or always desirable. And as anyone who uses software knows, software is far from ideal.

What’s more, even if companies share infrastructure and common application systems, they will not necessarily end up with identical systems or use them in similar ways. Executives will face a mul- titude of choices as to how they want to structure their databases and appli- cations, what data they will collect, what information will flow out of their sys- tems, and how they will manage it.

Still, I agree with Carr that the move to a common infrastructure is inevita- ble, though it will take a lot longer than he implies. Wal-Mart refuses to join in- dustry exchanges because it believes its supply chain practices are unparalleled. And look how long it has been taking General Motors, DaimlerChrysler, and Ford to build their business-to-business exchange, Covisint, to provide the shared infrastructure and systems that will fa- cilitate trade in the automobile indus- try. After investing billions of dollars, the exchange has gained only limited traction; the technological challenges and organizational changes needed are massive.

But the fundamental point is this: The move to a common infrastructure does not reduce the opportunities for com- petitive advantage; it increases them. Using these shared platforms, all firms will have the opportunity to build cus- tomized applications that exploit com- plex technological capabilities to give rise to new business strategies. When much of our investment in technology goes into shared infrastructure, the in- vestments that we make in customiza- tion will be much more valuable.

Vijay Gurbaxani

harvard business review • june 200314

D o e s I T M a t t e r? A n H B R D e b a t e • W E B E X C L U S I V E

The move to a common infrastructure is inevitable.

But it does not reduce opportunities for competitive

advantage. It increases them.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

Letter from Steven Alter

Steven Alter, Professor of Information Systems, University of San Francisco School

of Business and Management, San Francisco,

[email protected]

The argument in “IT Doesn’t Matter” goes roughly like this: Kidneys don’t matter. Kidneys are basically a com- modity. Just about everyone has kid- neys. People with one kidney often lead full lives with no problems. There is no evidence that CEOs with superior kid- neys are more successful than CEOs with average kidneys. In fact, CEOs who spend more on their kidneys often don’t do as well.

The title “IT Doesn’t Matter” conveys a fallacy. An accurate but less catchy title would have been “IT Is Not the Head- line.” In my executive MBA courses on information systems, I use a similarly mistitled HBR case study to demon- strate why IT is essential but is not the headline. The 1997 case “The IT System That Couldn’t Deliver” concerns man- agement lapses in developing a new laptop-based tool for life insurance salespeople. The students read the case study before class and e-mail me a brief statement identifying “the system” and describing what it produces and how well it operates. Their answers are typi- cally all over the map. As the discussion unfolds, it becomes clear that “the sys- tem” is neither the software itself nor the information system being created. Rather, it is a work system of selling in- surance that has not been improved as hoped. The students usually realize that the mistakes in the case might not have happened if the CEO, CFO, and CIO had understood that the headline was the new work system, not the information system.

Still, while IT is not the headline, it certainly matters (just like kidneys) be- cause the work systems cannot operate without IT.

Steven Alter

Letter from Cathy Hyatt

Cathy Hyatt, IT Consultant, San Francisco

If Nicholas Carr’s article were correct, every CEO would get the same answer to the question “What is the cheapest IT solution?” Just as with electricity, com- panies’ needs would vary only in quan- tity, not quality. However, those of us who have spent our careers in IT know that the answer to this question is al- ways, “It depends.”

And what it depends on, more than anything else, is the company’s strategy. Typically, competitive strategy leans to- ward one of two forms: being the low- cost provider of a commodity product or service, or being a value-added provider of a differentiated product or service. Because of the variety and complexity

of IT, there is a vast number of “correct” IT solutions and investment strategies for either of these approaches – but the set of solutions that works for one will not be the same as the set that works for the other. This, I think, makes IT man- agement, which includes the selection, maintenance, and deployment of new and ongoing IT capability, a key strategic issue.

