IT Doesn't MatterBy Nicholas G. Carr

In this article, published in the May 2003 edition of the Harvard Business Review, I examine the evolution of information technology in business and show that it follows a pattern strikingly similar to that of earlier technologies like railroads and electric power. For a brief period, as they are being built into the infrastructure of commerce, these "infrastructural technologies," as I call them, open opportunities for forward-looking companies to gain strong competitive advantages. But as their availability increases and their cost decreases - as they become ubiquitous - they become commodity inputs. From a strategic standpoint, they become invisible; they no longer matter. The staff of HBR voted "IT Doesn't Matter" the best article to appear in the magazine during 2003. A sequel to this article, titled The End of Corporate Computing, appears in the Spring 2005 issue of the MIT Sloan Management Review.

This article provides a small part of my broader exploration of information technology and business strategy contained in the book Does IT Matter? Information Technology and the Corrosion of Competitive Advantage, published by the Harvard Business School Press. You can order the book from Amazon.com. You can also download a reprint of the original HBR article for $7.00. The text of "IT Doesn't Matter" can also be read on my blog.

[note that all the following links worked when originally posted; some may no longer be active]

"IT Doesn't Matter" was featured in a major article on the IT industry by Steve Lohr in the May 4 Sunday New York Times. The article was reprinted on May 5 in the International Herald Tribune.

Computerworld's May 12 issue features an interview with me as well as a rebuttal of my article.

Information Week's editor in chief, Bob Evans, provides another counterpoint to my article in that magazine's May 12 issue. He also says, "The article is thoughtful and sweeping and quite interesting to read. I'd heartily recommend it."

Stewart Alsop mentions "IT Doesn't Matter" in his column in the May 12 edition of Fortune.

A somewhat testy Craig Barrett, Intel's CEO, "fired back" at my article in remarks to reporters before a May 15 analysts meeting, arguing that the IT infrastructure is critical to competitiveness. Judging from his comments, I'm not sure Mr. Barrett actually read the article (I don't blame him; I'm sure he's busy). As I make clear in the piece, the IT infrastructure is indeed essential to competitiveness, particularly at the regional and industry level. My point, however, is that it is no longer a source of advantage at the firm level - it doesn't enable individual companies to distinguish themselves in a meaningful way from their competitors. Essential to competitiveness but inconsequential to strategic advantage: that's why IT is best viewed (and managed) as a commodity.

Steve Lohr has another excellent article on the prospects of the tech industry in the May 16 New York Times (reprinted in the International Herald Tribune). He features my article as well

as Craig Barrett's remarks on it. He makes two critical points that are sometimes being lost in the current debate: ". . . it is possible to agree that technology can deliver broad productivity gains without necessarily delivering higher profits or competitive gains for individual companies, a point made by Mr. Carr. It is also possible to agree that the technology industry continues to be innovative and important, without also accepting that it will be a growth industry as it has been in the past."

John Hagel and John Seely Brown have written a response to my article, saying that it "will have a significant impact in the business world" (but that it's "also dangerous").

General Motors CIO Ralph Szygenda offers some thoughtful comments on my article in the May 19 Information Week. He says, "Nicholas Carr may ultimately be correct when he says IT doesn't matter . . . [but] business-process improvement, competitive advantage, optimization, and business success do matter and they aren't commodities. To facilitate these business changes, IT can be considered a differentiator or a necessary evil. But today, it's a must in a real-time corporation . . . I also agree on spending the minimum on IT to reach desired business results. Precision investment on core infrastructure and process-differentiation IT systems is called for in today's intensely cost-conscious business versus the shotgun approach sometimes used in the past." I find it interesting, and perhaps telling, that while my argument has certainly raised the hackles of IT vendors, consultants, and pundits, most of the actual IT executives I've heard from have expressed genuine interest in and considerable agreement for my point of view.

Computerworld takes another whack at the article in its May 19 issue: "You can get real business advantage with technology. You just don't get it from products, services and information. You get it from processes, skills and execution - the same things that let any business differentiate itself in ways that don't involve IT." So you can get advantage from technology, but not actually from the technology. Okay. I can live with that.

eWeek has published a brief article on "IT Doesn't Matter."

Various IT research houses have issued comments on my article: Gartner, Alinean, Peerstone.

Bill Gates "assailed" my article in a speech at Microsoft's CEO Summit on May 21, saying, "And so when somebody says, to take the extreme quote from the Harvard Business Review article, they say IT doesn't matter, they must be saying that with all this information flow, we've either achieved a limit where it's just perfect, everybody sees exactly what they want, or we've gotten to a point where it simply can't be improved - and that's where we'd object very strenuously." Just to be clear, what the article argues is that we're at the point where any technological improvement in the management of information will be quickly and broadly copied, rendering it meaningless for competitive advantage.

USA Today has a smart piece in its May 22 edition that examines the different competitive approaches of IBM and Dell through the lens of my article.

Information Week has posted a brief article titled "CIOs Sure Think IT Matters." It quotes the CTO of General Motors saying, "Brakes are a commodity, but I don't think anybody would say they don't matter."

David Kirkpatrick, a tech writer at Fortune, has launched a spirited, but glancing, attack on my article. Kirkpatrick first offers a convenient misreading of my argument, claiming that it deals only with hardware rather than with both hardware and software (not true at all), and then uses that as a platform for some furious verbal hand-waving. Of course hardware doesn't matter, he says, and then quotes a Microsoft executive: "the source of competitive advantage in business is what you do with the information that technology gives you access to." Yes, but how companies use the information they collect - about markets, operations, money flows, etc., etc. - has always been a potential source of advantage, or disadvantage. (The same could be said of the way they use electricity.) Making such a point isn't particularly interesting, but it does enable you to neatly sidestep the issue of IT commoditization. [Note that Fortune is now charging for access to its archives. Thanks to those AOL TimeWarner synergies, however, you can still read this piece for free over at CNN.com.]

Adam Lashinsky, another Fortune writer, contrasts my argument with Kirkpatrick's in a piece on the CNN/Money website. Lashinsky concludes: "As in any good intellectual debate, both writers make good points. Carr is accurately describing the technology world in the post-bubble era. Kirkpatrick proves that innovation isn't over yet. My hunch is that prudent investors, however, will side with Carr."

A thread of messages on "IT Doesn't Matter" has begun to unspool on ZDNet. It's noteworthy only because it includes the first airing, to my knowledge, of a conspiracy theory regarding the origins of my article. "In all likelihood," the poster writes, "it's a group of rich individuals with similar interests in keeping IT wages down that not only had a hand in the HBR article in the first place, but also a hand in making sure references to it appeared in the NYT." My lips are sealed.

In the May 29 Washington Post, Leslie Walker takes an insightful look at my article and the controversy it's stirred up. She concludes: "Carr may be early in calling this a turning point for the industry -- for some companies, there probably still is strategic value left to be squeezed out of clever implementation of information technology. But the elbow room for seizing sustainable leads through technology is clearly diminishing as standards proliferate and computing power accelerates."

