WTY IT Doesnt Matter by Nicholas G. Carr Case Study Summary

  

IT Doesn’t Matter
by Nicholas G. Carr
Reprint r0305b
May 2003
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H B R AT L A R G E
IT
Doesn’t
Matter
by Nicholas G. Carr
As information technology’s power and ubiquity have
grown, its strategic importance has diminished. The
way you approach IT investment and management will
need to change dramatically.
I
n 1968, 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 breakthroughs –
desktop computers, local and wide area
networks, enterprise software, and the
Internet – that have transformed the
business world. Today, no one would dispute that information technology has
become the backbone of commerce. It
underpins the operations of individual
companies, ties together far-flung supply chains, and, increasingly, links businesses to the customers they serve.
Hardly a dollar or a euro changes hands
anymore without the aid of computer
systems.
As IT’s power and presence have 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, according to a
study by the U.S. Department of Commerce’s Bureau of Economic Analysis,
less than 5% of the capital expenditures
of American companies went to information technology. 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, businesses 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
Copyright © 2003 by Harvard Business School Publishing Corporation. All rights reserved.
5
H B R AT L A R G E • I T D o e s n’ t M att e r
calculators – best relegated to low level
employees like secretaries, analysts, and
technicians. It was the rare executive
who would let his fingers touch a keyboard, much less incorporate information technology into his strategic thinking. Today, that has changed completely.
Chief executives now routinely talk
about the strategic value of information
technology, about how they can use IT
to gain a competitive edge, about the
“digitization” of their business models.
Most have appointed chief information
officers to their senior management
teams, and many have hired strategy
consulting firms to provide fresh ideas
on how to leverage their IT investments
for differentiation and advantage.
Behind the change in thinking lies a
simple assumption: that as 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
advantage – 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.1 Their
very power and presence have begun to
transform them from potentially strategic resources into commodity factors of
production. They are becoming costs
of doing business that must be paid by
all but provide distinction to none.
IT is best seen as the latest in a series
of broadly adopted technologies that
have reshaped industry over the past
two centuries – from the steam engine
and the railroad to the telegraph and
the telephone to the electric generator
and the internal combustion engine.
For a brief period, as they were being
built into the infrastructure of commerce, all these technologies opened
opportunities for forward-looking com-
panies to gain real advantages. But as
their availability increased and their
cost decreased – as they became ubiquitous – they became commodity inputs.
From a strategic standpoint, they became invisible; they no longer mattered.
That is exactly what is happening to information technology today, and the
implications for corporate IT management are profound.
Vanishing Advantage
Many commentators have drawn parallels between the expansion of IT, particularly the Internet, and the rollouts
of earlier technologies. Most of the
comparisons, though, have focused on
either the investment pattern associated with the technologies – the boomto-bust cycle – or the technologies’ roles
in reshaping the operations of entire industries or even economies. Little has
When a resource becomes essential to competition but
inconsequential to strategy, the risks it creates become
more important than the advantages it provides.
been said about the way the technologies influence, or fail to influence, competition at the firm level. Yet it is here
that history offers some of its most important lessons to managers.
A distinction needs to be made between proprietary technologies and
what might be called infrastructural
technologies. Proprietary technologies
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 discover an
innovative way to employ a process
technology that competitors find hard
to replicate. A company that produces
consumer goods may acquire exclusive
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 ncarr@hbsp.harvard.edu.
6
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 longterm strategic advantages, enabling
companies 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 nineteenth century,
and suppose that one manufacturing
company held the rights to all the technology 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 arrangement 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 economics 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 general business infrastructure.
In the earliest phases of its buildout,
however, an infrastructural technology
can take the form of a proprietary technology. As long as access to the technology is restricted – through physical limitations, intellectual property rights,
high costs, or a lack of standards–a company can use it to gain advantages over
rivals. Consider the period between the
construction of the first electric power
stations, around 1880, and the wiring of
the electric grid early in the twentieth
century. Electricity remained a scarce
harvard business review
I T D o e s n’ t M att e r • H B R AT L A R G E
resource during this time, and those
manufacturers able to tap into it – by,
for example, building their plants near
generating stations – often gained an
important edge. It was no coincidence
that the largest U.S. manufacturer of
nuts and bolts at 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
hydroelectric 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 workstations
throughout the plant. When electric
generators first became available, many
manufacturers simply adopted them as
a replacement single-point source, using
them to power the existing system of
pulleys and gears. Smart manufacturers,
however, saw that one of the great advantages of electric power is that it is easily distributable – that it can be brought
directly to workstations. By wiring their
plants and installing electric motors in
their machines, they were able to dispense with the cumbersome, inflexible,
and costly gearing systems, gaining an
important efficiency advantage over
their slower-moving competitors.