Carr says the main problem with IT management is overspending. If only those IT managers would get together and put pressure on their vendors, he says, this could be controlled. But he misses an important point related to the strategic use of IT. Let’s say a business wants a particular new IT capability that would dramatically boost its differenti- ation or cost advantage. If the new prod- uct or service is incompatible with the outdated hardware and software that IT management has frugally kept in ser- vice past its vendor-supported life cycle, the firm will lose out on a key strategic advantage. Those of us who have expe-

rienced this problem know that a com- pany’s hardware and software can be intricately intertwined; sometimes a sin- gle piece of outdated software can derail the deployment of important new func- tionality with real strategic value.

Finally, Carr’s analogy comparing the ubiquity of IT with that of electricity is only effective up to a point. The com- plexity and variety of IT, its evolving standards in many important areas, and its incredible innovation argue against his premise that its ubiquity eliminates its strategic value. IT’s history of inno- vation undermines his assertion that technology-related business transfor- mations are complete. The fact that IT

spending does not correlate with finan- cial success may be related to this, as effective business-process changes are frequently made after the initial de- ployment of technology. An example might be a business where CRM soft- ware delivers real advantage over a com- petitor that, although equally able to purchase the same package, is unable to successfully deploy or use it.

To improve the business results gained from IT, corporate leaders must continue to increase its alignment with strategy. To do this, most will need to gain a greater understanding of IT, bet- ter integrate IT leadership into their strategic planning processes, and insist on greater and greater strategic and leadership capability from their IT pro- fessionals. Getting IT “right” is a diffi- cult problem that many executives face, and while some will appreciate the sil- ver bullet Carr offers, most, I expect, will find his naïveté discouraging.

Cathy Hyatt

harvard business review • june 2003 15

D o e s I T M a t t e r? A n H B R D e b a t e • W E B E X C L U S I V E

Hardware and software can be intricately intertwined.

Sometimes a single piece of outdated software can

derail the deployment of important new functionality

with real strategic value.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

Letter from Chris Schlueter Langdon

Chris Schlueter Langdon, Assistant Profes- sor of Information and Operations Manage-

ment, Marshall School of Business, Univer-

sity of Southern California, Los Angeles

I am an information systems strategy professor, so it would be expected that I would disagree with Nicholas Carr’s provocative assertion that IT doesn’t matter. Indeed, I do. While I agree with much of Carr’s excellent – but incom- plete –analysis, I disagree with his con- clusion.

Certain areas in IT have become com- moditized and continue to be commod- itized. Just like the phone system: A busi- ness user does not have to be a network engineer to use it; the phone is a plug- and-play utility available to anyone. The same is basically true for office- productivity software and computer net- works – although many would argue that it is still much easier to plug in a new phone or fax machine than it is to hook up a PC to the Internet at home or to share a printer.

The analogy with the phone system breaks down at the point where Carr’s analysis stops. Information systems, and software applications in particular, dif- fer in versatility and adaptability. To ex- aggerate somewhat – but only a little – anything is possible with software, if not today, then tomorrow.

Increasingly, value added is being shifted from mechanical systems and their operations into software. For in- stance, much of the value added in the phone system is being provided by voice-over-IP software. The history of modern production is intimately tied to the automation of business processes. First, companies used steam engines, then conveyor belts, and today we use information systems, and especially soft- ware, to automate business activities. We might call it “softwarization.” Com- panies in many industries now use ERP and CRM software to automate back- office and customer-related activities. And this softwarization is not a one-step affair, like flipping a switch, but an on- going process. Value added is constantly

being shifted into or embedded in soft- ware, with mature areas obviously be- coming commoditized. Examples include computerized antilock brakes, credit

cards and calling cards, airline ticketing, and yield-management systems.

Why would this process stop? Why would there suddenly be only mature areas? Are there not enough business activities left to be automated? Would it be too difficult or expensive to auto- mate the remaining ones? The very com- moditization of mature infrastructure technology reduces unit cost, which in turn frees up funding for continued soft- warization without necessarily increas- ing total IT budgets.

Two trends ensure that the sky is the limit for softwarization. Carr mentioned the popular one – Moore’s Law, which establishes that hardware will become more powerful and cheaper over time. Even more important are advances in how increased processing power can be used – which leads us into the world of systems and software architecture design, with its fast-growing jungle of acronyms and ideas. One key advance in this field has been the recent break- through of object-oriented program- ming. The concept and some tools, such as the Smalltalk programming language, have been around for decades, but only very recently has the concept been turned into commercially viable imple- mentations.