David Ticoll takes issue with some of my conclusions in the May 29 edition of the Toronto Globe and Mail.

In Australian IT, a Gartner vice president offers a somewhat meandering rebuttal of my article under the melancholy title "Dousing the Embers of Hope." In response to my suggestion that, when it comes to investing in new information technologies, companies would often be smarter to be followers rather than leaders, he counters with this: "Without those individuals who have courage and conviction to lead the rest of us, where would humankind be?"

Dan Farber provides a useful summary and critique of my argument at ZD Net.

Chad Dickerson calls my article a "must-read" in InfoWorld, saying, "You know what?  Carr is right and IT staff should take heed." He goes on to examine some staffing implications.

On June 2, National Public Radio's Marketplace featured a lively segment on "IT Doesn't Matter," comparing the article to (I'm not kidding) Martin Luther's 95 Theses. (Requires RealPlayer.)

Another Microsoft executive had a go at the article in a June 2 speech at the Tech.Ed conference in Dallas. "I have access to golf clubs," he reportedly said, "but I am not Tiger Woods." And even if he upgrades those clubs every year, he will still not be Tiger Woods.

The CEO of a software vendor cites the article in an eWeek interview. Another eWeek piece, by Lisa Vaas, summarizes the article and reports on reactions to it. "Much of the [article's] premise makes sense to the enterprises that consume technology," Vaas writes.

Jimmy Guterman asks me three questions in Health-IT World.

The Fortune tech writer David Kirkpatrick squeezes another column out of my article by reporting on the responses he's received to his earlier column. The most telling quote comes from the CEO of a software company that, Kirkpatrick tells us, "builds sophisticated software for collaboration." Says this CEO: "We just closed several deals with leading Fortune 100 companies using our software to differentiate their ability to get vast international sales and marketing ecosystems working together to respond faster and more correctly to customers. This is not a 'me too!'" But if he's already sold the same system to "several" Fortune 100 companies, one has to wonder how differentiating the technology really is. It's difficult to purchase competitive advantage from an outside supplier who's peddling the same "advantage" to your peers.

The lead article in the Financial Times' special section on IT in the June 4 edition contains a reference to "IT Doesn't Matter." The article, "Corporate Computing Tries to Find a New Path," is well worth reading, though it does require a subscription to FT.com.

Steve Ballmer weighs in in a memo to Microsoft employees.

The Harvard Business School features two excerpts of my article on its Working Knowledge site.

The Guardian (London) features an evenhanded review of my article and responses to it in its June 12 edition.

The Harvard Business Review has released a 17-page compilation of letters about "IT Doesn't Matter." It's a free download.

Mike Langberg discusses my article in a column in the June 16 San Jose Mercury News. He calls the article "thought-provoking and well worth reading" and examines Oracle's proposed takeover of PeopleSoft in light of my argument.

George Colony, CEO of Forrester Research, uses the felicitous image of CIOs stomping on icebergs in arguing that while the bulk of IT no longer matters, a little bit still does.

Scott Leibs offers an interesting take on my article in the Summer edition of CFO magazine's IT supplement.

In the June 16 Information Week, Jeffrey Kaplan pens a perceptive article on how the tech business may change as IT commoditization continues. It opens with a reference to my article: "[Carr's 'IT Doesn't Matter'] sent shockwaves through the technology world as vendors and consultants scampered to refute his suggestion that commoditization had made technology irrelevant. Noticeably silent in this debate have been business executives who grew tired and impatient with technology long ago. While they haven't spoken out, their changing buying behavior says loud and clear that Carr's arguments are more on target than the IT industry is willing to believe."

The June 23 New York Times has a third article by Steve Lohr examining the prospects for the IT industry, again featuring an extensive discussion of my article and the reaction to it. The article also appears in the Tuscaloosa News.

Val Souza, editor of India's Express Computer, discusses "IT Doesn't Matter" in the June 23 issue.

Mohan Babu uses my article as a jumping off point to discuss IT professionals' career strategies as IT becomes a commodity.

Paul Andrews writes on my article in the June 23 Seattle Times, noting, "Even as their words reject Carr's thesis, industry leaders' actions seem to be proving him out."

A Fortune article on the prospects for Silicon Valley mentions my article. "The seeds to the next boom," it says, hopefully mixing metaphors, "are being sown now."

Baseline features some comments from me in an article on CIO pay.

Fortune's tech writer David Kirkpatrick once again misreads my argument at the end of a sentimental column comparing Larry Ellison and Steve Jobs (two executives leading very different companies competing in very different markets with very different strategies).

Calling "IT Doesn't Matter" "the rhetorical equivalent of a 50-megaton smart bomb," Mark Anderson examines the reaction from Canada in a long piece in the June 26 Ottawa Citizen.

Cisco Systems has issued a response to my article by its CIO, Brad Boston. He claims that "IT is becoming a more powerful tool for gaining competitive advantage, not less so." But he also admits that "Wal-Mart, Amazon, eBay, and other great companies didn't succeed because their information technology was better than others. Their vision was."

A thread on Slashdot discusses "IT Doesn't Matter," with one poster writing of the article: "It makes a number of points that I think most of us on Slashdot wish were more widely understood. I think most of us here want IT to be recognized as critical infrastructure. This is where conservative arguments in favor of open source, standardization, interoperability, and security really start to come together. It's a field for pragmatic professionals, rather than the uncritical promotion of gee-whiz product features."

It's Monday (July 7), and that means a new round of stories in Computerworld, eWeek, and Information Week. The Computerworld piece, titled "IT Does So Matter!," features comments by Rob Austin, Andrew McAfee, Paul Strassman, and Tom DeMarco. Strassman at one point says: "Right now only the CFO can go to jail. My hope is for the CIO of the future to be also eligible to go to jail."

Microsoft's Paul Flessner discusses "IT Doesn't Matter" in a CNET interview. He says: "It's just silly to think that there's no competitive advantage to be made in IT. It's insanity in my mind."

Steve Steinke, editor in chief of Network Magazine, surveys reactions to my article in his column in the latest issue. "There are a handful of thoughtful comments," he writes, "but I saw no sign of telling rebuttal from any of the detractors." He concludes: "The article doesn't say that IT spending ought necessarily decline, that high performing IT organizations aren't necessary for competing successfully, or that it's impossible to gain competitive advantage with IT. Some commentators apparently read these things into it, but the real argument is harder to attack successfully. I find the overall piece, if not the title, to be fundamentally persuasive and not simply provocative."

John Taschek also offers a strong defense of my argument in the July 14 eWeek. He writes: "I'll bet that plenty of the article's critics have not read it. Industry partisans who have read it but can't accept much of it as true are either awash in denial or so obsessed with self-preservation that they're blinded to facts."

