IT Doesn’t Matter by Nicholas G. Carr Presented by Study Team Gold Lisa Roth, Justin Zeulner, Tom Dickey, Ryan Stormer, and Jay Allen

Overview 1968 – Ted Hoff, Intel Engineer, discovered a way to put circuits for computer processing on a silicon chip. Technology has become the backbone to operational excellence, electronically linking data internally and externally. IT is seen as a critical resource in fact spending capital spending on technology has risen from 5% in 1965 to over 50% in the late 1990s. Today CEOs often talk about strategic value of IT, and have even created the CIO senior leader position in many organizations. The microprocessor was the enabler for a multitude of technological breakthroughs – desktop computers, LANs and WANs, and ultimately the internet. Linking supply chains, internal operations, and linking businesses to customers. Example – Forging purchases linked to each other through the internet. According to a study by the US Department of Commerce’s Bureau of Economic Analysis, <5% capital exp in 1965, in late 1990’s this number had risen to over 50%. Even more telling than the absolute dollars spent is the fact that organizations now feel that IT is of strategic importance to their competitive advantage, so important that they created positions like CIO on the senior staffs of their orgs. The only sustainable advantage is one that competitors can’t have or do. The proliferation is at a point where this is no longer the case the cost of obtaining this technology has been reduced to a level of affordability to all. Now it is essentially merely a cost of doing business. However, the proliferation of IT has reduced its strategic value. A competitive advantage is only an advantage if it is scarce. The premise of the article is that IT has become a commodity that is a business essential and management should focus on risk management in lieu of trying to achieve scarce competitive advantages.

Technology as a Competitive Advantage Proprietary Technology – Defined as a technology that can be owned actually or effectively by one company. Example: Pharmaceutical Company: Patent on Compound Infrastructural Technology – Defined as technology that can not be protected and in contrast to proprietary technology is worth more to the economy as a whole when shared. The history of the Railroad and Electricity industries can teach us much about these types of technology. A company with proprietary rights to manufacture railroads could create lines between it and its major suppliers and customers would definitely have an advantage over its competitors, however, the value to the entire economy would be sub-optimized. The author of this article states that the characteristics and economics of the potential of these technologies make it inevitable that it will become a shared technology. Example: Railroad or Electricity IT is considered an infrastructural technology.

Vanishing Advantage - The Phases Of Infrastructural Technology Buildout Early Phase – advantage takes the form of proprietary technology and enable new more efficient operating methods. physical limitations to technology, intellectual property rights, high costs, lack of standards, etc. Market Changes – in addition to improving operations dramatic broad market changes occur due to infrastructural technology. Example: Railroads in the mid-1800s Early Phase – As in electricity, those who located production close to power plants were able to take advantage of the technology. Companies can also take advantage by having superior insight into the uses of technology. Example: Using electrical power directly at work stations. Market Changes – Railroad speed and capacity allowed industries to ship finished products and created the mass market. Those who took advantage gained economies of scale and crushed small local competitors. The Trap – Executives make a mistake and assume that these advantages are sustainable when they are brief due to the technology becoming broadly adopted.

Commoditization of IT IT has all the characteristics of a infrastructural technology. it is a transport mechanism – carries digital information. it has more value when shared than when used in isolation. Standardization – each stage in the evolution of IT has increased the standardization and homogenization. Highly replicable – the most pure commodity – bytes of data. Perfect Delivery Channel – third party purchases similar to electric power by purchasing fee based services “the grid.” ITs mix of characteristics guarantees commoditization IT is a transport mechanism – just as railroads carry goods and power grids carry electricity Each stage in its developmental progression has involved greater standardization of the technology and greater homogenization of its functionality. For most business applications today, the benefits of customization would be overwhelmed by the costs of isolation Why write your own application for word processing or email….when a ready-made, state-of-the-art application is available at a fraction of the cost? Cost savings and interoperability benefits make the sacrifice of distinctiveness unavoidable. Internet has accelerated commoditization of IT – perfect delivery channel for generic applications More will fulfill IT requirements by purchasing fee-based “web services” from third parties similar to the way we buys electric power and/or telecommunication services Rapidly increasing affordability of IT functionality has destroyed competitive barriers Subject to rapid price deflation – Moore’s Law.