The bottom line is that powerful hardware combined with more flexible software will continue to fuel a process in which value added is increasingly achieved with information systems. While mature areas do indeed get com-

moditized and probably outsourced, new softwarization should receive more, not less, of top management’s attention. Why? As Michael Porter argues, “[Busi-

ness] activities are the basic unit of com- petitive advantage.” As these activities get automated using software, top man- agement’s attention should shift to in- formation systems architecture design.

Chris Schlueter Langdon

harvard business review • june 200316

D o e s I T M a t t e r? A n H B R D e b a t e • W E B E X C L U S I V E

To exaggerate somewhat – but only a little – anything is

possible with software, if not today, then tomorrow.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.

Reply from Nicholas G. Carr

First and most important, let me thank these correspondents (and the many others I’ve heard from) for taking the time to so clearly and thoroughly ex- press their points of view. Whatever the broader merits of my article, it has at least succeeded in setting off an impor- tant and long overdue debate about the role of information technology in business. That debate can only be constructive.

Let me quickly restate the gist of my argument, which at times gets lost in the responses. As IT’s core functions – data processing, storage, and transmis- sion – have become cheaper, more stan- dardized, and more easily replicable, their ability to serve as the basis for com- petitive advantage has steadily eroded. Given this continuing and indeed inex- orable trend, companies would be wise

to manage IT as a commodity input, seeking to achieve competitively neces- sary levels of IT capability at the lowest possible cost and risk.

I find nothing in these letters to con- tradict that argument. As many of the writers point out, the way companies organize processes and use information plays a critical role in their ability to dis- tinguish themselves from competitors. That’s always been true and always will be true. But that does not mean that the information systems involved in managing processes and information are the source of the distinctiveness. It is better, I would argue, to start with the assumption that the technology is generic – that its functionality can be easily and quickly copied – and that the more tightly an advantage is tied to the technology, the more transient it will be. I would certainly be wary of follow- ing Paul Strassmann’s recommendation that executives “be ready to engage in yet another IT investment cycle,” as if spending more money on IT is itself

a strategy. Many companies have taken that approach in the past, and most have come to regret it.

At the same time, I would disagree with Mark Lewis’s suggestion that “IT never mattered.” In the past, proprietary computer systems could indeed be the basis of long-lasting advantages, as the story of American Hospital Supply in my article shows. Dismissing the former strategic relevance of IT makes it too easy to ignore how IT’s role in business has changed. And that can lead to strategic miscalculations. As Warren McFarlan and Richard Nolan point out, the value of being a first mover hinges on the speed with which fast followers catch up. As IT’s power and presence have grown, fast followers have been able to catch up – or spring ahead – ever more quickly. Given the high cost of being an

early investor in new IT functionality, a first mover strategy becomes harder to justify. Just because we continue to see new innovations in IT does not mean that it pays to be a pioneer.

Finally, I want to say that Jason Hit- tleman is right to chide me for suggest- ing that rigorous cost control and risk management are “boring.” I used the term as a contrast to what John Seely Brown and John Hagel call “big bang” thinking in IT management – the “IT changes everything” school of thought that distorted so many business deci- sions during the 1990s. It was, however, an unfortunate word choice, and I apol- ogize to the many dedicated IT profes- sionals whose hard and valuable work is leading to a more efficient and prag- matic use of information systems – and to a more realistic understanding of those systems’ limitations.

Nicholas G. Carr

harvard business review • june 2003

D o e s I T M a t t e r? A n H B R D e b a t e • W E B E X C L U S I V E

Just because we continue to see new innovations in IT

does not mean that it pays to be a pioneer.

For the exclusive use of K. Vasseghi, 2017.

This document is authorized for use only by Katherine Vasseghi in Strategic Information Systems Spring 17 taught by Rashmi Jain, Montclair State University from January 2017 to July 2017.