CNET makes a passing reference to my article in a piece on Google.

The powers-that-be at Microsoft continue to chew on "IT Doesn't Matter." At the company's July 24 financial analysts meeting, Steve Ballmer said, "Our fundamental response to that is: hogwash. We look out there like kids in a candy store saying what a great world we live in," while Bill Gates put it this way: "We disagree with all of this. We fully acknowledge the harsh realities . . . [but] there are solutions to every one of those things."

Michael Schrage lambastes my argument in the August issue of CIO Magazine, although it appears that he failed to read beyond the first couple of pages of my article. Schrage claims that I say that "the quality of management matters far less than the quantity of the commodity," but that, of course, is exactly the opposite of what I say. Indeed, by the end of his piece, Schrage ends up circling around to confirm my essential thesis. I assume this is, by the way, the same Michael Schrage who recently wrote that in many markets "information has become so plentiful that it has become commoditized and marginalized" and who also recently said that "there is no correlation at all between innovation and profitability. Anybody who thinks there's a correlation between innovation and profitability doesn't understand innovation and doesn't understand profitability."

Robert Weisman examines my article and the "bitter response" to it from some in the IT industry in an article in the August 3 Boston Sunday Globe.

In the August 4 Wall Street Journal, Lee Gomes mentions "IT Doesn't Matter" in a perceptive article (requires subscription) on the recent mini-boom in tech stocks. Writes Gomes: "Many captains of the tech industry criticized the HBR piece, describing it almost as an affront to the very idea of human progress. Many common folks in Silicon Valley, however, have become comfortable with the idea that technology has entered a mature, slow-growing phase. Their attitude is like that of a gifted child who is forever being pressured into excelling, but who wants nothing more than to be ordinary." (Reprinted in the Contra Costa Times.)

Business Week features an extended interview with me in its August 18-25 special issue on The Future of Technology. "IT Doesn't Matter" is also discussed in several other articles in the issue. It's a good issue, even if all the usual suspects say the usual things.

Carly Fiorina says I'm "dead wrong" in her keynote speech at HP World on August 12. More interesting, though, is her blunt attack on Dell and IBM: “Dell is low cost but with low technology . . . IBM—they are high-tech but they are also high cost . . . IBM [provides] fairly mediocre total customer experience.” It's interesting how the CEOs of top business IT providers have begun to publicly slam their competitors. It's turning into the kind of mud fight you get in commodity businesses.

Samy Mosimann discusses my article in the Swiss journal IBcom.

Industry Week's September 1 issue has a column on "IT Doesn't Matter."

Erin Joyce writes on my article and the controversy surrounding it in Internet News.

Isaac Cheifetz says "IT still matters" in an article originally appearing in the Minneapolis Star Tribune.

James Morris, dean of the School of Computer Science at Carnegie Mellon, chimes in an article in the Sept. 7 Pittsburgh Post-Gazette.

Also on Sept. 7, Jeff May mentions my article in a piece on the tech industry's crisis of confidence in the New Orleans Times-Picayune.

Lou Bertin discusses my "incendiary" article in the Sept. 8 Information Week. It's "the vision thing," he contends.

Although there has been a great deal of reaction to my article from IT managers and the IT industry, there have been relatively few public comments from business managers. It's particularly noteworthy, therefore, to see Tony Comper, the chairman and CEO of BMO Financial Group, one of the largest North American financial services companies, discuss my article and the current IT landscape in a wide-ranging and often eloquent speech at the IBM Global Financial Services Forum on Sept. 8 in San Francisco. At one point, he addresses my much-debated contention that "IT's power is outstripping most businesses' needs." Here's what Comper says: "Let's think about that for a moment. I'd hazard an educated guess that the vast majority of the two main end-users in my organization - customers and employees - actually utilize about 20 per cent of their computing capabilities (and I'm being generous here). The rest of the investment is mostly wasted. . . . This leads to a greater truth about IT in 2003, which is that like most A-list organizations, BMO Financial Group has just about all the basic technologies we need to successfully compete right now." Highly-recommended reading for anyone interested in the general manager's viewpoint.

Also in San Francisco, Intel's Craig Barrett again responds to my article in remarks at the Oracle World conference on Sept. 10. He talks broadly about IT's ability to provide business benefits (which no one debates) while sidestepping the issue of whether those benefits can form the basis for a competitive advantage or whether, as I argue, they become rapidly shared by all companies. Apparently, he also rode around the stage in a Ford concept car.

Peter Hind writes a concise summary of my argument and the counterarguments in the Sept. 9 edition of CIO Australia.

My debate with Scott McNealy and Bill Gurley, moderated by Stewart Alsop, at the SunNetwork conference on Sept. 18 can be viewed at Sun's site (scroll down). The discussion was covered by the San Francisco Chronicle, San Jose Mercury News, and InfoWorld.

"If you read one thing this year, make it Carr's article." So counsels the Global IT Services Report in its July issue (print only).

Information Week mentions "IT Doesn't Matter" in an article on IT budgets in its Sept. 22 issue.

General Electric CEO Jeffrey Immelt appears to have touched on my article in a Sept. 25 speech at MIT, terming "stupid" the idea that now that "everyone has information technology it is a waste of money." I actually agree with him about that. Although companies have wasted a great deal of money on IT, continued investment in IT will remain a competitive necessity even if it doesn't provide a competitive advantage. The key now, as I explain in the article, is to make sure that the future investment isn't wasted.

Meanwhile, in Europe, Pedro Navarro discusses my article in Actualidad Economica, a leading Spanish business journal; Pierre Lombard offers a contrary view in France's JDNet; Billy McInnes supports my argument in Ireland's Business World; Jorge Nascimento Rodrigues looks at both sides of the issue in a piece for a Portuguese business site; Serdar Turan examines my article in Turkey's Infomag; and the Holland Management Review features my article in its September-October issue.

Gary Flood examines my article and the reaction to it in a Sept. 29 piece in Accountancy Age. Rebutting the "knee-jerk" responses of some critics, he says "a reading of the nine-page piece shows careful research, effective marshalling of figures, convincing use of historical parallels and a refreshing sense of 'emperor's new clothes' truth-telling."

Dan Farber offers a smart and balanced take on the "IT Doesn't Matter" debate in a Sept. 30 article at ZDNet. Highly recommended.

Jack McCredie, CIO of the University of California at Berkeley, says that "at least in higher education, IT certainly matters."

I'm quoted at the end of Dean Takahashi's Oct. 3 San Jose Mercury News article on Merrill Lynch's criticism of Sun Microsystems.

Believe it or not, an entire book has now been written in response to my eight-page article.