In addition to enabling new, more efficient operating methods, infrastructural technologies often lead to broader
market changes. Here, too, a company
that sees what’s coming can gain a step
on myopic rivals. In the mid-1800s, when
America started to lay down rail lines in
earnest, it was already possible to transport goods over long distances – hundreds of steamships plied the country’s
rivers. Businessmen probably assumed
that rail transport would essentially follow the steamship model, with some incremental enhancements. In fact, the
greater speed, capacity, and reach of
may 2003
the railroads fundamentally changed the
structure of American industry. It suddenly became economical to ship finished products, rather than just raw
materials and industrial components,
over great distances, and the mass consumer market came into being. Companies 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 dominated
manufacturing.
The trap that executives often fall
into, however, is assuming that opportunities for advantage will be available
indefinitely. In actuality, the window for
gaining advantage from an infrastructural 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. Railroad tracks,
telegraph wires, power lines – all were
laid or strung in a frenzy of activity (a
frenzy so intense in the case of rail lines
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 kilometers 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 Continental Europe,
there were just 2,000 miles of telegraph
wires in 1849; 20 years later, there were
110,000. The pattern continued with
electrical power. The number of central
stations operated by utilities grew from
468 in 1889 to 4,364 in 1917, and the average capacity of each increased 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
opportunities for individual advantage
are largely gone. The rush to invest leads
to more competition, greater capacity,
and falling prices, making the technology broadly accessible and affordable.
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 become 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 welldistributed power outlets. Both the
technology and its modes of use become, in effect, commoditized. The only
meaningful 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.
That’s not to say that infrastructural
technologies don’t continue to influence competition. They do, but their
influence is felt at the macroeconomic
level, not at the level of the individual
company. If a particular country, for instance, 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. Similarly, 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 potential –
inexorably declines as it becomes accessible 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 interconnectivity and
interoperability, from mainframe time7
H B R AT L A R G E • I T D o e s n’ t M att e r
sharing to minicomputer-based local
area networks 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 homogenization 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 reproducible at virtually
no cost. The near-infinite scalability of
many IT functions, when combined
with technical standardization, dooms
most proprietary applications to economic obsolescence. Why write your
own application for word processing
or e-mail or, for that matter, supplychain 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 software, they become replicable, too.
When companies buy a generic application, they buy a generic 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 perfect 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 businesstechnology vendors, from Microsoft to
IBM, are trying to position themselves
as IT utilities, companies that will control the provision of a diverse range of
business applications over what is now
called, tellingly, “the grid.” Again, the
upshot is ever greater homogenization
of IT capabilities, as more companies
replace customized applications with
generic ones. (For more on the challenges facing IT companies, see the sidebar “What About the Vendors?”)
8
Too Much of a Good Thing
As many experts have pointed out, the overinvestment in information
technology in the 1990s echoes the overinvestment in railroads in the
1860s. In both cases, companies and individuals, dazzled by the seemingly unlimited commercial possibilities of the technologies, threw large
quantities of money away on half-baked businesses and products. Even
worse, the flood of capital led to enormous overcapacity, devastating
entire industries.
We can only hope that the analogy ends there. The mid-nineteenthcentury boom in railroads (and the closely related technologies of the
steam engine and the telegraph) helped produce not only widespread
industrial overcapacity but a surge in productivity. The combination set
the stage for two solid decades of deflation. Although worldwide economic
production continued to grow strongly between the mid-1870s and the
mid-1890s, prices collapsed – in England, the dominant economic power
of the time, price levels dropped 40%. In turn, business profits evaporated.
Companies watched the value of their products erode while they were in
the very process of making them. As the first worldwide depression 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 assume that history will repeat itself. But with companies struggling to
boost profits and the entire world economy flirting with deflation, it would
also be dangerous to assume it can’t.
