IT Doesn’t MatterHBR AT LARGE • IT Doesn’t Matter Nicholas G. Carr is HBR’s editor-at-large.He edited The Digital Enterprise,a collec-tion of HBR articles published by Harvard

IT Doesn’t Matter

by Nicholas G. Carr

Reprint r0305b

With Letters to the Editor

HBR Case Study r0305aLeadership Development:Perk or Priority?Idalene F. Kesner

HBR at Large r0305bIT Doesn’t MatterNicholas G. Carr

Is Silence Killing Your Company? r0305cLeslie Perlow and Stephanie Williams

Global Gamesmanship r0305dIan C. MacMillan, Alexander B. van Putten,and Rita Gunther McGrath

The High Cost of Accurate Knowledge r0305eKathleen M. Sutcliffe and Klaus Weber

Hedging Customers r0305fRavi Dhar and Rashi Glazer

The Nonprofit Sector’s r0305g$100 Billion OpportunityBill Bradley, Paul Jansen, and Les Silverman

Best Practice r0305hDiamonds in the Data MineGary Loveman

Frontiers r0305jDon’t Trust Your GutEric Bonabeau

May 2003

Copyright © 2003 by Harvard Business School Publishing Corporation. All rights reserved. 5

n 1968, a young Intel engineer namedTed Hoff found a way to put the cir-cuits necessary for computer process-

ing onto a tiny piece of silicon. His in-vention of the microprocessor spurred aseries of technological breakthroughs –desktop computers, local and wide areanetworks, enterprise software, and theInternet – that have transformed thebusiness world. Today, no one would dis-pute that information technology hasbecome the backbone of commerce. Itunderpins the operations of individualcompanies, ties together far-flung sup-ply chains, and, increasingly, links busi-nesses to the customers they serve.Hardly a dollar or a euro changes handsanymore without the aid of computersystems.

As IT’s power and presence have ex-panded, companies have come to view itas a resource ever more critical to their

success, a fact clearly reflected in theirspending habits. In 1965, according to astudy by the U.S. Department of Com-merce’s Bureau of Economic Analysis,less than 5% of the capital expendituresof American companies went to infor-mation technology. After the introduc-tion of the personal computer in theearly 1980s, that percentage rose to 15%.By the early 1990s, it had reached morethan 30%, and by the end of the decadeit had hit nearly 50%. Even with the re-cent sluggishness in technology spend-ing, businesses around the world con-tinue to spend well over $2 trillion ayear on IT.

But the veneration of IT goes muchdeeper than dollars. It is evident as wellin the shifting attitudes of top manag-ers. Twenty years ago, most executiveslooked down on computers as prole-tarian tools – glorified typewriters and

I

ITDoesn’tMatter

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.

H B R AT L A R G E

calculators – best relegated to low levelemployees like secretaries, analysts, andtechnicians. It was the rare executivewho would let his fingers touch a key-board, much less incorporate informa-tion technology into his strategic think-ing. Today, that has changed completely.Chief executives now routinely talkabout the strategic value of informationtechnology, about how they can use ITto gain a competitive edge, about the“digitization” of their business models.Most have appointed chief informationofficers to their senior managementteams, and many have hired strategyconsulting firms to provide fresh ideason how to leverage their IT investmentsfor differentiation and advantage.

Behind the change in thinking lies asimple assumption: that as IT’s potencyand ubiquity have increased, so too hasits strategic value. It’s a reasonable as-sumption, even an intuitive one. But it’smistaken. What makes a resource trulystrategic – what gives it the capacity tobe the basis for a sustained competitiveadvantage – is not ubiquity but scarcity.You only gain an edge over rivals byhaving or doing something that theycan’t have or do. By now, the core func-tions of IT – data storage, data process-ing, and data transport – have becomeavailable and affordable to all.1 Theirvery power and presence have begun totransform them from potentially strate-gic resources into commodity factors ofproduction. They are becoming costsof doing business that must be paid byall but provide distinction to none.

IT is best seen as the latest in a seriesof broadly adopted technologies thathave reshaped industry over the pasttwo centuries – from the steam engineand the railroad to the telegraph andthe telephone to the electric generatorand the internal combustion engine.For a brief period, as they were beingbuilt into the infrastructure of com-merce, all these technologies openedopportunities for forward-looking com-

panies to gain real advantages. But astheir availability increased and theircost decreased–as they became ubiqui-tous – they became commodity inputs.From a strategic standpoint, they be-came invisible; they no longer mattered.That is exactly what is happening to in-formation technology today, and theimplications for corporate IT manage-ment are profound.

Vanishing Advantage

Many commentators have drawn paral-lels between the expansion of IT, par-ticularly the Internet, and the rolloutsof earlier technologies. Most of thecomparisons, though, have focused oneither the investment pattern associ-ated with the technologies – the boom-to-bust cycle–or the technologies’ rolesin reshaping the operations of entire in-dustries or even economies. Little has

been said about the way the technolo-gies influence, or fail to influence, com-petition at the firm level. Yet it is herethat history offers some of its most im-portant lessons to managers.

A distinction needs to be made be-tween proprietary technologies andwhat might be called infrastructuraltechnologies. Proprietary technologiescan be owned, actually or effectively,by a single company. A pharmaceuticalfirm, for example, may hold a patent ona particular compound that serves asthe basis for a family of drugs. An in-dustrial manufacturer may discover aninnovative way to employ a processtechnology that competitors find hardto replicate. A company that producesconsumer goods may acquire exclusive

rights to a new packaging material thatgives its product a longer shelf life thancompeting brands. As long as they re-main protected, proprietary technolo-gies can be the foundations for long-term strategic advantages, enablingcompanies to reap higher profits thantheir rivals.

Infrastructural technologies, in con-trast, offer far more value when sharedthan when used in isolation. Imagineyourself in the early nineteenth century,and suppose that one manufacturingcompany held the rights to all the tech-nology required to create a railroad. If itwanted to, that company could justbuild proprietary lines between its sup-pliers, its factories, and its distributorsand run its own locomotives and railcarson the tracks. And it might well operatemore efficiently as a result. But, for thebroader economy, the value produced

by such an arrangement would be triv-ial compared with the value that wouldbe produced by building an open railnetwork connecting many companiesand many buyers. The characteristicsand economics of infrastructural tech-nologies, whether railroads or telegraphlines or power generators, make it inev-itable that they will be broadly shared–that they will become part of the gen-eral business infrastructure.

In the earliest phases of its buildout,however, an infrastructural technologycan take the form of a proprietary tech-nology. As long as access to the technol-ogy is restricted – through physical lim-itations, intellectual property rights,high costs, or a lack of standards–a com-pany can use it to gain advantages overrivals. Consider the period between theconstruction of the first electric powerstations, around 1880, and the wiring ofthe electric grid early in the twentiethcentury. Electricity remained a scarce

6 harvard business review

H B R AT L A R G E • IT Doesn’t Matter

Nicholas G. Carr is HBR’s editor-at-large. He edited The Digital Enterprise, a collec-tion 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 additionto HBR. He can be reached at [email protected].

When a resource becomes essential to competition but

inconsequential to strategy, the risks it creates become

more important than the advantages it provides.

resource during this time, and thosemanufacturers able to tap into it – by,for example, building their plants neargenerating stations – often gained animportant edge. It was no coincidencethat the largest U.S. manufacturer ofnuts and bolts at the turn of the century,Plumb, Burdict, and Barnard, located itsfactory near Niagara Falls in New York,the site of one of the earliest large-scalehydroelectric power plants.

Companies can also steal a march ontheir competitors by having superior in-sight into the use of a new technology.The introduction of electric power againprovides a good example. Until the endof the nineteenth century, most man-ufacturers relied on water pressure orsteam to operate their machinery.Powerin those days came from a single, fixedsource – a waterwheel at the side of amill, for instance–and required an elab-orate system of pulleys and gears to distribute it to individual workstationsthroughout the plant. When electricgenerators first became available, manymanufacturers simply adopted them asa replacement single-point source, usingthem to power the existing system ofpulleys and gears. Smart manufacturers,however, saw that one of the great ad-vantages of electric power is that it is eas-ily distributable–that it can be broughtdirectly to workstations. By wiring theirplants and installing electric motors intheir machines, they were able to dis-pense with the cumbersome, inflexible,and costly gearing systems, gaining animportant efficiency advantage overtheir slower-moving competitors.

In addition to enabling new, more ef-ficient operating methods, infrastruc-tural technologies often lead to broadermarket changes. Here, too, a companythat sees what’s coming can gain a stepon myopic rivals. In the mid-1800s, whenAmerica started to lay down rail lines inearnest, it was already possible to trans-port goods over long distances – hun-dreds of steamships plied the country’srivers. Businessmen probably assumedthat rail transport would essentially fol-low the steamship model, with some in-cremental enhancements. In fact, thegreater speed, capacity, and reach of

the railroads fundamentally changed thestructure of American industry. It sud-denly became economical to ship fin-ished products, rather than just rawmaterials and industrial components,over great distances, and the mass con-sumer market came into being. Compa-nies that were quick to recognize thebroader opportunity rushed to buildlarge-scale, mass-production factories.The resulting economies of scale al-lowed them to crush the small, localplants that until then had dominatedmanufacturing.