In a long and notably lucid essay in the Australian edition of CIO magazine, Tim Mendham corrects some of the mischaracterizations of my argument and provides an incisive reading of the reactions to it. Toward the end of the piece, he writes, "There is an element of fanaticism and over-protectiveness in some of the responses, particularly as so many seem to indicate clearly either they have not read the article or they did not understand it. There are reasoned responses that do not rely on knee-jerk defensiveness, anti-outsider prejudice or self-serving position-selling, but these all tend to come back to the same “it’s the way

that you use it” argument: it’s all about strategy and people, which are, of course, technology-reliant but should not be technology-driven."

Kevin Francis, CEO of CenterBeam, examines my article and the state of corporate IT in an October 28 article on CNet. He concludes: "F. Scott Fitzgerald wrote, 'The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.' As we watch the mentally vapor-locked IT pundits continue to splutter and fume and blast Carr's article, it's painfully clear they are unable to pass Fitzgerald's test."

Forrester's Jean-Pierre Garbani mentions "IT Doesn't Matter" in an October 30 interview on SearchNetworking.com.

An article on the Taiwan server market mentions my article in the October 31 Taipei Times.

My article is discussed in an article on IT planning in higher education in the November 1 issue of Syllabus.

"What Does IT Mean?" asks Greg Neilson in an article at CertCities.com that examines the implications of my ideas for IT professionals.

A trio of Accenture consultants mention my article in a piece on IT misspending at CIO.com.

"Has IT Run Out of Big Ideas?," a November 11 article on IT innovation in the Australian edition of CIO, discusses my article.

An article in Federal Computer Week describes a panel discussion on IT in the public sector, which I participated in.

W. Brian Arthur cites my work in an essay on the broad economic implications of the new IT infrastructure in the November 10 issue of Fortune (requires subscription).

Rich Karlgaard discusses "IT Doesn't Matter" in a column on CIOs in the November 24 issue of Forbes.

James Champy, the erstwhile reengineering guru, gives his take on "IT Doesn't Matter" in the December issue of Fast Company.

Dean Takahashi discusses "IT Doesn't Matter" in a review of Clayton Christensen's new book in the November 16 San Jose Mercury News.

My ideas are featured in "Twilight of the PC Era?," Steven Levy's cover story in the November 24 issue of Newsweek. Levy also moderated a panel discussion on the same subject at Comdex, which featured author Edward Tenner, Microsoft executive Jeff Raikes, IBM marketer Deepak Advani, and me. Stories on the panel ran on InfoWorld and ZDNet. Levy and I also discussed the issue in a segment on Newsweek's radio program on November 16.

Here's a new discussion thread on the article at Slashdot.

Colin Boag writes on "IT Doesn't Matter" at vnunet.com. He notes that "support, maintenance and upgrades are the biggest problems faced by many businesses."

Kevin McKean, editorial director of InfoWorld, says IT's glory days still lie ahead.

The Los Angeles Times features an article on my "bold, Olympian pronouncement" (aw shucks) in its November 28 issue.

Looking back on the past year, ADT Magazine says that "Nicholas Carr's critique, "IT Doesn't Matter," in the May issue of the Harvard Business Review was perhaps the most talked about happening in 2003. More important than the criticism from the corporate IT and IT supplier world, the most important result was the debate Carr started. You and your suppliers have been forced to explain what you do, why you do it and why it's vital to your organizations. And that's a good thing."

Singaporean CIO Teo Chin Seng draws on my article in providing a thoughtful account of the current IT environment in the December cover story of the Asian edition of CIO.

Northwestern University economist Robert J. Gordon cites "IT Doesn't Matter" in "Five Puzzles in the Behavior of Productivity, Investment, and Innovation" (pdf download).

The Red Herring refers to "IT Doesn't Matter" in an article about the ongoing trend to keep tight control of IT costs. The article predicts that "companies will invest in cheaper, fast-commoditizing technologies like open-source software, blade servers, and voice-over-IP (VoIP), in addition to outsourcing functions that others can do more efficiently."

Information Age lists the publication of "IT Doesn't Matter" as one of the key events in IT in 2003.

ZDNet cites "IT Doesn't Matter" in an article on Oracle's bid for PeopleSoft.

Over at MidrangeServer.com, editor Timothy Prickett Morgan writes an insightful commentary on my article for the newsletter The Four Hundred.

For those keeping score, Network World has named me the 28th most important person in networking, just after HP's Nora Denzel and just before SCO's Darl McBride.

W. Brian Arthur comments on "IT Doesn't Matter" in an interview in Optimize magazine. I comment on his comments in "Productivity and the Profit Myth" in my newsletter, Digital Renderings.

In "IT Does Matter," an article in the European Business Forum, IT professor Enrique Dans stands atop his ivory tower and pokes at demons.

The November/December 2003 issue of Educause Review, a journal on IT in education, is devoted in large measure to commentary on my article. It also includes the full text of my article.

The always-interesting Paul Murphy comments on my article in a January 15 piece at LinuxInsider.

Andrew Wahl discusses "IT Doesn't Matter" in "Techies Now Cogs in Corporate Machine," an article in the January 19 issue of the Toronto Star.

Also on January 19, John Seely Brown and John Hagel examine "IT Doesn't Matter" in a Financial Times article on the commoditization of IT and its implications for business strategy.

Former FBI CIO Darwin John mentions "IT Doesn't Matter" in a provocative article about the role of the CIO in the January 1 issue of CIO Insight. John argues that the CIO's job has become too much for any one person to handle; he suggests companies establish an Office of the CIO.

The February issue of American Airlines' American Way magazine names me as one of 10 people to watch in 2004, saying of "IT Doesn't Matter": "Carr’s bombshell - denounced by the likes of Bill Gates, Intel’s Craig Barrett, and, of course, the ever-pugnacious Scott McNealy of Sun Microsystems - is still being cussed and discussed by the geekerati. Now, Carr’s legion of critics is bracing for his book-length salvo due out this year. Just don’t look for any latte-stoked book-signing parties at Microsoft headquarters."

Computerworld reports on a panel discussion I participated in at a Feb. 10 CFO conference in New York.

The February issue of Australia's MIS magazine features an article on and interview with me entitled The Reluctant Anti-Hero. The author notes: "For an industry nurtured in the ego-stroking and phenomenally successful nineties, it took a lone journalist – albeit an influential one – to reveal how sensitive the IT contingent has become about its strategic position in the world."

With the publication of my book Does IT Matter? Information Technology and the Corrosion of Competitive Adavantage in April 2004, I am now tracking reactions to my ideas on a new page within the book site.

related readings

Two texts from Michael Porter, the book Competitive Strategy and the article What Is Strategy?, are essential for understanding the relationships among industry structure, firm strategy, and competitive advantage. A third Porter book, Competitive Advantage, has a seminal chapter on technology and strategy. An extremely lucid overview of the current state of thinking about business strategy can be found in Richard Whittington's What Is Strategy - and Does It Matter?