Finally, and for all the reasons already discussed, IT is subject to rapid
price deflation. When Gordon Moore
made his famously prescient 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 unabated. Similar declines have occurred
in the cost of data storage and transmission. The rapidly increasing affordability of IT functionality has not only
democratized the computer revolution, it has destroyed one of the most
important potential barriers to com-
petitors. Even the most cutting-edge
IT capabilities quickly become 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
fatalities). Consider some statistics. During the last quarter of the twentieth century, the computational power of
a microprocessor increased by a factor
of 66,000. In the dozen years from 1989
to 2001, the number of host computers
connected to the Internet grew from
80,000 to more than 125 million. Over
the last ten years, the number of sites
on the World Wide Web 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 reharvard business review
I T D o e s n’ t M att e r • H B R AT L A R G E
cently 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 example
is American Hospital Supply. A leading
distributor 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 mainframe 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 distributor offering
electronic ordering, a competitive advantage that led to years of superior
financial 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 computers and packaged software, together with the emergence of
networking standards, was rendering
proprietary communication systems unattractive to their users and uneconomical to their owners. Indeed, in an ironic,
if predictable, 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 senior executives had come to view ASAP
as “a millstone around their necks,” acmay 2003
cording to a Harvard Business School
case study.
Myriad other companies have gained
important advantages through the innovative deployment of IT. Some, like
American Airlines with its Sabre reservation system, Federal Express with its
package-tracking system, and Mobil Oil
with its automated Speedpass payment
system, used IT to gain particular op-
erating or marketing advantages – to
leapfrog the competition in one process
or activity. Others, like Reuters with its
1970s financial information network or,
more recently, eBay with its Internet
auctions, had superior insight into the
way IT would fundamentally change an
industry and were able to stake out commanding positions. In a few cases, the
dominance companies gained through
What About the Vendors?
Just a few months ago, at the 2003 World Economic Forum in Davos,
Switzerland, 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 people have already bought most of the stuff they want
to own?” The people he was talking about are, of course, businesspeople,
and the stuff is information technology. With the end of the great buildout
of the commercial IT infrastructure apparently at hand, Joy’s question is
one that all IT vendors should be asking themselves. There is good reason
to believe that companies’ existing IT capabilities are largely sufficient for
their needs and, hence, that the recent and widespread sluggishness in
IT demand is as much a structural as a cyclical phenomenon.
Even if that’s true, the picture may not be as bleak as it seems for vendors, at least those with the foresight and skill to adapt to the new environment. The importance 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 electricity 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 establishment
of lucrative monopolies and oligopolies.
Many technology vendors are already repositioning themselves and
their products in response to the changes in the market. Microsoft’s
push to turn its Office software suite from a packaged good into an annual
subscription service is a tacit acknowledgment that companies are losing
their need – and their appetite – for constant upgrades. Dell has succeeded
by exploiting the commoditization of the PC market and is now extending
that strategy to servers, storage, and even services. (Michael Dell’s essential genius has always been his unsentimental trust in the commoditization of information technology.) 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 transformation of IT into a commodity, will lead to the further
consolidation of many sectors of the IT industry. The winners will do very
well; the losers will be gone.
9
H B R AT L A R G E • I T D o e s n’ t M att e r
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 examples of firms
that have been able to turn temporary
technological advantages into enduring
positioning advantages.
But the opportunities for gaining ITbased advantages are already dwindling. Best practices are now quickly
built into software or otherwise replicated. And as for IT-spurred industry
transformations, most of the ones that
are going to happen have likely already
happened or are in the process of 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 diminishes 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 beginning. First, IT’s
power is outstripping most 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 distribution network (the
Internet) has caught up with demand –
indeed, we already have considerably
more fiber-optic capacity than we need.
Fourth, IT vendors are rushing to position themselves as commodity suppliers or even as utilities. Finally, and most
definitively, the investment bubble has
burst, which historically has been a clear
indication that an infrastructural technology is reaching the end of its buildout. A few companies may still be able
to wrest advantages from highly specialized applications that don’t offer
strong economic incentives 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
10
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.