The trap that executives often fallinto, however, is assuming that oppor-tunities for advantage will be availableindefinitely. In actuality, the window forgaining advantage from an infrastruc-tural technology is open only briefly.When the technology’s commercial po-tential begins to be broadly appreciated,huge amounts of cash are inevitably in-vested in it, and its buildout proceedswith extreme speed. Railroad tracks,telegraph wires, power lines – all werelaid or strung in a frenzy of activity (afrenzy so intense in the case of rail linesthat it cost hundreds of laborers theirlives). In the 30 years between 1846 and1876, reports Eric Hobsbawm in TheAge of Capital, the world’s total railtrackage increased from 17,424 kilome-ters to 309,641 kilometers. During thissame period, total steamship tonnagealso exploded, from 139,973 to 3,293,072tons. The telegraph system spread evenmore swiftly. In Continental Europe,there were just 2,000 miles of telegraphwires in 1849; 20 years later, there were110,000. The pattern continued withelectrical power. The number of centralstations operated by utilities grew from468 in 1889 to 4,364 in 1917, and the av-erage capacity of each increased morethan tenfold. (For a discussion of thedangers of overinvestment, see the side-bar “Too Much of a Good Thing.”)

By the end of the buildout phase, theopportunities for individual advantageare largely gone. The rush to invest leadsto more competition, greater capacity,and falling prices, making the technol-ogy broadly accessible and affordable.At the same time, the buildout forces

may 2003 7

IT Doesn’t Matter • H B R AT L A R G E

users to adopt universal technical stan-dards, rendering proprietary systemsobsolete. Even the way the technologyis used begins to become standardized,as best practices come to be widely un-derstood and emulated. Often, in fact,the best practices end up being builtinto the infrastructure itself; after elec-trification, for example, all new facto-ries were constructed with many well-distributed power outlets. Both thetechnology and its modes of use be-come, in effect, commoditized. The onlymeaningful advantage most companiescan hope to gain from an infrastructuraltechnology after its buildout is a costadvantage – and even that tends to bevery hard to sustain.

That’s not to say that infrastructuraltechnologies don’t continue to influ-ence competition. They do, but theirinfluence is felt at the macroeconomiclevel, not at the level of the individualcompany. If a particular country, for in-stance, lags in installing the technol-ogy – whether it’s a national rail net-work, a power grid, or a communicationinfrastructure – its domestic industrieswill suffer heavily. Similarly, if an in-dustry lags in harnessing the power ofthe technology, it will be vulnerable todisplacement. As always, a company’sfate is tied to broader forces affectingits region and its industry. The point is,however, that the technology’s poten-tial for differentiating one companyfrom the pack – its strategic potential –inexorably declines as it becomes acces-sible and affordable to all.

The Commoditization of IT

Although more complex and malleablethan its predecessors, IT has all the hall-marks of an infrastructural technology.In fact, its mix of characteristics guar-antees particularly rapid commoditi-zation. IT is, first of all, a transport mech-anism–it carries digital information justas railroads carry goods and power gridscarry electricity. And like any transportmechanism, it is far more valuable whenshared than when used in isolation. Thehistory of IT in business has been a his-tory of increased interconnectivity andinteroperability, from mainframe time-

sharing to minicomputer-based localarea networks to broader Ethernet net-works and on to the Internet. Each stagein that progression has involved greaterstandardization of the technology and,at least recently, greater homogeniza-tion of its functionality. For most busi-ness applications today, the benefits ofcustomization would be overwhelmedby the costs of isolation.

IT is also highly replicable. Indeed, itis hard to imagine a more perfect com-modity than a byte of data – endlesslyand perfectly reproducible at virtuallyno cost. The near-infinite scalability ofmany IT functions, when combinedwith technical standardization, doomsmost proprietary applications to eco-nomic obsolescence. Why write yourown application for word processing or e-mail or, for that matter, supply-chain management when you can buya ready-made, state-of-the-art applica-tion for a fraction of the cost? But it’snot just the software that is replicable.Because most business activities andprocesses have come to be embeddedin software, they become replicable, too.When companies buy a generic appli-cation, they buy a generic process aswell. Both the cost savings and the in-teroperability benefits make the sacri-fice of distinctiveness unavoidable.

The arrival of the Internet has accel-erated the commoditization of IT byproviding a perfect delivery channel forgeneric applications. More and more,companies will fulfill their IT require-ments simply by purchasing fee-based“Web services” from third parties –similar to the way they currently buyelectric power or telecommunicationsservices. Most of the major business-technology vendors, from Microsoft toIBM, are trying to position themselvesas IT utilities, companies that will con-trol the provision of a diverse range ofbusiness applications over what is nowcalled, tellingly, “the grid.” Again, theupshot is ever greater homogenizationof IT capabilities, as more companiesreplace customized applications withgeneric ones. (For more on the chal-lenges facing IT companies, see the side-bar “What About the Vendors?”)

Finally, and for all the reasons al-ready discussed, IT is subject to rapidprice deflation. When Gordon Mooremade his famously prescient assertionthat the density of circuits on a com-puter chip would double every twoyears, he was making a prediction about the coming explosion in process-ing power. But he was also making aprediction about the coming free fall inthe price of computer functionality. Thecost of processing power has droppedrelentlessly, from $480 per million in-structions per second (MIPS) in 1978 to $50 per MIPS in 1985 to $4 per MIPSin 1995, a trend that continues un-abated. Similar declines have occurredin the cost of data storage and trans-mission. The rapidly increasing afford-ability of IT functionality has not onlydemocratized the computer revolu-tion, it has destroyed one of the mostimportant potential barriers to com-

petitors. Even the most cutting-edge IT capabilities quickly become avail-able to all.

It’s no surprise, given these charac-teristics, that IT’s evolution has closelymirrored that of earlier infrastructuraltechnologies. Its buildout has been everybit as breathtaking as that of the rail-roads (albeit with considerably fewerfatalities). Consider some statistics. Dur-ing the last quarter of the twentieth cen-tury, the computational power of a microprocessor increased by a factorof 66,000. In the dozen years from 1989to 2001, the number of host computersconnected to the Internet grew from80,000 to more than 125 million. Overthe last ten years, the number of siteson the World Wide Web has grownfrom zero to nearly 40 million. Andsince the 1980s, more than 280 millionmiles of fiber-optic cable have been in-stalled – enough, as BusinessWeek re-



Too Much of a Good ThingAs 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 seem-

ingly 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-nineteenth-

century 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.

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

As with earlier infrastructural tech-nologies, IT provided forward-lookingcompanies many opportunities for com-petitive advantage early in its buildout,when it could still be “owned”like a pro-prietary technology. A classic exampleis American Hospital Supply. A leadingdistributor of medical supplies, AHS introduced in 1976 an innovative systemcalled Analytic Systems AutomatedPurchasing, or ASAP, that enabled hos-pitals to order goods electronically. De-veloped in-house, the innovative systemused proprietary software running on a mainframe computer, and hospitalpurchasing agents accessed it throughterminals at their sites. Because moreefficient ordering enabled hospitals toreduce their inventories–and thus theircosts–customers were quick to embracethe system. And because it was propri-etary to AHS, it effectively locked outcompetitors. For several years, in fact,AHS was the only distributor offeringelectronic ordering, a competitive ad-vantage that led to years of superior financial results. From 1978 to 1983,AHS’s sales and profits rose at annualrates of 13% and 18%, respectively – wellabove industry averages.

AHS gained a true competitive ad-vantage by capitalizing on characteris-tics of infrastructural technologies thatare common in the early stages of theirbuildouts, in particular their high costand lack of standardization. Within adecade, however, those barriers to com-petition were crumbling. The arrival ofpersonal computers and packaged soft-ware, together with the emergence ofnetworking standards, was renderingproprietary communication systems un-attractive to their users and uneconom-ical to their owners. Indeed, in an ironic,if predictable, twist, the closed natureand outdated technology of AHS’s sys-tem turned it from an asset to a liability.By the dawn of the 1990s, after AHS hadmerged with Baxter Travenol to formBaxter International, the company’s se-nior executives had come to view ASAPas “a millstone around their necks,” ac-

cording to a Harvard Business Schoolcase study.

Myriad other companies have gainedimportant advantages through the in-novative deployment of IT. Some, likeAmerican Airlines with its Sabre reser-vation system, Federal Express with itspackage-tracking system, and Mobil Oilwith its automated Speedpass paymentsystem, used IT to gain particular op-

erating or marketing advantages – toleapfrog the competition in one processor activity. Others, like Reuters with its1970s financial information network or,more recently, eBay with its Internetauctions, had superior insight into theway IT would fundamentally change anindustry and were able to stake out com-manding positions. In a few cases, thedominance companies gained through

may 2003 9


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 Micro-

systems, 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 ven-

dors, at least those with the foresight and skill to adapt to the new environ-

ment. 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 essen-

tial genius has always been his unsentimental trust in the commoditiza-

tion 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.