To explore the effects of earlier tehnological revolutions on business, see Alfred Chandler's classics The Visible Hand and Scale and Scope. A more recent, and extremely interesting, book is Carlota Perez's Technological Revolutions and Financial Capital. For a lively account of the commercial and social impact of the telegraph, see Tom Standage's The Victorian Internet. Martin Campbell-Kelly provides a comprehensive history of software in From Airline Reservations to Sonic the Hedgehog: A History of the Software Industry. Steve Lohr's Go To provides an enjoyable and illuminating account of key developments in software and the people behind them. Paul Ceruzzi's History of Modern Computing provides an excellent overview.

Porter's article Strategy and the Internet diagnoses the failures of e-strategy. Carl Shapiro and Hal Varian take a cold look at the economics of digital business in Information Rules. For

a solid, practical overview of corporate information management today, consider Jon Piot and John Baschab's weighty The Executive's Guide to Information Technology.

sources of data used in article

Page 41, column 2:The Bureau of Economic Analysis data on IT capital spending have been reported widely; see, e.g., page A1-7 of this report.

Worldwide annual IT spending figure is from a Gartner study.

Page 43, column 1:Plumb, Burdict and Barnard is discussed in Schurr et al., Electricity in the American Economy (Greenwood Press, 1990), p. 27 (note that company name is misspelled in this book).

Column 2:Rail, steamship, and telegraph growth figures are from Hobsbawm, The Age of Capital (Vintage, 1996). Electrical power figures are from DuBoff, Electric Power in American Manufacturing, 1889-1958 (Arno Press, 1979), p. 43.

Page 44, sidebar:Deflation figure from Hobsbawn, op. cit.

Landes quote is from The Unbound Prometheus (Cambridge, 1969), pp 240-1.

Page 45, column 1:MIPS figures are from Progressive Policy Institute’s Technology Project.

Computational power of microprocessor figure is from Delong, Macroeconomic Implications of the 'New Economy'; Internet figures are from Zakon's Internet Timeline; Business Week quote is from “The Fiber-Optic Glut in a New Light” in 8/31/01 issue.

Pages 45 and 46:AHS case draws from a series of Harvard Business School case studies, particularly “Baxter International: OnCall as Soon as Possible,” HBS Case #9-195-103, and “American Hospital Supply Corporation: The ASAP System," HBS Case #9-186-005, as well as “Seizing the Electronic Information Advantage” from Business Marketing’s January 1988 issue and “A Cure for Hospital Woes” from Information Week’s 9/9/91 issue.

Sidebar:Bill Joy quote is from Titans Still Gather at Davos, Shorn of Profits and Bravado in New York Times 1/27/03 edition.

Page 48, column 3:PC sales figure comes from various sources such as IDC and Dataquest; see, e.g., this article.

Page 49, column 1:Data storage’s share of spending is from Why Squirrels Manage Storage Better Than You Do in the April 2002 issue of Darwin.

Computerworld figure is from Five Cost-Cutting Strategies for Data Storage in 10/21/02 issue.

Column 2:Alinean figures were provided to me by Alinean. Forrester study was widely reported; see, e.g., this article.

Ellison quote is from this interview.

cult of the amateur

copyright 2004 by Nicholas G. Carr

The End of Corporate ComputingBy Nicholas G. Carr

This article, appearing in the Spring 2005 issue of the MIT Sloan Management Review, is something of a sequel to my 2003 Harvard Business Review article IT Doesn't Matter. Whereas the earlier piece examined the demand side of business computing (how companies use IT), "The End of Corporate Computing" examines the supply side (how the technology industry will be organized to supply IT to companies). In particular, it shows how the wastefulness of the current, fragmented model of IT supply is unsustainable. As with the factory-owned generators that dominated electricity production a century ago, today's private IT plants will be supplanted by large-scale, centralized utilities. The transition to the new supply model promises to bring challenges and opportunities to the users of IT while upending the status quo of the computer industry.

The title of the article has a dual meaning. Computing utilities will bring to an end the traditional model of "corporate computing" in which computing is carried out within individual corporations - just as electric utilities made "corporate electricity generation" obsolete. And utility computing will represent "the end" toward which business computing in general is heading. It's IT's destination.

"...As a business resource, information technology today looks a lot like electric power did at the start of the last century [when manufacturers built and maintained their own generators]. Companies go to vendors to purchase various components — computers, storage drives, network switches and all sorts of software — and cobble them together into complex information-processing plants, or data centers, that they house within their own walls. They hire specialists to maintain the plants, and they often bring in outside consultants to solve particularly thorny problems. Their executives are routinely sidetracked from their real business — manufacturing automobiles, for instance, and selling them at a profit — by the need to keep their company’s private IT infrastructure running smoothly.

The creation of tens of thousands of independent data centers, all using virtually the same hardware and, for the most part, running similar software, has imposed severe penalties on individual firms as well as the broader economy. It has led to the overbuilding of IT assets, resulting in extraordinarily low levels of capacity utilization. One recent study of six corporate data centers revealed that most of their 1,000 servers were using just 10% to 35% of their available processing power. Desktop computers fare even worse, with IBM estimating average capacity utilization rates of just 5%. Gartner indicates that between 50% and 60% of a typical company’s data storage capacity is wasted. And overcapacity is by no means limited to hardware. Because software applications are highly scalable — able, in other words, to serve additional users at little or no incremental cost — installations of identical or similar programs at thousands of different sites also create acute diseconomies, in both upfront expenditures and ongoing costs and fees. The replication, from company to company, of IT departments that share many of the same technical skills represents an overinvestment in labor as well. According to a 2003 survey, about 60% of the average U.S. company’s IT staffing budget goes to routine support and maintenance functions.

When overcapacity is combined with redundant functionality, the conditions are ripe for a shift to centralized supply. Yet companies continue to invest large sums in maintaining and

even expanding their private, subscale data centers. Why? For the same reason that manufacturers continued to install private electric generators during the early decades of the 20th century: because of the lack of a viable, large-scale utility model. But such a model is now emerging..."

responses

ZDNet's Dan Farber, in an April 18 posting on his blog Between the Lines, discusses "The End of Corporate Computing," calling the article "another clarion call for extinction of enterprise computing as we know it." While Farber says he agrees that a utility model for IT supply seems "natural and necessary," he cautions that "it will take decades to kill the way corporate computing is practiced today." He points out that we don't yet "have efficient marketplaces, like commodity futures, for selling IT services. Nor is the standardized metering and billing infrastructure in place to enable IT utility marketplaces." I agree with Dan that there's much work to be done, but every advance will help to reshape the current model of IT supply in ways both big and small.

In the April 21 edition of the Toronto Globe and Mail, Dan McLean offers a long analysis of my article. "To his credit," McLean writes, "Mr. Carr challenges computing convention, even if the reality of what he believes is a lot more complicated than he's making it sound." In particular, Mclean says, "Mr. Carr hasn't addressed what is likely the biggest obstacle to creating an IT utility: Managing all that data as it traverses its way along a multitude of cyberpathways through potentially millions of unknown sources and destinations." That will indeed be one of the biggest challenges in shifting to a full utility model, though I think McLean may be overstating it at least a little. One need only look at the ever increasing complexity of the Internet and its uses to know that managing extraordinarily complicated data flows is a challenge that can - and I have no doubt will - be met.