350
Railways
300
250
Railroad track
worldwide,
in thousands
of kilometers
200
150
100
50
0
1841 1846 1851 1856 1861 1866 1871 1876
15,000
Electric Power
12,000
U.S. electric utility
generating capacity,
in megawatts
9,000
6,000
3,000
0
1889
1899 1902 1907 1912 1917 1920
200
Information Technology
Number of
host computers
on the Internet
(in millions)
150
100
50
0
1990
1992
1994
1996
1998
2000
2002
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/).
harvard business review
I T D o e s n’ t M att e r • H B R AT L A R G E
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
practical standpoint, the most important lesson to be learned from earlier
infrastructural technologies may be
this: When a resource becomes essential to competition but inconsequential
to strategy, the risks it creates become
more important than the advantages it
provides. Think of electricity. Today, no
company builds its business strategy
around its electricity usage, but even a
brief lapse in supply can be devastating
(as some 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 partners, security breaches,
even terrorism–and some have become
magnified as companies have moved
from tightly controlled, proprietary 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 tempering their
vulnerabilities. Worrying about what
might go wrong may not be as glamorous 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 entwined with so many business
functions means that it will continue to
consume a large portion of corporate
spending. For most companies, 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
may 2003
from ones that are discretionary, unnecessary, or even counterproductive.
At a high level, stronger cost management requires more rigor in evaluating expected returns from systems investments, more creativity in exploring
simpler and cheaper alternatives, and a
greater openness to outsourcing and
other partnerships. But most companies
can also reap significant savings by simply cutting 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 applications–word processing, spreadsheets,
e-mail, and Web browsing. These applications have been technologically mature for years; they require only a fraction of the computing power provided
by today’s microprocessors. Nevertheless, 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 contracts that ensure the longterm usefulness of their PC investments
and impose hard limits on upgrade
costs. And if vendors balk, companies
should be willing to explore cheaper solutions, including open-source applications and bare-bones network PCs, even
New Rules for IT Management
With the opportunities for gaining strategic advantage from information
technology rapidly disappearing, many companies 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 companies 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
disadvantage.
Follow, don’t lead. Moore’s Law guarantees that the longer you wait to
make an IT purchase, the more you’ll get for your money. And waiting
will decrease your risk of buying something technologically flawed or
doomed to rapid obsolescence. In some cases, being on the cutting edge
makes sense. But those cases are becoming rarer and rarer as IT capabilities become more homogenized.
Focus on vulnerabilities, not opportunities. It’s unusual for a company
to gain a competitive advantage through the distinctive use of a mature
infrastructural technology, but even a brief disruption in the availability of
the technology can be devastating. As corporations continue to cede control over their IT applications and networks to vendors and other third parties, the threats they face will proliferate. They need to prepare themselves
for technical glitches, outages, and security breaches, shifting their attention from opportunities to vulnerabilities.
11
H B R AT L A R G E • I T D o e s n’ t M att e r
if it means sacrificing 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
purchasing, 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 serving customers – it consists
another powerful way to cut costs –
while also reducing a firm’s chance of
being saddled with buggy or soon-tobe-obsolete technology. Many companies, particularly during the 1990s,
rushed their IT investments either because they hoped to capture a firstmover advantage or because they feared
being left behind. Except in very rare
cases, both the hope and the fear were
unwarranted. The smartest users of
technology – here again, Dell and WalMart stand out–stay well back from the
Studies of corporate IT spending consistently show
that greater expenditures rarely translate into superior
financial results. In fact, the opposite is usually true.
of employees’ saved e-mails and files,
including terabytes of spam, MP3s, and
video clips. Computerworld estimates
that as much as 70% of the storage capacity of a typical Windows network is
wasted – an enormous unnecessary expense. Restricting employees’ ability to
save files indiscriminately and indefinitely may seem distasteful 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
advance, delaying IT investments can be
12
cutting edge, waiting to make purchases
until standards and best practices solidify. They let their impatient competitors
shoulder the high costs of experimentation, and then they sweep past them,
spending less and getting more.
Some managers may worry that being stingy with IT dollars will damage
their competitive positions. But studies
of corporate IT spending consistently
show that greater expenditures 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. com-
panies and discovered that the top performers tended to be among the most
tightfisted. The 25 companies that delivered the highest economic returns,
for example, spent on average just 0.8%
of their revenues on IT, while the typical
company spent 3.7%. A recent study by
Forrester Research showed, similarly,
that the most lavish spenders on IT
rarely post the best results. Even Oracle’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 meticulously. 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 already on the right course. The
challenge will be to maintain that discipline when the business 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 technologies used for processing, storing,
and transporting information in digital form.