IT innovation conferred additional ad-vantages, such as scale economies andbrand recognition, that have provedmore durable than the original techno-logical edge. Wal-Mart and Dell Com-puter are renowned examples of firmsthat have been able to turn temporarytechnological advantages into enduringpositioning advantages.

But the opportunities for gaining IT-based advantages are already dwin-dling. Best practices are now quicklybuilt into software or otherwise repli-cated. And as for IT-spurred industrytransformations, most of the ones thatare going to happen have likely alreadyhappened or are in the process of hap-pening. Industries and markets will con-tinue to evolve, of course, and some willundergo fundamental changes – the fu-ture of the music business, for example,continues to be in doubt. But historyshows that the power of an infrastruc-tural technology to transform industriesalways diminishes as its buildout nearscompletion.

While no one can say precisely whenthe buildout of an infrastructural tech-nology has concluded, there are manysigns that the IT buildout is much closerto its end than its beginning. First, IT’spower is outstripping most of the busi-ness needs it fulfills. Second, the price ofessential IT functionality has droppedto the point where it is more or less affordable to all. Third, the capacity ofthe universal distribution network (theInternet) has caught up with demand –indeed, we already have considerablymore fiber-optic capacity than we need.Fourth, IT vendors are rushing to posi-tion themselves as commodity suppli-ers or even as utilities. Finally, and mostdefinitively, the investment bubble hasburst, which historically has been a clearindication that an infrastructural tech-nology is reaching the end of its build-out. A few companies may still be ableto wrest advantages from highly spe-cialized applications that don’t offerstrong economic incentives for repli-cation, but those firms will be the ex-ceptions that prove the rule.

At the close of the 1990s, when Inter-net hype was at full boil, technologists



0

50

100

150

200

250

300

350

Railroad track worldwide,in thousands of kilometers

1841 1846 1851 1856 1861 1866 1871 1876

Railways

U.S. electric utility generating capacity, in megawatts

0

50

100

150

200

Number ofhost computerson the Internet(in millions)

Information Technology

1990 1992 1994 1996 1998 2000 2002

0

3,000

6,000

9,000

12,000

15,000

1920191719121907190218991889

Electric Power

The Sprint to CommoditizationOne of the most salient characteristics of infrastructural technologies is

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

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

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

offered grand visions of an emerging“digital future.” It may well be that, interms of business strategy at least, thefuture has already arrived.

From Offense to Defense

So what should companies do? From apractical standpoint, the most impor-tant lesson to be learned from earlierinfrastructural technologies may bethis: When a resource becomes essen-tial to competition but inconsequentialto strategy, the risks it creates becomemore important than the advantages itprovides. Think of electricity. Today, nocompany builds its business strategyaround its electricity usage, but even abrief lapse in supply can be devastating(as some California businesses discov-ered during the energy crisis of 2000).The operational risks associated withIT are many – technical glitches, obso-lescence, service outages, unreliablevendors or partners, security breaches,even terrorism–and some have becomemagnified as companies have movedfrom tightly controlled, proprietary sys-tems to open, shared ones. Today, an ITdisruption can paralyze a company’sability to make its products, deliver itsservices, and connect with its customers,not to mention foul its reputation. Yetfew companies have done a thoroughjob of identifying and tempering theirvulnerabilities. Worrying about whatmight go wrong may not be as glam-orous a job as speculating about the fu-ture, but it is a more essential job rightnow. (See the sidebar “New Rules for ITManagement.”)

In the long run, though, the greatestIT risk facing most companies is moreprosaic than a catastrophe. It is, simply,overspending. IT may be a commodity,and its costs may fall rapidly enough toensure that any new capabilities arequickly shared, but the very fact that itis entwined with so many businessfunctions means that it will continue toconsume a large portion of corporatespending. For most companies, just stay-ing in business will require big outlaysfor IT. What’s important–and this holdstrue for any commodity input – is to beable to separate essential investments

from ones that are discretionary, un-necessary, or even counterproductive.

At a high level, stronger cost man-agement requires more rigor in evalu-ating expected returns from systems in-vestments, more creativity in exploringsimpler and cheaper alternatives, and agreater openness to outsourcing andother partnerships. But most companiescan also reap significant savings by sim-ply cutting out waste. Personal comput-ers are a good example. Every year, busi-nesses purchase more than 100 millionPCs, most of which replace older mod-els. Yet the vast majority of workers whouse PCs rely on only a few simple appli-cations–word processing, spreadsheets,e-mail, and Web browsing. These appli-cations have been technologically ma-ture for years; they require only a frac-tion of the computing power provided

by today’s microprocessors. Neverthe-less, companies continue to roll outacross-the-board hardware and softwareupgrades.

Much of that spending, if truth betold, is driven by vendors’ strategies. Bighardware and software suppliers havebecome very good at parceling out newfeatures and capabilities in ways thatforce companies into buying new com-puters, applications, and networkingequipment much more frequently thanthey need to. The time has come for ITbuyers to throw their weight around, tonegotiate contracts that ensure the long-term usefulness of their PC investmentsand impose hard limits on upgradecosts. And if vendors balk, companiesshould be willing to explore cheaper so-lutions, including open-source applica-tions and bare-bones network PCs, even

may 2003 11


New Rules for IT ManagementWith 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 invest-

ments 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 capabili-

ties 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 con-

trol over their IT applications and networks to vendors and other third par-

ties, the threats they face will proliferate. They need to prepare themselves

for technical glitches, outages, and security breaches, shifting their atten-

tion from opportunities to vulnerabilities.

if it means sacrificing features. If a com-pany needs evidence of the kind ofmoney that might be saved, it need onlylook at Microsoft’s profit margin.

In addition to being passive in theirpurchasing,companies have been sloppyin their use of IT. That’s particularly truewith data storage, which has come toaccount for more than half of manycompanies’ IT expenditures. The bulk ofwhat’s being stored on corporate net-works has little to do with making prod-ucts or serving customers – it consists

of employees’ saved e-mails and files,including terabytes of spam, MP3s, andvideo clips. Computerworld estimatesthat as much as 70% of the storage ca-pacity of a typical Windows network iswasted – an enormous unnecessary ex-pense. Restricting employees’ ability tosave files indiscriminately and indefi-nitely may seem distasteful to manymanagers, but it can have a real impacton the bottom line. Now that IT has become the dominant capital expensefor most businesses, there’s no excusefor waste and sloppiness.

Given the rapid pace of technology’sadvance, delaying IT investments can be



another powerful way to cut costs –while also reducing a firm’s chance ofbeing saddled with buggy or soon-to-be-obsolete technology. Many compa-nies, particularly during the 1990s,rushed their IT investments either be-cause they hoped to capture a first-mover advantage or because they fearedbeing left behind. Except in very rarecases, both the hope and the fear wereunwarranted. The smartest users oftechnology – here again, Dell and Wal-Mart stand out–stay well back from the

cutting edge, waiting to make purchasesuntil standards and best practices solid-ify. They let their impatient competitorsshoulder the high costs of experimenta-tion, and then they sweep past them,spending less and getting more.

Some managers may worry that be-ing stingy with IT dollars will damagetheir competitive positions. But studiesof corporate IT spending consistentlyshow that greater expenditures rarelytranslate into superior financial results.In fact, the opposite is usually true. In2002, the consulting firm Alinean com-pared the IT expenditures and the fi-nancial results of 7,500 large U.S. com-

Studies of corporate IT spending consistently show

that greater expenditures rarely translate into superior

financial results. In fact, the opposite is usually true.

panies and discovered that the top per-formers tended to be among the mosttightfisted. The 25 companies that de-livered the highest economic returns,for example, spent on average just 0.8%of their revenues on IT, while the typicalcompany spent 3.7%. A recent study byForrester Research showed, similarly,that the most lavish spenders on ITrarely post the best results.Even Oracle’sLarry Ellison, one of the great technol-ogy salesmen, admitted in a recent in-terview that “most companies spend toomuch [on IT] and get very little in re-turn.” As the opportunities for IT-basedadvantage continue to narrow, the pen-alties for overspending will only grow.

IT management should, frankly, be-come boring. The key to success, for thevast majority of companies, is no longerto seek advantage aggressively but tomanage costs and risks meticulously. If,like many executives, you’ve begun totake a more defensive posture toward ITin the last two years, spending more fru-gally and thinking more pragmatically,you’re already on the right course. Thechallenge will be to maintain that disci-pline when the business cycle strength-ens and the chorus of hype about IT’sstrategic value rises anew.

1.“Information technology” is a fuzzy term. In thisarticle, it is used in its common current sense, as de-noting the technologies used for processing, storing,and transporting information in digital form.

Reprint r0305b; HBR OnPoint 3566To place an order, call 1-800-988-0886.

Every magazine has an ideal, or an ideal-ized, reader.For Harvard Business Review,he or she is an executive of uncommonintelligence and curiosity: the brightestCEO you know or can imagine, perhaps.We like to pretend that our ideal readerhas chartered us to prepare a briefingevery month.On the agenda,we’ve beentold, should be three kinds of items.