ManyWorlds reviews my argument that we are beginning a fundamental shift in the nature of business computing. "Without doubt," it writes, "this transition will shake up IT companies, and put pressure on other companies to rethink their need to own IT assets. Carr may be overselling the general economic upheaval, however. Companies have already had plenty of warning of the changes underway: many are already using application service providers (ASPs), or have at least considered business process outsourcing ... On the other hand, Carr’s article neatly brings together several strands of this trend, illuminating it with a plausible historical parallel, and succeeds in pressing home the waste, expense, and security dangers inherent in today’s still-dominant model."

In reviewing my article on April 29, Tom Steinert-Threlkeld, editor of Baseline, tells executives: "Form your own opinion. Don’t just sit on the sidelines. It is too important. Better yet: Run the numbers on utility computing or 'renting' applications. When all is said and done, the smart CEO will offload as many capital costs, operating costs and upgrade costs as possible. But the smart CEO will still keep his corporation computing. Even if the infrastructure is commoditized, even if someone else owns the boxes and cables, how you compute, how you embody your strategic thinking in code and how you get your instructions executed will be the source of competitive advantage for decades to come."

The May 1 edition of the Boston Sunday Globe features an article on "The End of Corporate Computing" by Robert Weisman. He sums up the thrust of the piece, noting that the shift to a utility model may disrupt "the business models of technology hardware and software

suppliers" while freeing executives "to focus on their businesses." He quotes me: "'CEOs and managers in general want to think hard about the information. They don't care about the machinery." Weisman also quotes Forrester Research CEO George Colony as saying I'm at once "half right" and "totally wrong." It's understandable Colony would object. Once managers offload their information technology, they'll no longer have much need for the kind of arcane technical information that's been the bread and butter of researchers like Forrester.

Forbes calls "The End of Corporate Computing" one of "Ten Must-Read Tech Stories."

Sun Microsystems president Jonathan Schwartz is "lukewarm on Carr's latest," according to a CNET blog. Says Schwartz: "Nick missed ... the one fundamental point, that the concept of utility is predicated upon common platform multi-tenancy." I'm not sure exactly what "common platform multi-tenancy" means, but it sounds a lot like a long-winded, tech exec version of the word "utility."

In the May 9 issue of Computerworld, Kathleen Melymuka interviews me on "The End of Corporate Computing."

"Provocateur predicts 'end of corporate computing,'" screams CNET headline. Pieces in ComputerWeekly and Australia's idm.net also discuss the article.

In a May 16 rebuttal to my article, Computerworld columnist Frank Hayes rushes to the defense of "scattered, wasteful computing." My response can be found at my blog.

Over at Application Development Tools, editor Michael Alexander takes a whiff of my oracular gas and doesn't like what he smells.

John Fontana profiles me in the June 13 issue of Network World. He calls me "the quintessential disruptive force."

Martin LaMonica surveys responses to my article in a June 17 piece at news.com.

In a Datamation column, Steve Andriole, a business professor at Villanova, looks at my argument that we're approaching the end of corporate computing, as companies will increasingly shift from owning their own IT assets to renting most of the IT resources they need. "Long-term," he writes, "I think [Carr] is absolutely right. Initially, companies will purchase transaction processing services from centralized data centers managed by large technology providers, but over time companies will rent applications developed the old-fashioned way by the same old mega software vendors ... Eventually, as SOA proliferates, new software delivery and support models will develop from the old vendors as well as a host of new ones...The appeal of 'paying by the drink' is just too great to resist – especially since the alternative will still (and forever) require the care and feeding of increasingly difficult-to-find technology professionals."

CIO Insight has published a number of responses from its readers to my ideas about utility computing. Here's the first set of responses, and here's the second.

Michael Hugos, CIO of Network Services, offers his take on my ideas in a Computerworld column. "I'm amused to see us all rush to refute [Carr's] pronouncements," he writes. "But, to paraphrase a famous quote, methinks we doth protest too much. Carr is right about a

number of things, and many of us know it. A big chunk of what we do in the IT business - stuff like running networks and application systems, and installing and supporting packaged software - is necessary but no longer strategic to most organizations. Ironically, because we have gotten so good at these things, they have become commoditized. Now it often does make sense to outsource them to an IT utility, just as we outsource the production and delivery of electricity to an electric utility."

The Philadelphia Inquirer features a story on "The End of Corporate Computing" in its August 28 edition. Writes columnist Reid Goldsborough: "If it weren't for Carr's blue-chip resume and the big-name responses he has spurred, you might be tempted to write him off as the egghead provocateur a la mode who gives the digerati something to talk about over lunch ... But Carr provides compelling support for his 'utility' computing model. [T]here's unquestionably room for greater efficiency in the way information-technology tools are delivered and used, and Carr offers a lot to think about."

Get Over YourselfThe pervasiveness of IT may be making it strategically irrelevant.

By Kathleen Melymuka

Computerworld - Information technology has become a commodity. All that's left to do is mitigate risks and control costs. So states Nicholas G. Carr in this month's Harvard Business Review. Carr argues that IT, like railroads, electricity and other infrastructural revolutions that came before, has become so pervasive that companies can't live without it but that it now offers them little strategic advantage. Carr, HBR's editor at large, told Kathleen Melymuka why he thinks "IT management should, frankly, become boring."

Why is the strategic value of IT diminishing? For any resource to have strategic value, it has to allow companies to use it in a distinctive way. As information technology becomes more powerful and ubiquitous, it is increasingly a shared resource that everyone has access to. As a result, it's getting harder and harder to use IT to gain any kind of edge over competitors.

Does this apply to all kinds of IT, or just to infrastructure? I'm defining IT as the processing, storage and transmission of data, so I'm talking quite broadly. All of that is actually becoming part of the general business infrastructure, just as the rail system became part of the infrastructure in the 1800s and the electric power grid became part of the infrastructure in the early 1900s.

Nicholas G. Carr, HBR's editor at

large

Are you saying, for example, that businesses have already derived most of the value they can get from the Internet? Most of the strategic value. Companies are going to continue to use the Internet to increase productivity, but that's going to happen at the industry level, not at the level of individual companies. As a means of differentiation, I think we're already past the peak and on the downside.

What are the characteristics of IT that guarantee this rapid commoditization you write about? First, IT is essentially a transport mechanism. It carries digital information in the same way power grids carry electricity. That's much more valuable when it's shared than when it's used in isolation, so everyone quickly moves to shared systems. Second, the almost infinite scalability of many IT functions, combined with the rush to technical standardization, means there's no economic benefit to having proprietary applications.