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IT
Doesn’t
Matter
by Nicholas G. Carr
As information technology’s power and ubiquity have
grown, its strategic importance has diminished. The
way you approach IT investment and management will
need to change dramatically.
I
n 1968, 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 breakthroughs –
desktop computers, local and wide area
networks, enterprise software, and the
Internet – that have transformed the
business world. Today, no one would dispute that information technology has
become the backbone of commerce. It
underpins the operations of individual
companies, ties together far-flung supply chains, and, increasingly, links businesses to the customers they serve.
Hardly a dollar or a euro changes hands
anymore without the aid of computer
systems.
As IT’s power and presence have 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, according to a
study by the U.S. Department of Commerce’s Bureau of Economic Analysis,
less than 5% of the capital expenditures
of American companies went to information technology. 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, businesses 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
Copyright © 2003 by Harvard Business School Publishing Corporation. All rights reserved.
5
H B R AT L A R G E • I T D o e s n’ t M att e r
calculators – best relegated to low level
employees like secretaries, analysts, and
technicians. It was the rare executive
who would let his fingers touch a keyboard, much less incorporate information technology into his strategic thinking. Today, that has changed completely.
Chief executives now routinely talk
about the strategic value of information
technology, about how they can use IT
to gain a competitive edge, about the
“digitization” of their business models.
Most have appointed chief information
officers to their senior management
teams, and many have hired strategy
consulting firms to provide fresh ideas
on how to leverage their IT investments
for differentiation and advantage.
Behind the change in thinking lies a
simple assumption: that as 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
advantage – 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.1 Their
very power and presence have begun to
transform them from potentially strategic resources into commodity factors of
production. They are becoming costs
of doing business that must be paid by
all but provide distinction to none.
IT is best seen as the latest in a series
of broadly adopted technologies that
have reshaped industry over the past
two centuries – from the steam engine
and the railroad to the telegraph and
the telephone to the electric generator
and the internal combustion engine.
For a brief period, as they were being
built into the infrastructure of commerce, all these technologies opened
opportunities for forward-looking com-
panies to gain real advantages. But as
their availability increased and their
cost decreased – as they became ubiquitous – they became commodity inputs.
From a strategic standpoint, they became invisible; they no longer mattered.
That is exactly what is happening to information technology today, and the
implications for corporate IT management are profound.
Vanishing Advantage
Many commentators have drawn parallels between the expansion of IT, particularly the Internet, and the rollouts
of earlier technologies. Most of the
comparisons, though, have focused on
either the investment pattern associated with the technologies – the boomto-bust cycle – or the technologies’ roles
in reshaping the operations of entire industries or even economies. Little has
When a resource becomes essential to competition but
inconsequential to strategy, the risks it creates become
more important than the advantages it provides.
been said about the way the technologies influence, or fail to influence, competition at the firm level. Yet it is here
that history offers some of its most important lessons to managers.
A distinction needs to be made between proprietary technologies and
what might be called infrastructural
technologies. Proprietary technologies
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 discover an
innovative way to employ a process
technology that competitors find hard
to replicate. A company that produces
consumer goods may acquire exclusive
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 ncarr@hbsp.harvard.edu.
6
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 longterm strategic advantages, enabling
companies 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 nineteenth century,
and suppose that one manufacturing
company held the rights to all the technology 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 arrangement 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 economics 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 general business infrastructure.
In the earliest phases of its buildout,
however, an infrastructural technology
can take the form of a proprietary technology. As long as access to the technology is restricted – through physical limitations, intellectual property rights,
high costs, or a lack of standards–a company can use it to gain advantages over
rivals. Consider the period between the
construction of the first electric power
stations, around 1880, and the wiring of
the electric grid early in the twentieth
century. Electricity remained a scarce
harvard business review
I T D o e s n’ t M att e r • H B R AT L A R G E
resource during this time, and those
manufacturers able to tap into it – by,
for example, building their plants near
generating stations – often gained an
important edge. It was no coincidence
that the largest U.S. manufacturer of
nuts and bolts at 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
hydroelectric 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 workstations
throughout the plant. When electric
generators first became available, many
manufacturers simply adopted them as
a replacement single-point source, using
them to power the existing system of
pulleys and gears. Smart manufacturers,
however, saw that one of the great advantages of electric power is that it is easily distributable – that it can be brought
directly to workstations. By wiring their
plants and installing electric motors in
their machines, they were able to dispense with the cumbersome, inflexible,
and costly gearing systems, gaining an
important efficiency advantage over
their slower-moving competitors.