First, our reader says, bring me im-portant new ideas, research, or insights:“Boss, here’s something you shouldknow.”

Second, bring me important eternaltruths, rediscovered and refreshed: “Boss,here’s something you shouldn’t forget.”

Third, bring me into the pictureabout important issues and arguments:“Boss, here’s something you will want to know about.”

New ideas, truths, and disputes: Whenwe do our job well, HBR is a forumwhere you get some of each, and all ofit is important. Nicholas G. Carr’s “ITDoesn’t Matter,” published in the May2003 issue, falls into the third category.It takes one side of an argument that’sundeniably urgent and important tobusiness leaders.

In 2000, nearly half of U.S. corporatecapital spending went to information

technology. Then the spending col-lapsed and the Nasdaq with it, and inevery boardroom–and in every technol-ogy company–people began to wonder:What happened? What was that spend-ing about? What’s changed? What hasnot? And what do we do now? What isour technology strategy, and how does it affect our corporate strategy?

Forcefully, Carr argues that invest-ments in IT, while profoundly impor-tant, are less and less likely to deliver a competitive edge to an individualcompany. “No one would dispute thatinformation technology has become the backbone of commerce,” Carr says.“The point is, however, that the tech-nology’s potential for differentiatingone company from the pack – its strate-gic potential – inexorably diminishes asit becomes accessible and affordable to all.”

Unsurprisingly, “IT Doesn’t Matter”has generated an enormous amount ofcontroversy. Our ideal reader wants thatgive-and-take, argument and counter-argument, the better to understand theissues. Always in such cases, people aremore likely to write to us when they disagree with an article’s point of viewthan when they agree with it. Always

in such cases, a few people mistake theargument. (In this instance, the mostcommon misperception is that the arti-cle says that IT is dead and that it willnot continue to be a source of dramatic,even transformational change. It doesn’tsay that. Instead, it says the odds are thatthe benefits of such changes will inureto whole industries rather than any onecompetitor. Instead of seeking advantagethrough technology, Carr argues, com-panies should manage IT defensively –watching costs and avoiding risks.)

And always in such cases, some verysmart, thoughtful people present urgent,cogent, and forceful challenges to thearticle’s conclusions.

We have received so many thoughtfulletters that we have decided to publishthem here, together with Carr’s reply.That decision reflects – among otherthings – one way in which the ubiquityof IT has created new opportunities forus and for all publishers to interact withreaders. It also reflects HBR’s continuingcommitment to offer readers a forumfull of thoughtful voices, bringing youwhat’s newly learned, what’s fiercely argued, and what truly matters.

Thomas A. StewartEditor

harvard business review • june 2003 1

sre t o t h e E d i t o rL e t t

Does IT Matter? An HBR Debate 1 Introduction by Thomas A. Stewart

Letters from:2 John Seely Brown and John Hagel III5 F. Warren McFarlan and Richard L. Nolan7 Paul A. Strassmann

Other readers

17 Reply from Nicholas G. Carr

Order the article,“IT Doesn’t Matter”

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Letter from John Seely Brownand John Hagel III

John Seely Brown, Former Chief Scientist,

Xerox, Palo Alto, California

John Hagel III, Management Consultant

and Author, Burlingame, California

Nicholas Carr’s article “IT Doesn’t Mat-ter” (May 2003) is an important, per-haps even seminal, piece. It effectivelycaptures the zeitgeist among seniormanagers of large enterprises and giveseloquent voice to the backlash that hasswept through management suites re-garding IT’s business value.

As Carr’s article says, businesses haveoverestimated the strategic value of IT.They have significantly overspent ontechnology in the quest for businessvalue. They need to manage large por-tions of their IT infrastructures more rigorously to reduce capital investmentrequirements and operating costs. Ascompanies become more dependent onIT platforms for their day-to-day opera-tions, they must focus on potential vul-nerabilities and more aggressively man-age for reliability and security. But suchideas are not inconsistent with the viewthat IT remains a profound catalyst forthe creation of strategic differentiation.

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

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

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

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

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

Extracting value from IT requires in-novations in business practices. Com-panies that mechanically insert IT intotheir businesses without changing theirpractices for exploiting the new capabil-ities will only destroy IT’s economicvalue. Unfortunately, all too many com-panies do this. For that reason, the re-search findings by Alinean and For-rester–that IT spending rarely correlateswith superior financial results – are notsurprising.

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

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

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

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

Companies also think too narrowlyabout IT’s possibilities when they focusso heavily on business practices withinthe enterprise. In fact, many opportuni-ties for business-practice innovations ex-tend beyond the walls of the enterpriseto include relationships with other com-panies. Rather than think in narrowtransactional terms, as evidenced by thefirst wave of business-to-business mar-ketplaces, executives would be far betteradvised to think in terms of opportuni-


Does IT Matter? An HBR Debate • W E B E X C L U S I V E

ties to build long-term relationships withcompanies possessing complementaryassets and capabilities. Companies likeLi & Fung, with its orchestration modelbased on a loosely coupled approach toprocess management spanning thou-sands of companies, suggest opportuni-ties for redefining relationships amongcompanies and, in the process, creatingsignificant differentiation.

In short,many executives have startedto view IT as a commodity because theyhave not thought aggressively enoughabout how IT can bring about new busi-ness practices. The differentiation is notin IT itself but in the new practices it en-ables. IT does indeed matter. AlthoughIT may be ubiquitous and increasinglyless expensive, the insight and ability re-quired for it to create economic valueare in very short supply. It is far differentfrom commodities like wheat and alu-minum,where the processing operationsare well understood and the economicadvantage lies in being able to sourcethe commodity at lower cost.

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

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

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

innovations can also reduce the finan-cial risks by generating near-term re-turns that can help fund subsequentwaves of operating initiatives.Politically,this kind of incremental approach, withits relentless focus on tangible near-termreturns, also helps deepen organiza-tional support for new business practiceswhile neutralizing potential opposition.

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

To understand this point, it is essentialto differentiate the characteristics of ITas an infrastructure technology relativeto the variety of other infrastructure tech-nologies cited by Carr – steam engines,railroads, electricity, and telephones. Ineach of those prior areas, the underlyingtechnology burst forth in one relativelyconcentrated innovation.While the tech-

nology’s performance continued to im-prove after it was introduced, the rate ofimprovement was far more modest andreached a point of diminishing returnsmuch sooner than we have seen in thedecades since the introduction of digitaltechnology. Thus, the ability to contin-

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

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

This sustained pace and expandingrange of digital technology innovationcontinues to precipitate fundamentalnew opportunities for thinking abouthow we organize such technology. Weare now on the cusp of a shift to distrib-



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

IT-driven initiatives rarely produce expected returns.

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

The underlying technology compo-nents may be widely and cheaply avail-able, but the skills required to organizethem into high-value architectures arestill in very short supply, and a new gen-eration of skills must be developed witheach new generation of architecture.These new architectures amplify thepossibilities enabled by the perfor-mance improvements in the underlyingtechnology components.

The gap between IT’s potential andbusiness’s realization of that potentialhas not narrowed. Instead, it has steadilywidened over the past several decades.This gap creates enormous instability inthe business world. Wherever there is somuch potential for instability, there isalso fertile ground for new strategies.

To further amplify the effect of theseperformance improvements in terms ofreal business-practice innovation and toconvert tactical advantage into strategicadvantage, something else is required.Companies need to align themselvesaround a long-term view of the chal-lenges and opportunities brought aboutby IT. Senior managers need a sharedbut high-level view of the kinds of mar-kets they are likely to be operating in

and the kinds of companies they willneed to become if they are to continuecreating economic value. This long-termview helps to focus and prioritize near-term innovations in business practices,thereby helping to build a sustainablestrategic advantage across multiplewaves of initiatives. It is exactly this kindof long-term view that guides Dell andWal-Mart in their ongoing use of IT tocreate strategic advantage.

Without this view, even the most ag-gressive near-term incremental initia-tives run the risk of becoming dispersedover too many fronts. The continuingperformance improvements of IT createfar more possibilities than any companycan or should pursue. The temptation inthis kind of environment is to launchtoo many initiatives. The result is thatfew, if any, of the near-term initiativesproduce the expected results. Withoutfocusing on the long-term, companieswill have difficulty building momentumacross multiple waves of operating ini-tiatives. Each new wave responds to theevents of the moment rather than driv-ing toward a common destination. Thefocus remains entirely on near-term ini-tiatives rather than on building a moresustained capability to innovate andleverage IT’s new capabilities.Short-termtactical advantage remains just that–tac-tical and transitory. In such a world, it iseasy to see why management couldcome to believe that IT does not pro-duce significant strategic differentiation.

Paradoxically, technology vendorsthemselves are somewhat responsiblefor the widespread belief that IT doesn’tproduce significant strategic differentia-tion. For too long, they have built theirbusinesses around big bang, IT-centricselling propositions. Rather than helpcompanies understand that IT is only atool, technology vendors have tended to present it as a panacea.“Buy this tech-



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

technology vendors have tended to present it as a panacea.