No one writes their own e-mail or word-processing applications, and that approach is quickly moving to supply chain management and CRM. Generic systems are efficient but don't offer advantages over competitors because we're all moving to the same systems. With the arrival of the Internet, we've got the perfect delivery channel for generic applications. As we move to Web services, where we can purchase key applications just like we buy electricity, that will push us further toward the homogenization of IT capability.

Isn't it possible that there will be another "big thing" in IT that's still unforeseen? That's possible, but we're already starting to see that the capabilities of the IT infrastructure are greater than the needs that businesses have. It's always possible something out of the blue will change everything, but it's hard to imagine that happening the way you could five or 10 years ago. Also, even if something like that happens, it will probably come out of the vendor community, not the user community. All companies will be able to buy the capability, so no company will get an advantage.

What do the previous infrastructure build-outs -- like railroads and electricity -- tell us about the ratio of risks to advantages in the current state of IT? In the early stages of the build-out, companies can get proprietary advantages because access remains limited due to physical limitations or patents or high cost. So companies begin to see them as ways to build advantage. But the build-out happens so fast that the window to gain advantage is open only for a short time. Then the technology becomes a cost of doing business that all pay, and nobody gets advantage.

When things begin to tip that way, the risk involved in using that technology starts to outweigh the advantage. For example, nobody gets strategic advantage from electricity, but if you lose access, that can devastate your business. We're seeing the same thing with IT. The risks are beginning to weigh much more heavily than possible benefits, so companies need a more defensive and less offensive posture toward IT investments.

Are you saying companies should be more concerned with IT risk mitigation than with IT strategy? Exactly. I think IT security should be a much greater concern than it has been. I think the real competitive struggle in the use and management of IT is over cost. It's hard to use IT to gain a strategic advantage, but if you use it poorly, you can quickly put yourself at a cost disadvantage.

You talk about overspending as the biggest risk of all, but every IT leader I talk to bleeds ROI. If an IT project pays for itself and more, isn't that enough? I think the focus on ROI is exactly right. But it's important to make sure when you look at ROI that you're not assuming some competitive advantage that heightens payback. You have to really look at payoff in cost savings and operational efficiency. I think there's still a danger of managers getting excited about the potential for advantage and moving too quickly into new technology.

If it's getting harder to realize the benefits of IT, why is the cutting edge not the place to be? IT costs plummet extremely quickly. Companies should ask not only whether this investment is justified based on ROI calculations today, but whether payoff will be even greater if they wait six months or a year. An imperative for IT management is to go slowly—to follow rather than lead.

Should IT managers be looking for new careers? It depends on what kind of IT managers they are. Companies have

increasingly bought into the assumption that IT is a strategic resource. As a result, they have brought in CIOs who are conceptual, strategic thinkers about IT. I think there's less of a need for those types of individuals.

But because expenditures will remain so high, there's enormous need for technically astute, hard-nosed business people who can really help companies to get the most out of IT spending. I think IT management will get less sexy but remain just as essential in another way.

Melymuka is a Computerworld contributing writer. Contact her at kmelymuka@yahoo.com.

CIOs Sure Think IT Matters CIOs and chief technology officers beg to differ with a recent Harvard Business Review article titled 'IT Doesn't Matter.'

By Rick Whiting ,  InformationWeek May 23, 2003 02:00 PM

Does IT matter? A recent Harvard Business Review article titled "IT Doesn't Matter" sparked discussion among attendees at a CIO conference at MIT in Cambridge, Mass., this week. And not surprisingly, the CIOs and chief technology officers begged to differ.

General Motors Corp. CTO Tony Scott, while saying the story raised interesting points, argued with the article's premise that IT doesn't matter because it has become commoditized and provides no competitive advantage. IT that provides competitive advantages continues to be developed, Scott said, and even technology that's a commodity still provides business flexibility.

"Brakes are a commodity, but I don't think anybody would say they don't matter," Scott said, using an auto-industry analogy. Because of the rate of IT development, any company that fails to invest in IT is doomed to fall behind, he said.

CIO and executive VP Michael Harte at PFPC/PNC (part of the PNC Financial Services Group) questioned the article's argument that IT is less productive than other forms of capital. If anything, IT is becoming more productive with new generations of IT portfolio-management tools, he said. But he agreed that there's increased pressure to measure the return provided by IT investments.

Business Technology: IT Is A Must, No Matter How You View It

By Bob Evans ,  InformationWeek May 19, 2003 12:01 AM

As we chatted about last week, the vaunted Harvard Business Review recently came up with the conclusion that "IT Doesn't Matter," and the prestigious journal devoted several pages to an article penned by Nicholas Carr and dedicated to proving that IT is going the way of the telegraph, railroad tracks, and internal-combustion engines.

No doubt, lots of people will have lots of different opinions on the conclusions framed in the article. But one person with a truly unique set of qualifications with which to assess the article is Ralph Szygenda, CIO of General Motors for the past several years and InformationWeek's "Chief of the Year" for 2002. Ralph was gracious enough to share with InformationWeek some of his reactions after reading the piece in the Harvard Business Review.

"Nicholas Carr may ultimately be correct when he says IT doesn't matter," Szygenda began. "Business-process improvement, competitive advantage, optimization, and business success do matter and they aren't commodities. To facilitate these business changes, IT can be considered a differentiator or a necessary evil. But today, it's a must in a real-time corporation."

GM's CIO Ralph Szygenda

Szygenda did concur with one of Carr's corollary recommendations: spend less. In the HBR article, Carr stated, "It's 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." Szygenda's reaction: "I also agree on spending the minimum on IT to reach desired business results. Precision investment on core infrastructure and process-differentiation IT systems is called for in today's intensely cost-conscious business versus the shotgun approach sometimes used in the past."

What I take from that is this: Spend what is required but no more to achieve essential differentiation via business processes and the IT systems that support them.

The CIO of GM continues with another agreement, although one with a significant qualification: "Yes, IT has aspects of commoditization. PCs, telecommunications, software components such as payroll, benefit programs, business-process outsourcing, and maybe even operating systems and database-management systems are examples. But the application of information systems in a corporation's product design, development, distribution, customer understanding, and cost-effective Internet services is probably at the fifth-grade level."

Well, if IT doesn't matter, I guess they'll just stay stuck at that fifth-grade level.

On the other hand, if the focused and strategic applications that they support and that Ralph is describing do indeed matter, then there's plenty--plenty--of progress to be made.

And, in conclusion, Ralph's thoughts on the commodity claim: "After being a part of the IT industry for 35 years, I have heard similar pronouncements during the introduction of the integrated circuit, microprocessor, PCs, office systems, ERP systems, and the Internet. Nicholas Carr and others need to be careful not to overstate the speed of the information-management journey or [they] may make the same mistake that Charles H. Duell, the director of the U.S. Patent Office, did in 1899 when he said, 'Everything that can be invented has been invented.'"