Sprint to Commoditization Over the last ten years, the number of sites on the WWW has gone from 0 – 40 million. Since the 80s, more than 280 million miles of fiber-optic cable have been installed – enough to circle the earth 11,320 times. A primarily characteristic of infrastructural technologies is the rapidity of installation. Following are large investments in the technology, followed by falling prices which finally – in short order – leads to commoditization. Important advantages have been gained through innovative uses of IT: Fed Ex – package tracking Mobil Oil – auto speedpass payment system EBay – internet auctions The key for companies to combat commoditization is to stake out commanding position using IT innovation to secure enduring positioning. Wal-Mart Dell

Are we near the end of the IT buildout phase? Power is outstripping business needs Technology is affordable and available Capacity has caught up with demand IT vendors are repositioning themselves as commodity suppliers or utilities Investment bubble has burst Opportunity for gaining IT based advantages are dwindling. Best practices built into software and are easily replicable. Power of infrastructural technology diminishes as buildout nears completion. Given this and that Alibris is grappling with significant IT issues in late 1998, are they too late? IT is an enabler, allowing them to get to their customers but is not their “white knight” just as their financial backer isn’t either. Books are their primarily commodity and IT allows them to connect with their customers. Diminishing advantages with Amazon, Barnes & Noble among other already having a solid foothold in the market – and already using Alibris to purchase rare books. Given that, what is their value? A website? Approach Implemented a standard Oracle IT system Hired implementation consultants Developed code in-house to customize system Oracle eCommerce IT System implementation failed Debating whether to drop Oracle and start over with original small vendor

From Offense to Defense “When a resource becomes essential to competition but inconsequential to strategy, the risks it creates become more important than the advantages it provides” - Nicholas G. Carr Focus on IT risks more than the potential for strategic advantages. Electricity: Cannot rely on electricity for strategic advantage, but a brief lapse in supply can be devastating. IT disruption can paralyze a company. Examples: Technical glitches Obsolescence Service Outages Security breaches Terrorism

Greatest IT Risk? Overspending… As costs fall, new capabilities rise and business increases reliance on IT – companies continue to invest resources towards large investments from big hardware and software suppliers. Meanwhile… Vast majority of business PC’s rely on a few simple applications. Invaluable Information Examples: Saved e-mails Spam MP3’s Video Clips Computerworld estimates that as much as 70% of the storage capacity of a typical Windows network is wasted. Applications are technologically mature. Applications require only a fraction of computing power. Corporate networks are storing invaluable information.

Larry Ellison (Oracle Legend) on IT… “Most companies spend too much on IT and get very little in return”

“Simplify and Systemize Before You Computerize” Manufacturer of Helicopter Engines – Problem with Controlling Inventory “After reflecting on its predicament, company managers commented that they would have been better off had they improved the efficiency of the operations by eliminating inventory in the first place and not simply thrown technology at the problem.” - Meredith and Shafer From Operations Management for MBA’s (2nd Edition) Solution: Purchased Expensive Automated Equipment Result: Created More Problems than it Solved

New Rules for IT Management SPEND LESS Rigorously evaluate expected returns from IT investments. Negotiate contracts ensuring long-term usefulness of your investment. Assess data storage (eliminate waste and non-relevant information). FOLLOW, DON’T LEAD The longer you wait to make an IT purchase, the more you’ll get for your money. FOLLOW: Decrease risk of buying flawed or soon-to-be obsolete equipment or applications. Let impatient rivals shoulder the high costs of experimentation. Wait for standards and best practices to solidify. FOCUS ON VULNERABILITIES, NOT OPPORTUNITIES Focus IT resources on preparing for disruptions and proprietary control.

Bush Boake Allen SPEND LESS “Penalties for making this large IT investment needs to be evaluated: Giving proprietary control to customers. Placing business at cost-disadvantage. Internal acceptance and large investment ($500K per client). FOLLOW, DON’T LEAD Uncertain that competition will make this investment. If applicable, allow competition to shoulder costs of experimentation.

Bush Boake Allen FOCUS ON RISKS, NOT OPPORTUNITIES Protection of trade secrets. Uncertain that competition will make this investment. “Gaps in Maps” goal of supplying consistency. Consolidation of suppliers. Optimize “global” internal information (flavorists knowledge).

Summary IT is an Infrastructural Technology (no longer proprietary) Vanishing Advantage for Corporate Sustainability IT Has Become A Commodity Standardization/Highly Replicable Delivery Channel Rapid Price Deflation Focus IT Investments on Risk more than Strategic Advantages. Greatest IT Risk is Overspending. To Avoid Overinvesting in IT: Spend Less Follow, Don’t Lead Focus on Risks, Not Opportunities