In addition to enabling new, more efficient operating methods, infrastructural technologies often lead to broader
market changes. Here, too, a company
that sees what’s coming can gain a step
on myopic rivals. In the mid-1800s, when
America started to lay down rail lines in
earnest, it was already possible to transport goods over long distances – hundreds of steamships plied the country’s
rivers. Businessmen probably assumed
that rail transport would essentially follow the steamship model, with some incremental enhancements. In fact, the
greater speed, capacity, and reach of
may 2003
the railroads fundamentally changed the
structure of American industry. It suddenly became economical to ship finished products, rather than just raw
materials and industrial components,
over great distances, and the mass consumer market came into being. Companies 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 dominated
manufacturing.
The trap that executives often fall
into, however, is assuming that opportunities for advantage will be available
indefinitely. In actuality, the window for
gaining advantage from an infrastructural 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. Railroad tracks,
telegraph wires, power lines – all were
laid or strung in a frenzy of activity (a
frenzy so intense in the case of rail lines
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 kilometers 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 Continental Europe,
there were just 2,000 miles of telegraph
wires in 1849; 20 years later, there were
110,000. The pattern continued with
electrical power. The number of central
stations operated by utilities grew from
468 in 1889 to 4,364 in 1917, and the average capacity of each increased 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
opportunities for individual advantage
are largely gone. The rush to invest leads
to more competition, greater capacity,
and falling prices, making the technology broadly accessible and affordable.
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 become 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 welldistributed power outlets. Both the
technology and its modes of use become, in effect, commoditized. The only
meaningful 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.
That’s not to say that infrastructural
technologies don’t continue to influence competition. They do, but their
influence is felt at the macroeconomic
level, not at the level of the individual
company. If a particular country, for instance, 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. Similarly, 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 potential –
inexorably declines as it becomes accessible 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 interconnectivity and
interoperability, from mainframe time7
H B R AT L A R G E • I T D o e s n’ t M att e r
sharing to minicomputer-based local
area networks 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 homogenization 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 reproducible at virtually
no cost. The near-infinite scalability of
many IT functions, when combined
with technical standardization, dooms
most proprietary applications to economic obsolescence. Why write your
own application for word processing
or e-mail or, for that matter, supplychain 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 software, they become replicable, too.
When companies buy a generic application, they buy a generic 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 perfect 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 businesstechnology vendors, from Microsoft to
IBM, are trying to position themselves
as IT utilities, companies that will control the provision of a diverse range of
business applications over what is now
called, tellingly, “the grid.” Again, the
upshot is ever greater homogenization
of IT capabilities, as more companies
replace customized applications with
generic ones. (For more on the challenges facing IT companies, see the sidebar “What About the Vendors?”)
8
Too Much of a Good Thing
As many experts have pointed out, the overinvestment in information
technology in the 1990s echoes the overinvestment in railroads in the
1860s. In both cases, companies and individuals, dazzled by the seemingly unlimited commercial possibilities of the technologies, threw large
quantities of money away on half-baked businesses and products. Even
worse, the flood of capital led to enormous overcapacity, devastating
entire industries.
We can only hope that the analogy ends there. The mid-nineteenthcentury boom in railroads (and the closely related technologies of the
steam engine and the telegraph) helped produce not only widespread
industrial overcapacity but a surge in productivity. The combination set
the stage for two solid decades of deflation. Although worldwide economic
production continued to grow strongly between the mid-1870s and the
mid-1890s, prices collapsed – in England, the dominant economic power
of the time, price levels dropped 40%. In turn, business profits evaporated.
Companies watched the value of their products erode while they were in
the very process of making them. As the first worldwide depression 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 assume that history will repeat itself. But with companies struggling to
boost profits and the entire world economy flirting with deflation, it would
also be dangerous to assume it can’t.
