Book excerpt: Does IT matter?

More than 50 years have passed since computers began to be used in business, yet there remains much we don't know about their influence on commerce in general and corporate performance in particular. At a broad level, we can't yet say precisely why computerization had little effect on industrial productivity for four decades and then, in the mid-1990s, suddenly seemed to become the driving force behind a sharp acceleration in U.S. productivity. Nor can we say with certainty why the recent productivity gains have been so unevenly distributed, appearing in certain industries and regions that have invested heavily in information technology but not in others that have also spent great sums on computer hardware and software.

When we look at individual companies, the picture becomes even murkier. IT has changed the way companies carry out many important activities, but it has not — at least yet — led to any alteration in the essential form or size of corporate organizations. It has delivered great benefits to a handful of firms, even propelling a few into positions of industry leadership, but for most businesses it has been a source more of frustration and disappointment than of glory. It has allowed many companies to substantially cut their labor costs and working capital, but it has also led managers to plow cash into risky and misguided initiatives, sometimes with catastrophic results.

Simply put, it remains difficult, if not impossible, to draw any broad conclusions about IT's effect on the competitiveness and profitability of individual businesses. IT has become the largest of all corporate capital expenditures — and an intrinsic element of nearly every modern business process — but companies continue to make IT investments in the dark, without a clear conceptual understanding of the ultimate strategic or financial impact. The goal of this book is to help promote such an understanding, to provide business and technology managers, as well as investors and policy-makers, with a new perspective on how technology, competition and profits

intersect.

Through an analysis of its unique characteristics, evolving business role and historical precedents, I will argue that IT's strategic importance is not growing, as many have claimed or assumed, but diminishing. As IT has become more powerful, more standardized and more affordable, it has been transformed from a proprietary technology that companies can use to gain an edge over their rivals into an infrastructural technology that is shared by all competitors. IT has increasingly become, in other words, a simple factor of production — a commodity input that is necessary for competitiveness but insufficient for advantage.

The emergence of a ubiquitous, shared IT infrastructure has, as I will show, many important practical implications, both for how companies manage and invest in technology itself and, more broadly, for how they think about creating and defending competitive advantages. The way executives respond to IT's changing role will influence their companies' fortunes for years to come.

Background and scope

This book deepens, expands and extends a point of view that I originally presented in an article in the May 2003 edition of the Harvard Business Review. That article, titled "IT Doesn't Matter," has become a touchstone for a wide and often passionate debate among the suppliers and users of IT. In dozens of articles published in newspapers, business magazines and IT journals around the world, my thesis has been discussed and dissected, questioned and critiqued, attacked and defended. Many respected executives, business professors and journalists have probed the strengths and weaknesses of my argument and offered their own views on IT and its meaning for business. Beyond the intellectual and practical value of the discussion, which is considerable, its very breadth and intensity underscore both the importance of this subject for companies and the profound lack of a common understanding of it.

For me personally, the debate has been at once gratifying and frustrating. It has been gratifying because I feel I have spurred a necessary, constructive and overdue reconsideration of one of the most important business phenomena of the last half-century. A relatively brief piece of business writing rarely engages so many people and brings into the open so many contending perspectives. It has been frustrating because at least a few of the criticisms of my article reflect misinterpretations of it — misinterpretations traceable in some cases to my own lack

of clarity in defining the terms and scope of my argument.

As I elaborate my thesis in this book, I will address many of the questions that have been raised about my views while also expressing those views with, I hope, more precision and thoroughness. I certainly don't present this volume as the last word in what I'm sure will be a long and fruitful discussion, but I

do hope it helps move the debate at least a little nearer to concrete conclusions of practical benefit to managers....

IT as a utility

Such a discussion is particularly timely today. We are arriving at a turning point in the history of IT in business, with the convergence of three important trends that will shape the future. First, companies are re-evaluating their approaches to IT investment and management as the economy emerges from the post-Internet bubble downturn.

Second, the technology industry is in the midst of a restructuring, as vendors reshape their competitive strategies in response to shifts in the marketplace.

Third, policy-makers and economists are assessing the broad impact of computers on industrial performance and productivity, which will lead to crucial government decisions about the development of the IT infrastructure throughout the world. Making the right choices in all these areas requires an open exchange of information and views, and it is in that spirit that I offer this book.

Early in the 20th century, many large companies created the new management post of "vice president of electricity," an acknowledgement of electrification's transformative role in companies and industries. But within a few years, as electricity's strategic importance diminished, vice presidents of electricity quietly disappeared from the corporate hierarchy. Their work was complete....

Overall, according to a study by researchers at the Massachusetts Institute of Technology and the Wharton School of the University of Pennsylvania, the cost of corporate data processing has dropped by more than 99.9 percent since the 1960s. 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 replication. Even the most cutting-edge IT capabilities rapidly become available to all....

Paul Strassman, who has served as the chief information officer of Kraft Foods Inc., Xerox Corp. and NASA, has been researching the link between IT spending and business results for more than 20 years. His studies, including a 2001 analysis of 1,585 U.S. firms, have also revealed absolutely no correlation between how much a company spends on IT and how well it performs....

Following the lead of General Motors Corp., Verizon and other companies that have actually reduced their year-over-year IT spending, more businesses may want to establish explicit goals for trimming their IT budgets — by 5 percent a year, say. That won't be the right target for every company, of course....

In their extensive studies of IT's role in productivity growth, Erik Brynjolfsson and Lorin Hitt also stress the importance of "complementary investments." It usually takes many years, they show, for IT to lift a company's productivity substantially, and the gains hinge as much on related process and organizational innovations as on the original technology

itself.

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