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

nology and all your problems will besolved.” It is a seductive proposition.Rather than focusing on the enormouschallenge of innovating in business prac-tices and creating the discipline requiredto generate economic value from theseinnovations, vendors have convincedmany companies that signing a purchaseorder would deliver the required value.They even managed to convince compa-nies, for a while, that they needed to buya lot of the technology because the onlyway to stay competitive was throughmassive IT implementations. When theanticipated results didn’t materialize, thebacklash began to gather force in execu-tive suites. Executives swing from oneextreme to the other. If IT doesn’t solveall their business problems, then it mustnot matter, at least in terms of strategicvalue. We still need it to run our busi-ness, but let’s buy as little as we can andsqueeze the vendors as much as we can.

It has never been true that IT mattersin isolation. It only matters in the contextof a concerted effort to innovate basedon new possibilities and opportunitiescreated by the technology. Then it mat-ters–and will continue to–a lot.

That’s a far more difficult message forIT vendors to communicate to custom-ers. It’s an even more difficult messagefor the vendors to execute against. Itmeans changing their economic model,selling model, organizational model,and product strategies in fundamentaland very painful ways. Yet, the alterna-tive for technology vendors is to copewith the growing belief that IT reallydoesn’t matter, at least in terms of its po-tential for strategic differentiation. Inthe end, that will be a far more painfulworld for them to confront. It will alsobe a tragedy for businesses that continueto miss the opportunities IT creates.

John Seely Brown and John Hagel III

Letter from F. Warren McFarlanand Richard L. Nolan

F. Warren McFarlan, Albert H. Gordon

Professor of Business Administration,

Harvard Business School, Boston

Richard L. Nolan, William Barclay Harding

Professor of Business Administration,

Harvard Business School, Boston

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

Carr’s examples of railroads and elec-tric power played out over 80 years, (not40, as he suggests), turning society, busi-ness organizations, and lifestyles insideout. The deeper societal impacts cameduring the second 40 years, as society’sinsights on how to use the technologychanged. It is worth noting that al-though these technologies mutated sig-nificantly (for trains, it meant movingfrom 15 miles an hour to 80 miles anhour), the mutation was on a totally dif-ferent and much smaller scale than IT’s.

The cost performance of IT technolo-gies over the first 40 years changed byroughly 10 to the seventh, and for theforeseeable future will continue toevolve at the same rate. That is in sharpcontrast to a train, which after 80 yearsmoved six times faster than it had in theearlier period.This is impressive,but notnearly as dramatic as a computer pro-duced in 2000, which runs 10 milliontimes faster than a 1960s’ computer.

Carr’s graph on information technol-ogy stands as a subject lesson for DarrellHuff’s well-known book How to Lie withStatistics. Carr’s chart would look verydifferent if he had tracked the number ofMIPS or CPU cycles on the networkfrom 1990 to 2002.Even using a log scaleon the vertical axis would be barelyenough to tilt a vertical straight lineenough to create something resemblingthe curves of the other two schematics in

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

In our view, the most important thingthat the CEO and senior managementshould understand about IT is its associ-ated economics. Driven by Moore’s Law,those evolving economics have enabledevery industry’s transaction costs to de-crease continually, resulting in new eco-nomics for the firm and creating the fea-sibility of products and services notpossible in the past. The economics of fi-nancial transactions have continuallydropped from dollars to cents. New en-trants have joined many industries andhave focused on taking strategic advan-tage of IT’s associated economics. Com-pany boundaries have become perme-able,organic,and global in scope throughIT networks and the Internet.

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

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

CEO and senior management mustunderstand that historical constraints ofevery kind continue to be knocked offIT because it is a “universal information-processing machine.” Before e-mail andthe Internet, the cost of communica-tions was seen as limiting IT’s wider use.Packet switching was invented as a wayto digitize voice, data, and video in amatter that enabled digital computers(and its associated economics) to com-municate, and the cost of communica-tion sharply and suddenly dropped. Sim-ilar situations have transpired with theadvent of digitized photography, use ofradio frequencies for various handheldIT appliances, and the development ofsuch products as elevators that call in tothe service center or to a computer thatautomatically dispatches collective soft-ware or people when a part or system isabout to fail. Often, only the senior man-agement team’s imagination limits newIT-based opportunities.

Our research suggests the following: New technologies will continue to

give companies the chance to differenti-ate themselves by service, product fea-ture, and cost structure for some time tocome. The first mover takes a risk andgains a temporary advantage (longer ifthere are follow-on possibilities). Thefast follower is up against less risk butalso has to recover lost ground. CharlesSchwab versus Merrill Lynch and Wal-greens versus CVS are examples of thisplaying out over the past decade. Ouradvice to the CEO is to look at IT usethrough several different lenses. Onelens should be focused on improvingcost savings and efficiencies. Anothershould be focused on the incremental



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

petitive scope, partnerships (customersand other parties), the changing of therules of competition, and the provisionof new IT-based services to extend thecustomer value proposition.

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

Evaluating these opportunities as wellas thinking through their implicationsand timing, is vitally important, nonbor-ing work. The new technologies willallow new things to be transformed innonlinear ways. Radio-frequency identi-fication devices for grocery stores, smartcards, and automated ordering systemsfor hospital physicians are all examplesof new process targets that technologieswill soon address. In the more distant fu-ture we will see the improved creation ofdrugs and treatments through the abilityto rapidly and more deeply analyze hugedatabases. Understanding the potentialand then deciding when the time is rightto seize these transformative applica-tions will be neither routine nor boringfor the CEO or CIO.

Letter from Jason Hittleman

Jason Hittleman, IT Director,

RKA Petroleum Companies,

Romulus, Michigan

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

Competitive advantage should neverbe the sole objective of IT. Rather, man-aging costs and assessing risk must be-come standard objectives as well. By fo-cusing on systems and processes, moreso than on just technologies, and by cou-pling the suggestions outlined in the article with an approach that embracesthe mission of the company, IT man-agement can remain challenging and rewarding.

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

Jason Hittleman



Grid computing, standardization ofcomponents, and open systems, far fromstifling differentiation, provide a stableplatform to build on and offer new ways

of differentiating, either by coststructure,product,or service. Justas literacy stimulated innovation,so do open systems and grids.

Outsourcing the commodityinfrastructure is a great way to

control costs,build competence,and freeup resources, which can be used to com-bine data bits in creative ways to addvalue.Relatively bulletproof operationalreliability will be a key part of the priceof success. Back-office or server farms,help desks, and network operations willbe outsourced to specialists to attain thisreliability (at rock-bottom costs). Pack-ages like SAP further help remove com-modity maintenance activities and allowfirms to better analyze customer infor-mation and provide service at the sharpend. The package of skills needed insidean organization is changing very fast forcompetition in the information age.

The jobs of the CTO and CIO are andwill be of unparalleled importance in thedecades ahead. Max Hopper of Ameri-can Airlines and Paul Strassmann of Kraftand NASA are not the last of a dyingbreed of dinosaurs,but prototypes of theleadership skills needed for survival.

If you take 1955 (with the IBM 701) asthe start date and use 80 years as a tech-nology cycle, 2035 may not be far off themark for playing much of this out. Eventhen, the special recombinant nature ofthis technology makes us uncomfortablecalling an end date. We wish Carr wereright, because everyone’s golf handicapcould then improve. Unfortunately, theevidence is all to the contrary.

F. Warren McFarlanand Richard L. Nolan

The jobs of CTO and CIO are and

will be of unparalleled importance

in the decades ahead.

Letter from Paul A. Strassmann

Paul A. Strassmann, Executive Advisor,

NASA; Former CIO of General Foods,

Kraft, Xerox, the Department of Defense,

and NASA

Nicholas Carr pronounces informationtechnology strategically irrelevant tobusinesses and recommends adoptionof the following policies: Cut IT bud-gets; do not invest in information tech-nology innovations; invest only afterothers have succeeded (follow, do notlead); delay IT investments becauseprices are dropping and everything willbe less expensive later; refocus fromseeking opportunities to managing vul-nerabilities and risks; disregard innova-tive offerings because vendors are seek-ing added revenues and are thereforesuspect; and delay innovation as the pre-ferred way for cutting IT costs. Theserecommendations are a departure frompolicies that have been pursued for thepast 50 years. Therefore, each of the as-sertions Carr makes to support themwarrants a commentary.

Assertion: IT has lost its strategicvalue. Carr argues that IT is no longerstrategic because it has ceased to be ascarce good, and he contends that profitmargins on IT-related innovations willconsequently disappear. He does notsupport this argument with researchfindings (except for a reference to myown research and a misunderstood ex-ample from the Alinean Corporation).He bases his conclusions entirely on hisreasoning, by analogy, that IT must fol-low the patterns that arose as businessesadopted steam engines, railroads, tele-phones, electric generators, and inter-nal combustion motors. But any proofthat rests entirely on analogies is flawed.This technique was used to uphold me-dieval dogma, and it delayed the ad-vancement of science by centuries.