Finally, and for all the reasons already discussed, IT is subject to rapid
price deflation. When Gordon Moore
made his famously prescient 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 unabated. Similar declines have occurred
in the cost of data storage and transmission. The rapidly increasing affordability of IT functionality has not only
democratized the computer revolution, it has destroyed one of the most
important potential barriers to com-
petitors. Even the most cutting-edge
IT capabilities quickly become 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
fatalities). Consider some statistics. During the last quarter of the twentieth century, the computational power of
a microprocessor increased by a factor
of 66,000. In the dozen years from 1989
to 2001, the number of host computers
connected to the Internet grew from
80,000 to more than 125 million. Over
the last ten years, the number of sites
on the World Wide Web 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 reharvard business review
I T D o e s n’ t M att e r • H B R AT L A R G E
cently 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 example
is American Hospital Supply. A leading
distributor 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 mainframe 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 distributor offering
electronic ordering, a competitive advantage that led to years of superior
financial 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 computers and packaged software, together with the emergence of
networking standards, was rendering
proprietary communication systems unattractive to their users and uneconomical to their owners. Indeed, in an ironic,
if predictable, 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 senior executives had come to view ASAP
as “a millstone around their necks,” acmay 2003
cording to a Harvard Business School
case study.
Myriad other companies have gained
important advantages through the innovative deployment of IT. Some, like
American Airlines with its Sabre reservation system, Federal Express with its
package-tracking system, and Mobil Oil
with its automated Speedpass payment
system, used IT to gain particular op-
erating or marketing advantages – to
leapfrog the competition in one process
or activity. Others, like Reuters with its
1970s financial information network or,
more recently, eBay with its Internet
auctions, had superior insight into the
way IT would fundamentally change an
industry and were able to stake out commanding positions. In a few cases, the
dominance companies gained through
What About the Vendors?
Just a few months ago, at the 2003 World Economic Forum in Davos,
Switzerland, 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 people have already bought most of the stuff they want
to own?” The people he was talking about are, of course, businesspeople,
and the stuff is information technology. With the end of the great buildout
of the commercial IT infrastructure apparently at hand, Joy’s question is
one that all IT vendors should be asking themselves. There is good reason
to believe that companies’ existing IT capabilities are largely sufficient for
their needs and, hence, that the recent and widespread sluggishness in
IT demand is as much a structural as a cyclical phenomenon.
Even if that’s true, the picture may not be as bleak as it seems for vendors, at least those with the foresight and skill to adapt to the new environment. The importance 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 electricity 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 establishment
of lucrative monopolies and oligopolies.
Many technology vendors are already repositioning themselves and
their products in response to the changes in the market. Microsoft’s
push to turn its Office software suite from a packaged good into an annual
subscription service is a tacit acknowledgment that companies are losing
their need – and their appetite – for constant upgrades. Dell has succeeded
by exploiting the commoditization of the PC market and is now extending
that strategy to servers, storage, and even services. (Michael Dell’s essential genius has always been his unsentimental trust in the commoditization of information technology.) 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 transformation of IT into a commodity, will lead to the further
consolidation of many sectors of the IT industry. The winners will do very
well; the losers will be gone.
9
H B R AT L A R G E • I T D o e s n’ t M att e r
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 examples of firms
that have been able to turn temporary
technological advantages into enduring
positioning advantages.
But the opportunities for gaining ITbased advantages are already dwindling. Best practices are now quickly
built into software or otherwise replicated. And as for IT-spurred industry
transformations, most of the ones that
are going to happen have likely already
happened or are in the process of 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 diminishes 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 beginning. First, IT’s
power is outstripping most 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 distribution network (the
Internet) has caught up with demand –
indeed, we already have considerably
more fiber-optic capacity than we need.
Fourth, IT vendors are rushing to position themselves as commodity suppliers or even as utilities. Finally, and most
definitively, the investment bubble has
burst, which historically has been a clear
indication that an infrastructural technology is reaching the end of its buildout. A few companies may still be able
to wrest advantages from highly specialized applications that don’t offer
strong economic incentives 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
10
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.
