The Matter of IT
As the technology industry emerges from the bottom, it criticism has been lowered to the nature of being. Information Technology has always been a source of competitive advantage. At the bottom of the business cycle, advantage is basic survival, risk taken only on low hanging fruit. But now, as the leaky pipes have stopped dripping, some wish to relegate the job of IT to that of a plumber.
Friday's article in the NY Times by Steve Lohr asks the question, "Has Technology Lost its Special Status?" Technology as an industry is 10 percent of the economy and 60 percent of business spending. According to John Gantz of IDC, technology spending has increased 2-3 times the rate of economic growth since the 1960s. The question is if the industry will return to its historical growth rates, the driver of valuation multiples. Lohr reports:
That assumption about technology's special role is questioned in a provocative article this month in The Harvard Business Review, titled "IT Doesn't Matter." The article asserts that information technology, or I.T. for short, is inevitably headed in the same direction as the railroads, the telegraph, electricity and the internal combustion engine — becoming, in economic terms, just ordinary factors of production, or "commodity inputs."
"From a strategic standpoint, they became invisible; they no longer mattered," Nicholas G. Carr, editor at large of The Harvard Business Review, wrote in the article. "That is exactly what is happening to information technology today."
John Hagel and John Seely Brown believe this is an important article because it very effectively captures the backlash sweeping through executive suites against IT spending...But Carr’s article is also dangerous because it endorses the growing view that IT offers only limited potential for strategic differentiation....and are preparing a rebuttal in the July issue of HBR:
- Extracting business value from IT requires innovations in business practices. In many respects, we believe Carr attacks a red herring – few people would argue that IT alone provides any significant business value or strategic advantage.
- The economic impact from IT comes from incremental innovations, rather than "big bang" initiatives. A process of rapid incrementalism enhances learning potential and creates opportunities for further innovations.
- The strategic impact of IT investment comes from the cumulative effect of sustained initiatives to innovate business practices in the near-term. The strategic differentiation emerges over time, based less on any one specific innovation in business practice and much more on the capability to continuously innovate around the evolving capabilities of IT.
Some tech executives have countered in the NY Times article:
"I.T. is the vehicle by which you turn ideas and content into intellectual property products," Mr. Craig Barrett (of Intel) said. "As a nation and as a company, you either upgrade your I.T. infrastructure or you won't be competitive."
Samuel J. Palmisano, chief executive of I.B.M., made the case for his industry's growing at twice the rate of the economy when he spoke to analysts on Wednesday. "The industry is fundamentally a growth industry because it underpins productivity," he said.
Kevin Werbach speaks of new models in the Post-PC era in his Supernova report:
...The point of the article is not that tech is dying, or that innovation is drying up. It's that enterprise technology is moving into a new phase. Bigger, faster, and more feature-laden are no longer selling points in the same way. Smarter, simpler, more efficient, and more flexible are the new criteria. It's much harder to make powerful system simple than to make them complex....
Zack Lynch points how IT drives growth in other sectors:
For instance, although not a punctuated leap in competitive advantage, social software has the potential to accrue significant value for companies that leverage its potential to accelerate innovation. In some industries, two product cycles can be the difference between corporate life and death.
For example, decreasing innovation cycle times in the pharmaceutical industry by 10% could slash years off product research, development and approval processes. When translated into revenue and market capitalization impacts, intelligent adoption of social software could significantly disrupt the balance of power in this multi-billion dollar industry. Who says IT competitive advantage is dead?
What is unique about IT compared to other revolutions is how it extends the capabilities of people and groups. IT fuels competitive advantage by enhancing productivity. Erik Brynjolfsson of MIT has demonstrated that productivity gains occur not through IT in and of itself, but when it is introduced with new business practice and process.
This is actually a contrarian point for many. Some private equity investors shy away from technologies that require change of behavior, for example, because it adds risk that users will resist change. But in fact, that's the real promise of IT, to extend our capabilities in new ways. Changing behavior is good in a changing world.
Brynjofsson's studies have been in process-intensive areas of organization. Areas where economies of scale can be easily realized. When business process is defined, it is almost immeadiately outdated because environmental conditions change presenting new sets of information. This underscores the need for business practice that realizes economies of scope (agility), but also the limits of process itself.
What remains is knowledge work. Most jobs in the service sector spend the majority of their time undertaking unstructured tasks in social context. And this time is where innovation occurs (Palmisano points to IP creation, but that's just one set of montetizable outcomes).
IT will continue to drive competitive advantage for business because an incremental enhancement of how groups work still yields exponental benefits.
11:38:47 PM -- Others on this topic: IT | John Hagel | John Seely Brown | Kevin Werbach | New York Times | Productivity | Social Software | Technology and Society | Zack Lynch