Carr’s logic is defective because hisexamples deal exclusively with capital-intensive goods. Capital investments inmachinery do indeed exhibit diminish-ing returns as markets saturate and thedifference between marginal costs andmarginal revenues disappears, but in-

formation goods are not subject to sucheffects.The marginal cost of informationgoods – especially of software, whichnow accounts for the dominant shareof information technology costs – doesnot rise with increased scale. It drops as-ymptotically toward zero.Therefore,anyfirm that can steadily reduce marginalcosts by deploying IT can make infor-mation technology investments enor-mously profitable and can generate arising strategic value.

Assertion: IT is a commodity thatdoes not offer a competitive distinc-tion and therefore does not provide acompetitive advantage. It is true thatMicrosoft desktops running on Intelprocessors have become widespread,but they account for less than 12% of ITbudgets, and that number is declining.Most IT products are diverse – they cer-tainly are not commodities. And whilemany business processes do rely on stan-dardized desktops, are those processestherefore doomed to uniformity? Inother words, does partial standardiza-tion wipe out opportunities for gainingcompetitive advantage? The evidencedoes not support such a conclusion.

Competitive advantage is not the re-sult of personal computers. It is the resultof effective management by skilled andhighly motivated people. Since 1982 Ihave shown (in numerous publications)that firms using identical informationtechnologies and spending comparableamounts on IT display an enormousvariability in profitability. My research,now confirmed by other investigators,has demonstrated that profitability andIT spending are unrelated, even if iden-tical technologies are used.

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

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

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

Assertion: The influence of IT willhenceforth be macroeconomic andnot a means for competitive differen-tiation. The proposition that IT benefitswill flow to consumers and not to firmsis a contradiction. Sustainable profitsmaterialize when benefits accrue to cus-tomers. There are as yet enormous gainsin value to be delivered in health, edu-cation, entertainment, business services,and especially government. Extendingthe benefits of the global division oflabor and the inclusion of billions ofnew consumers into the global market-place will generate trillions of dollars ofnew revenues. Enabling the global mar-ketplace to function effectively will re-quire enormous new IT investments byindividual firms. Surely there will bemillions of enterprises that will be ableto take advantage of such opportuni-ties. The lower entry costs for using the



power of information technologies willmake that feasible. Carr completely dis-regards the explosive growth of smallbusinesses, a development made possi-ble by the Internet. Information tech-nology is a killer of bureaucracies and a reducer of overhead expenses; thosequalities increase its microeconomic vi-ability. Asserting that benefits will ac-crue only to the economy at large andnot to individual firms is a prescriptionfor opting out of the information-basedcompetitive races in the years to come.

Assertion: IT is primarily a transporttechnology, and because it is open toeveryone, it offers no advantage. Thisproposition is a misunderstanding ofwhat IT is all about. Message transportis not the primary reason why organiza-tions deploy IT. Information technologyadds value mainly by improving themanagement of information intelli-gence and collaboration among indi-viduals, groups, and organizations. Thetransport function is essential, but IT’simportance as a conduit is only tertiary.The value is in the message itself, not inthe means of conveyance!

Information technologies now pro-vide the primary means for extendingthe value of a firm’s knowledge capital.They help companies manage the ex-ploding accumulation of scientific, re-search, customer, engineering, property,and intellectual assets. Computers arethe repositories of intelligence aboutcustomers, suppliers,and products; thoserepositories constitute the most valu-able knowledge assets for any firm thatrealizes returns greater than its cost of financial capital. It is noteworthy thatinformation technology is now recog-nized as the means for waging informa-tion warfare – a term that I apply notonly to the military but also to com-mercial confrontations.

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

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

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

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

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

With standards in place, the IT staff canfinally concentrate on what is indeedvalue enhancing for the enterprise, suchas applications that reflect the firm’s dis-tinctive characteristics and allow it toshare information easily with customersand suppliers. Applications that werecompletely custom-designed in the

past – and that Carr praises – inhibitedthe economic contributions of IT.

Assertion: Corporations will adoptgeneric applications; business pro-cesses will therefore be uniform andwithout competitive advantage. Thisassertion can be contradicted by anyonewho has had experience with one-code-fits-all “enterprise” software suites thatclaim to deliver answers to most busi-ness-systems problems. Even the mosttightly controlled generic applicationsuite (SAP’s enterprise resource plan-ning application) can deliver completelydifferent results for look-alike firms.

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

Assertion: Existing IT capabilitiesare largely sufficient for corporateneeds. It is hubris to assert that we have



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

of evidence that IT developments have reached a plateau,

as did innovations in industrial-age machinery.

already attained the pinnacle of what isultimately achievable. The history ofthat assertion is a history of failures. TheChinese burned their fleet when theythought nothing further could be gainedfrom overseas trade. The leaders of theSoviet Union retained their bankruptcentral planning system because theyconsidered it perfect for managing theeconomy.

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

more and better information technolo-gies. Carr’s view that the time has cometo arrest further IT developments andtake a static posture is a prescription forinaction as challenges keep rising.

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

and greater adoption of informationtechnologies. The arrival of a new in-formation-based best practice is usuallyseen by the more aggressive leaders as a signal to commence yet another roundof more expensive competition withmore, not less, IT.

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

as far as we can tell. Software can endowcomputing devices with unrestrictedvariability in features and functions. Thecapability of a software-enriched globalnetwork has no boundaries. The currentcyclical correction to the excesses of thepast decade is a crucible for generatingmore and better innovation.

Assertion: IT risks now exceed ad-vantages, requiring shifts in executiveattention. The need to pay more atten-tion to IT risks is indisputable, but I donot agree that the risks exceed the ad-vantages. Carr advises executives toadopt a reclusive posture – to withdrawfrom the search for new opportunities.He recommends pursuing cost reduc-tions through cutting off IT instead ofsearching for opportunities in thesteady stream of new ideas.

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

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

• • •Carr’s assertions and recommendationscould inhibit the most innovative andvalue-creating means available for in-creasing the economic benefits to en-terprises and customers. Informationtechnologies are too important to bepronounced irrelevant.

Paul A. Strassmann



The dissemination of business best practices means

survival today requires speed and innovation – and

greater adoption of information technologies.

Letter from Marianne Broadbent,Mark McDonald, and Richard Hunter

Marianne Broadbent, Group Vice Presi-

dent and Gartner Fellow, Global Head

of Research, Executive Programs, Gartner

Mark McDonald, Vice President and

Research Director, Executive Programs,

Gartner

Richard Hunter, Vice President and Gart-

ner Fellow, Executive Programs, Gartner

Nicholas Carr’s well-written article takesthe view that IT is now like other infra-structures and that, on average, the com-panies that are the biggest investors inIT are not the most successful in termsof business performance. He contendsthat firms should now focus on carefullymanaging costs and risks and not getcarried away with IT’s strategic role.

Carr is correct that hardware andnetwork connectivity are commoditybusinesses and that some IT infrastruc-ture services have evolved into com-modity services. But the article misses abig part of the story. IT does matter, butnot because of hardware or even stan-dard commercial software. It is becausethe intelligent and innovative applica-tion of information solves businessproblems and creates customer value athigh speed, low cost, and the right scale.To put it simply, it’s not about the box;it’s about what’s inside the box.

Carr is right that the simple posses-sion of infrastructure technology wasfor a time a source of competitive ad-vantage. In the 1970s, the Dallas Cow-boys’ Tex Schram used a computer tomanage information on NFL draftchoices, assess the strengths of otherfootball teams, and perform additionaltasks that increased the Cowboys’ abil-ity to use information competitively.But the advantage disappeared whenother teams began using computers.The source of competitive advantageshifted from simply having a computerto knowing how to use it.

Carr’s examples are of companieslooking for competitive advantage fromthe intrinsic performance characteris-tics of the hardware. In the case of

American Hospital Supply, the charac-teristic was connectivity; at AmericanAirlines, it was management of largeamounts of complex data. In high tech,whenever you rely on hardware capa-bility as a competitive technology, it’sonly a matter of time before otherscatch up.

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

That’s what Wal-Mart and Dell havedone. They have continuously used in-formation better and with greater align-ment to their value proposition. It’s truethat these companies have also contin-uously reinvested in new hardware andsoftware platforms. But the sheer scaleof their investment in infrastructureisn’t the most important factor. Whyhave competitors been unable to copyWal-Mart’s and Dell’s successes? The an-swer lies in large part in Wal-Mart’s andDell’s ability to integrate IT into busi-ness processes – their “benefit conver-sion” ability.

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

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

The major messages we have beengiving CIOs over the past two yearshave been that they should managecosts and risks aggressively and workwith business colleagues to design ITgovernance thoughtfully. Beyond that,as in any business area, executives mustunderstand the need for risk-managedinnovation.

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

Marianne Broadbent,Mark McDonald,

and Richard Hunter



Letter from Bruce Skaistis

Bruce Skaistis, President, eGlobal CIO,

Tulsa, Oklahoma

In “IT Doesn’t Matter,” Nicholas Carr isessentially issuing a warning: Organiza-tions need to get realistic about what ITcan and cannot do for them. In spite ofall the hype, wireless systems and otherexciting new computer technologiesaren’t going to create lasting strategicadvantages.