350
Railways
300
250
Railroad track
worldwide,
in thousands
of kilometers
200
150
100
50
0
1841 1846 1851 1856 1861 1866 1871 1876
15,000
Electric Power
12,000
U.S. electric utility
generating capacity,
in megawatts
9,000
6,000
3,000
0
1889
1899 1902 1907 1912 1917 1920
200
Information Technology
Number of
host computers
on the Internet
(in millions)
150
100
50
0
1990
1992
1994
1996
1998
2000
2002
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/).
harvard business review
I T D o e s n’ t M att e r • H B R AT L A R G E
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
practical standpoint, the most important lesson to be learned from earlier
infrastructural technologies may be
this: When a resource becomes essential to competition but inconsequential
to strategy, the risks it creates become
more important than the advantages it
provides. Think of electricity. Today, no
company builds its business strategy
around its electricity usage, but even a
brief lapse in supply can be devastating
(as some 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 partners, security breaches,
even terrorism–and some have become
magnified as companies have moved
from tightly controlled, proprietary 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 tempering their
vulnerabilities. Worrying about what
might go wrong may not be as glamorous 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 entwined with so many business
functions means that it will continue to
consume a large portion of corporate
spending. For most companies, 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
may 2003
from ones that are discretionary, unnecessary, or even counterproductive.
At a high level, stronger cost management requires more rigor in evaluating expected returns from systems investments, more creativity in exploring
simpler and cheaper alternatives, and a
greater openness to outsourcing and
other partnerships. But most companies
can also reap significant savings by simply cutting 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 applications–word processing, spreadsheets,
e-mail, and Web browsing. These applications have been technologically mature for years; they require only a fraction of the computing power provided
by today’s microprocessors. Nevertheless, 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 contracts that ensure the longterm usefulness of their PC investments
and impose hard limits on upgrade
costs. And if vendors balk, companies
should be willing to explore cheaper solutions, including open-source applications and bare-bones network PCs, even
New Rules for IT Management
With the opportunities for gaining strategic advantage from information
technology rapidly disappearing, many companies 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 companies 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
disadvantage.
Follow, don’t lead. Moore’s Law guarantees that the longer you wait to
make an IT purchase, the more you’ll get for your money. And waiting
will decrease your risk of buying something technologically flawed or
doomed to rapid obsolescence. In some cases, being on the cutting edge
makes sense. But those cases are becoming rarer and rarer as IT capabilities become more homogenized.
Focus on vulnerabilities, not opportunities. It’s unusual for a company
to gain a competitive advantage through the distinctive use of a mature
infrastructural technology, but even a brief disruption in the availability of
the technology can be devastating. As corporations continue to cede control over their IT applications and networks to vendors and other third parties, the threats they face will proliferate. They need to prepare themselves
for technical glitches, outages, and security breaches, shifting their attention from opportunities to vulnerabilities.
11
H B R AT L A R G E • I T D o e s n’ t M att e r
if it means sacrificing 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
purchasing, 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 serving customers – it consists
another powerful way to cut costs –
while also reducing a firm’s chance of
being saddled with buggy or soon-tobe-obsolete technology. Many companies, particularly during the 1990s,
rushed their IT investments either because they hoped to capture a firstmover advantage or because they feared
being left behind. Except in very rare
cases, both the hope and the fear were
unwarranted. The smartest users of
technology – here again, Dell and WalMart stand out–stay well back from the
Studies of corporate IT spending consistently show
that greater expenditures rarely translate into superior
financial results. In fact, the opposite is usually true.
of employees’ saved e-mails and files,
including terabytes of spam, MP3s, and
video clips. Computerworld estimates
that as much as 70% of the storage capacity of a typical Windows network is
wasted – an enormous unnecessary expense. Restricting employees’ ability to
save files indiscriminately and indefinitely may seem distasteful 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
advance, delaying IT investments can be
12
cutting edge, waiting to make purchases
until standards and best practices solidify. They let their impatient competitors
shoulder the high costs of experimentation, and then they sweep past them,
spending less and getting more.
Some managers may worry that being stingy with IT dollars will damage
their competitive positions. But studies
of corporate IT spending consistently
show that greater expenditures 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. com-
panies and discovered that the top performers tended to be among the most
tightfisted. The 25 companies that delivered the highest economic returns,
for example, spent on average just 0.8%
of their revenues on IT, while the typical
company spent 3.7%. A recent study by
Forrester Research showed, similarly,
that the most lavish spenders on IT
rarely post the best results. Even Oracle’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 meticulously. 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 already on the right course. The
challenge will be to maintain that discipline when the business 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 technologies used for processing, storing,
and transporting information in digital form.
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