I also think Carr is trying to help uslearn from the mistakes we made duringthe late 1990s, when companies weremaking huge investments in e-businessinitiatives in an attempt to achieve com-petitive and strategic advantages. Many

of those investments never produced sig-nificant benefits–many of the initiativeswere never completed. With the benefitof hindsight, Carr is telling us most ofthose gigantic efforts were never goingto deliver real strategic advantage, evenif they had been successful.

IT does matter, and organizationsshould do the following to make suretheir IT efforts and resources continue to matter:

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

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

Letter from Vladimir Zwass

Vladimir Zwass, Distinguished Professor

of Computer Science and MIS, Fairleigh

Dickinson University, Teaneck, New Jersey,

[email protected]

Two of the other articles in your May2003 issue best refute Nicholas Carr’sclaim that “IT Doesn’t Matter.” As GaryLoveman describes in “Diamonds in theData Mine,” Harrah’s Entertainment“has outplayed its competition” by bas-ing its deep service orientation on howvaluable its different kinds of customersare. The firm determines this value bymining the multifaceted and volumi-nous transactional information in itsdatabase. This is a textbook example ofthe strategic deployment of informa-tion technology to gain competitive ad-vantage. Daniel Corsten and NirmalyaKumar report in their Forethought ar-ticle,“Profits in the Pie of the Beholder,”that the suppliers that comprehensivelyadopt the IT-based “efficient consumerresponse”practices in their relationshipswith Sainsbury’s Supermarkets attainhigher levels of economic performancethan do their peers. This is an excellentexample of the successful use of inter-organizational systems for competitiveadvantage.

The hardware and software compo-nents of information technology do in-deed provide the infrastructure for datastorage, communication, and process-ing. This basic aspect of IT is certainlybeing commoditized. However, as theseand other examples show, informationsystems can be embedded in a com-pany’s organizational and interorga-nizational processes and combined in-extricably with other capabilities andassets to produce superior performance.Dell’s pull-based order processing andWal-Mart’s supplier-relationship man-agement come to mind. The implemen-tation of these IT-based systems doesnot come cheaply and requires contin-ual retargeting, yet it underlies the suc-cess of many firms.

Vladimir Zwass



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

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

always been under the same pres-sure as other functional areas toimprove overall corporate perfor-mance and reduce costs. Now thatsome of the IT mystique has beeneliminated,corporate IT has to playby the same rules as everyone else.That means refocusing the entire

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

Focus on minimizing IT risks. Carrrightfully concludes that minimizing ITrisks is a critical issue for all companies.Almost every day there is a new storyabout a major company or governmentagency having their networks hacked ortheir Web sites attacked.Every companyshould have some of its most talentedpeople worrying about how to manageits IT efforts and outsourcing relation-ships; protect its networks, systems, andinformation; and mitigate other IT risks.

In a very straightforward way,Carr hasput a stake in the heart of the misdi-rected thinking about IT that flourishedin the free-spending 1990s. It’s time forenterprises to be realistic about IT’s rolein their future. IT can produce signifi-cant strategic and competitive benefitsfor an organization–but only when it isused effectively.

Bruce Skaistis

Now that some of the IT mystique

has been eliminated, corporate IT

has to play by the same rules as

everyone else.

Letter from Mark S. Lewis

Mark S. Lewis, Executive Vice President of

New Ventures, Chief Technology Officer, EMC

Corporation, Hopkinton, Massachusetts

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

Carr’s historical analogies to other infrastructure technologies are notconvincing. Information technologyhas infinite and constantly expandingfunctionality, while Carr’s other tech-nologies – steam engines, railroads,electricity, telephones – have narrowfunctionality.

Electricity, for example, is simply a source of energy; it hasn’t changedmuch since we found a way to harnessit. And it can, and probably will, be re-placed by another source of energy. Un-like electricity, IT is very different fromwhat it was 30 or even ten years ago.The technologies used for processing,storing, and transporting informationcontinue to expand. Also growing is thedemand for IT, with more businessesand types of organizations, more pro-cesses and activities, and more and moreconsumers at home and on the go inneed of its productivity-enhancing func-tions. Should we believe Carr, who saysthat the buildout is over, or should welisten to Alan Greenspan, who arguesthat “there are still significant opportu-nities for firms to upgrade the quality oftheir technology and with it the level ofproductivity”? Or perhaps we should lis-ten to genomics expert Craig Venter,who says that at least a decade or twowill go by before computing can catchup with the current needs of biological

investigation. Or maybe we should ob-serve the millions of businesses and peo-ple around the world who are currentlywithout affordable access to IT.

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

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

IT never mattered. What matters arethe people who invent informationtechnologies and who deploy and usethem. Like any other human endeavor,IT has its share of failures, foibles, andfads. Computer scientist Michael Der-touzos reminded us that “IT acts like amagnifying lens, amplifying manage-ment’s strengths but also its weak-nesses.”Carr’s advice to avoid “waste andsloppiness” applies to any investmentor purchase we make. A few years ofover-investment followed by a few yearsof under-investment due to general eco-nomic and psychological conditions can-not change the nature of informationtechnologies nor the industry builtaround them.

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

teed to use their monopoly status toraise profits and squash innovation, theexecutives I’ve spoken with are de-manding more choice, more flexibility,and more advanced IT. They, unlikeCarr, do not confuse the way they buyIT – increasingly moving toward a con-sumption-based model –with a lack ofstrategic importance.

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

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

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

Mark S. Lewis



IT never mattered. What matters are the people who

invent technologies and who deploy and use them.

Letter from Tom Pisello

Tom Pisello, CEO and Founder,

Alinean Corporation, Orlando, Florida

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

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

spending frugally on IT are demon-strating superior overall results. But dig deeper and you’ll find that there isno consistent correlation between ITspending levels and financial perfor-mance; two companies investing thesame amounts in identical technologieswill yield vastly different results.

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

On the flip side, the worst-perform-ing companies – those delivering thelowest return on shareholder invest-ment–are equally penurious in their ITinvestment. Our research indicates thatthis laggardly group spends well belowthe industry average of 3.7% of revenueon IT (as do the top performers).

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

Unfortunately, commoditization oftechnologies does not translate intomaking the best IT implementationseasily replicable. That’s because everyorganization has unique needs and pri-orities. However, one trend in particularholds great promise: Cheap, standards-based hardware and software are thesingle biggest driver of innovation, pre-cisely because the heavy lifting can nowbe focused on activities that delivermuch more value. (From databases, forinstance, has sprung the promise of

truly individualizedcustomer contact;from the rudimentsof factory planningcome supply chains

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

Information technology is expectedto manage companies’ most vital andvaluable intellectual assets and is theonly tool companies have to turn thisknowledge into the kind of competitiveweapon that redefines industries – andits leaders. For this very reason, IT willcontinue to play an important role inour personal lives and in the companiesthat employ us. Those who recognizethe importance of good management,not spending levels, will ultimately reapthe rewards.

Tom Pisello



There is no consistent correlation between IT

spending levels and financial performance.

Letter from Roy L. Pike

Roy L. Pike, Vice President of Information

Technology and CIO, Millennium Chemi-

cals, Hunt Valley, Maryland

Everyone will agree with Nicholas Carrthat the storage, transmission, and pro-cessing of digital information has be-come a utility service. We outsourcedour global enterprise software data center in 1998. The problem is that sincemost executives think of IT in muchbroader terms, many readers may bemisled unless they read the definition ofIT he provides in the footnote.

In its broadest context, informationtechnology is all about productivity.And nothing can be more strategic rightnow for manufacturing and service in-dustries than improving productivity.During the 1980s and 1990s, IT gave riseto huge improvements in productivityby changing the way individuals work–providing direct access to informationand eliminating hordes of informationgatherers and intermediaries who addedno value to their businesses.

What Carr misses completely is that,after having improved the productivityof individual workers, IT still has the po-tential to improve productivity dramat-ically, this time by changing the waybusinesses work together. The new stra-tegic task for IT is all about creating in-tegrated business relationships in whichsuppliers, producers, and customers actas if they were in one company, sharinginformation on inventories, production,demand forecasts, lead times,and maybecosts and pricing. For decades, the solu-tion to supply chain inefficiencies wasinventory. Today, inventory is the prob-lem. The savings in material inventoriesand streamlined delivery that IT can de-liver will dwarf the efficiencies that havealready been achieved.

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

Roy L. Pike

Letter from Vijay Gurbaxani

Vijay Gurbaxani, Faculty Chair, Professor

of Information Systems, Director of the

Center for Research on IT and Organiza-

tions, Graduate School of Management,

University of California, Irvine

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

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

to create value with that technology.These capabilities involve more thanjust managing the technology itself.They also encompass the ability to un-derstand how investments in organiza-tional capital complement and magnifythe payoffs from technology and theability to produce relevant informationfrom the systems through sophisticateddecision-making techniques. Recent re-search has demonstrated that compa-nies spend five or ten times as much onmanagement practices that accompanytechnology introductions as they do onthe technology itself. What’s more, astechnology evolves and becomes in-creasingly complex, these managementskills become ever scarcer.

Most companies struggle to imple-ment a sophisticated information-basedstrategy. One has only to read two otherarticles in the May 2003 HBR – GaryLoveman’s insightful “Diamonds in theData Mine,” which describes how Har-rah’s mined its customer information todramatically improve its performance,and Eric Bonabeau’s “Don’t Trust Your

Gut,” which demonstrates the value ofsophisticated decision-support tools–tounderstand why so much of what com-panies can do with information tech-nology will never be found in a stan-dard software package and why somecompanies will pull it off while otherswon’t.

Carr argues that companies don’tneed to develop their own technologymanagement capabilities: They can justbuy computing services that embodybest practices. But that assumes, first of

all, that such utilities exist. Check outthe current utility-computing models ofthe technology service providers – theyare a long way from being utilities.

And when they are developed, theeconomics of software dictates that suchshared systems must focus on a com-mon denominator so they can be widelyused. These common systems will not fita company’s processes out of the box;the firm will either need to customizethe systems or change its business pro-cesses to accommodate the software.Neither approach is straightforward oralways desirable. And as anyone whouses software knows, software is farfrom ideal.

What’s more, even if companies shareinfrastructure and common applicationsystems, they will not necessarily endup with identical systems or use them insimilar ways. Executives will face a mul-titude of choices as to how they want to structure their databases and appli-cations, what data they will collect, whatinformation will flow out of their sys-tems, and how they will manage it.

Still, I agree with Carr that the moveto a common infrastructure is inevita-ble, though it will take a lot longer thanhe implies. Wal-Mart refuses to join in-dustry exchanges because it believes itssupply chain practices are unparalleled.And look how long it has been takingGeneral Motors, DaimlerChrysler, andFord to build their business-to-businessexchange,Covisint, to provide the sharedinfrastructure and systems that will fa-cilitate trade in the automobile indus-try. After investing billions of dollars,the exchange has gained only limitedtraction; the technological challengesand organizational changes needed aremassive.

But the fundamental point is this: Themove to a common infrastructure doesnot reduce the opportunities for com-petitive advantage; it increases them.Using these shared platforms, all firmswill have the opportunity to build cus-tomized applications that exploit com-plex technological capabilities to giverise to new business strategies. Whenmuch of our investment in technologygoes into shared infrastructure, the in-vestments that we make in customiza-tion will be much more valuable.

Vijay Gurbaxani



The move to a common infrastructure is inevitable.

But it does not reduce opportunities for competitive

advantage. It increases them.

Letter from Steven Alter

Steven Alter, Professor of Information

Systems, University of San Francisco School

of Business and Management, San Francisco,

[email protected]

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

The title “IT Doesn’t Matter”conveysa fallacy. An accurate but less catchy titlewould have been “IT Is Not the Head-line.” In my executive MBA courses oninformation systems, I use a similarlymistitled HBR case study to demon-strate why IT is essential but is not theheadline. The 1997 case “The IT SystemThat Couldn’t Deliver” concerns man-agement lapses in developing a new laptop-based tool for life insurancesalespeople. The students read the casestudy before class and e-mail me a briefstatement identifying “the system” anddescribing what it produces and howwell it operates. Their answers are typi-cally all over the map. As the discussionunfolds, it becomes clear that “the sys-tem” is neither the software itself northe information system being created.Rather, it is a work system of selling in-surance that has not been improved ashoped. The students usually realize thatthe mistakes in the case might not havehappened if the CEO, CFO, and CIO hadunderstood that the headline was thenew work system, not the informationsystem.

Still, while IT is not the headline, itcertainly matters (just like kidneys) be-cause the work systems cannot operatewithout IT.

Steven Alter

Letter from Cathy Hyatt

Cathy Hyatt, IT Consultant, San Francisco

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

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

of IT, there is a vast number of “correct”IT solutions and investment strategiesfor either of these approaches – but theset of solutions that works for one willnot be the same as the set that works forthe other. This, I think, makes IT man-agement, which includes the selection,maintenance, and deployment of newand ongoing IT capability, a key strategicissue.

Carr says the main problem with ITmanagement is overspending. If onlythose IT managers would get togetherand put pressure on their vendors, hesays, this could be controlled. But hemisses an important point related to thestrategic use of IT. Let’s say a businesswants a particular new IT capability thatwould dramatically boost its differenti-ation or cost advantage. If the new prod-uct or service is incompatible with theoutdated hardware and software that ITmanagement has frugally kept in ser-vice past its vendor-supported life cycle,the firm will lose out on a key strategicadvantage. Those of us who have expe-

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

Finally, Carr’s analogy comparing theubiquity of IT with that of electricity isonly effective up to a point. The com-plexity and variety of IT, its evolvingstandards in many important areas, andits incredible innovation argue againsthis premise that its ubiquity eliminatesits strategic value. IT’s history of inno-vation undermines his assertion thattechnology-related business transfor-mations are complete. The fact that IT

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

To improve the business resultsgained from IT, corporate leaders mustcontinue to increase its alignment withstrategy. To do this, most will need togain a greater understanding of IT, bet-ter integrate IT leadership into theirstrategic planning processes, and insiston greater and greater strategic andleadership capability from their IT pro-fessionals. Getting IT “right” is a diffi-cult problem that many executives face,and while some will appreciate the sil-ver bullet Carr offers, most, I expect, willfind his naïveté discouraging.

Cathy Hyatt



Hardware and software can be intricately intertwined.

Sometimes a single piece of outdated software can

derail the deployment of important new functionality

with real strategic value.

Letter from Chris Schlueter Langdon

Chris Schlueter Langdon, Assistant Profes-

sor of Information and Operations Manage-

ment, Marshall School of Business, Univer-

sity of Southern California, Los Angeles

I am an information systems strategyprofessor, so it would be expected that I would disagree with Nicholas Carr’sprovocative assertion that IT doesn’tmatter. Indeed, I do. While I agree withmuch of Carr’s excellent – but incom-plete –analysis, I disagree with his con-clusion.

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

The analogy with the phone systembreaks down at the point where Carr’sanalysis stops. Information systems, andsoftware applications in particular, dif-fer in versatility and adaptability. To ex-aggerate somewhat – but only a little –anything is possible with software, if nottoday, then tomorrow.

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

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

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

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

Two trends ensure that the sky is thelimit for softwarization. Carr mentionedthe popular one – Moore’s Law, whichestablishes that hardware will becomemore powerful and cheaper over time.Even more important are advances inhow increased processing power can be used – which leads us into the worldof systems and software architecture design, with its fast-growing jungle ofacronyms and ideas. One key advance in this field has been the recent break-through of object-oriented program-ming. The concept and some tools, suchas the Smalltalk programming language,have been around for decades, but onlyvery recently has the concept beenturned into commercially viable imple-mentations.

The bottom line is that powerfulhardware combined with more flexiblesoftware will continue to fuel a processin which value added is increasinglyachieved with information systems.While mature areas do indeed get com-

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

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

Chris Schlueter Langdon



To exaggerate somewhat – but only a little – anything is

possible with software, if not today, then tomorrow.

Reply from Nicholas G. Carr

First and most important, let me thankthese correspondents (and the manyothers I’ve heard from) for taking thetime to so clearly and thoroughly ex-press their points of view. Whatever thebroader merits of my article, it has atleast succeeded in setting off an impor-tant and long overdue debate about the role of information technology in business. That debate can only beconstructive.

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

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

I find nothing in these letters to con-tradict that argument. As many of thewriters point out, the way companiesorganize processes and use informationplays a critical role in their ability to dis-tinguish themselves from competitors.That’s always been true and always willbe true. But that does not mean thatthe information systems involved inmanaging processes and informationare the source of the distinctiveness. It is better, I would argue, to start with the assumption that the technology isgeneric – that its functionality can beeasily and quickly copied–and that themore tightly an advantage is tied to thetechnology, the more transient it willbe. I would certainly be wary of follow-ing Paul Strassmann’s recommendationthat executives “be ready to engage inyet another IT investment cycle,” as ifspending more money on IT is itself

a strategy. Many companies have takenthat approach in the past, and mosthave come to regret it.

At the same time, I would disagreewith Mark Lewis’s suggestion that “ITnever mattered.”In the past, proprietarycomputer systems could indeed be thebasis of long-lasting advantages, as thestory of American Hospital Supply inmy article shows. Dismissing the formerstrategic relevance of IT makes it too easyto ignore how IT’s role in business haschanged. And that can lead to strategicmiscalculations. As Warren McFarlanand Richard Nolan point out, the valueof being a first mover hinges on thespeed with which fast followers catchup. As IT’s power and presence havegrown, fast followers have been able tocatch up – or spring ahead – ever morequickly. Given the high cost of being an

early investor in new IT functionality,a first mover strategy becomes harder tojustify. Just because we continue to seenew innovations in IT does not meanthat it pays to be a pioneer.

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

Nicholas G. Carr

harvard business review • june 2003


Just because we continue to see new innovations in IT

does not mean that it pays to be a pioneer.

17

Documents

IT Doesn’t MatterHBR AT LARGE • IT Doesn’t Matter Nicholas G. Carr is HBR’s editor-at-large.He edited The Digital Enterprise,a collec-tion of HBR articles published by Harvard