Bob Evans, Editor in Chiefbevans@cmp.com

Business Technology: IT Doesn't Matter? By Bob Evans ,  InformationWeek May 12, 2003 12:00 AM

Whichever ancient sage who first divined that the gods do not always smile upon us surely knew of which he spoketh. I need to cut my shaggy grass, but it keeps raining; my beloved but bungling Pittsburgh Pirates have lost six in a row; the drain trap below my shower is leaking; and on top of all that comes word that the Harvard Business Review has decided that IT doesn't matter.

Yep, that's what they say in the table of contents, in the headline, and at the top of each page in the lengthy article: "IT Doesn't Matter" (HBR, May 2003, p. 41). And here I was, fussing about leaks and losing streaks when IT was just stopping mattering. Can it be so?

The article is thoughtful and sweeping and quite interesting to read. I'd heartily recommend it. But that doesn't make it either accurate in its conclusions or even properly focused, and that's the problem I have with it. Written by HBR editor-at-large Nicholas Carr, the article is intent on proving the thesis that because IT has become widespread, then it must perforce become a commodity, as happened to other one-time breakthrough and industry-jarring innovations, such as steam engines and railroads, telephones and telegraphs, electric generators and internal-combustion engines. And Carr's unshakable belief in that inevitability leads him to a conclusion that's no doubt provocative, which I think was his primary intent, but also profoundly shortsighted and dangerous.

Now, please allow me a brief digression to the Full Disclosure Department: I will certainly admit that given my position with a publication like InformationWeek, I have a vested interest in the ongoing relevance, growth, and vitality of what I believe Carr is referring to as the IT industry. And I can certainly say that my view of the future that lies ahead for you readers could not possibly be in more extreme opposition to what Carr forecasts in the final paragraph of his article: "IT management should, frankly, become boring. The key to success, for the vast majority of companies, is no longer to seek advantage aggressively but to manage costs and risks meticulously." So, yes, I am a bit subjective on this topic, but I also feel that while the jobs of Randy Mott and Ralph Szygenda and Rob Carter and many tens of thousands of others in top IT management positions will be many things, one thing they will must assuredly not be is boring.

Where the article should have gone, I think, is outside the realm of embedded infrastructure and applications and into some attempts to look at what the future might look like. Instead, it assumes that the futures that befell railroads and steam engines will, inexorably and inevitably, be the future of IT. And I think that's astonishingly shortsighted. Only 10 years ago, how many of you had heard of the World Wide Web? And today, we've all heard of Web services--heard too much and seen too little, some would say--but can any of us really imagine what business will be like when the potential of those new technologies begins to be expressed? Or when global and mobile get more stable, and true collaboration becomes less psychology and more process and software, and the recent focus on internal technology becomes redirected on customer-centered possibilities? If we've learned anything in the last several years, it's that the balance of power in the world of business has tipped to the buyer and they will continue to get more demanding, more fickle, more selective, and more willing to spend their bucks elsewhere unless businesses mold their efforts around those customers.

Will that be done with people? With paper? With singing telegrams? I don't think so; the key will continue to be technology.

IT doesn't matter. Or does it?

Bob EvansEditor in Chiefbevans@cmp.com

Overview: Excellence On A Budget

IT managers work hard to stake out their identity as innovators, not just cost centers in need of pruning

By Aaron Ricadela ,  InformationWeek September 22, 2003 12:02 AM

Times aren't quite as tough this year for America's CIOs as in the recent past, but the signs of economic recovery

have been slow to reach their budgets. Market researchers forecast a comeback in the decimated chip sector, led in part by a rebound in corporate PC buying. Strength in consumer spending and a recovery in capital investment by businesses--signs of demand for companies' products--are fueling optimism about an expanding economy.

But during a year in which a Harvard Business Review article touched off a reassessment of whether new technology really sets companies apart from competitors, business-technology managers are finding it tough to stake out an identity as innovators, instead of cost centers in need of pruning.

"Everyone's questioning the price of everything," says Robert Egan, VP of IT at Boise Cascade Corp. The $7.4 billion-a-year supplier of paper and office products is No. 8 on this year's InformationWeek 500 list of U.S. companies judged as the top innovators in business technology and IT operations. "The general attitude in business now is to be very skeptical of the claims software companies make" about their ability to give companies new tools and save them money, Egan says. During four years of flat IT budgets, Boise Cascade has offset staff raises with declining hardware costs. Now that, too, is coming to an end. "We've been doing that for so long that we're at a point where, if we're going to give raises, our IT costs will go up," Egan says. "We're being squeezed."

Egan's story isn't uncommon. Companies on the InformationWeek 500 plan to spend nearly 3.7% of revenue on IT this year, compared with 4.3% in 2000. That's up from 3.4% last year. Meantime, though, the average revenue of companies on the list is little changed, at about $9.6 billion. Furthermore, twice as many companies--12% of those surveyed--say they'll spend less than 1% of revenue on IT this year, versus 6% of companies pinching pennies last year.

InformationWeek 500 companies are more bullish about the future. After two years of decline in average dollars spent on IT--from $484 million in 2001 to $353 million this year--InformationWeek expects the top companies to spend an average of $369 million on IT next year. For some, an environment of falling prices means an opportunity to take advantage of vendor price-cutting. John Dick, executive VP and CIO at Regions Financial Corp., which provides banking, brokerage, insurance, and mortgage services in nine Southern states, has used a budget increase and favorable buying environment to stock up.

"We've found tremendous cost economics in the market, particularly with the vendor competition in the technology space," he says. "The deals we've been able to get on technology we just couldn't pass up." Upgrades are made with an eye to the future. In just one example, Regions swapped out 13 terabytes of mainframe direct-attached storage. "The maintenance and operating costs were higher than bringing in new technology and replacing everything we had," Dick says.

But IT managers' focus this year has been mostly on cutting costs and shoring up infrastructure that got its last big push when companies were refreshing their environments to guard against the Y2K problem. Just 11% of companies on the InformationWeek 500 say their business-technology strategy is primarily to generate revenue; for 89%, it's cost-cutting or simplifying operations. E-business revenue makes up 14% of U.S. sales this year, down from 24% last year.

Where The

Money Went

Average dollar breakdown of IT

budgets

  2002

New product or technology purchases 19.5% $62.2M 17.0% $60.2M

I.T. consulting or outsourcing 18.0% $57.4M 14.7% $51.7M

Research and development 2.5% $7.9M 3.3% $11.7M

Salaries and benefits 27.9% $89.3M 32.1% $113.2M

Applications 21.0% $67.2M 20.0% $70.5M

Everything else 11.1% $35.5M 12.9% $45.7M

Note: In 2002, the average total

IT budget was $356.6 million; in

2003, it was $353.0 million.

Data: InformationWeek Research survey

of InformationWeek 500 executives

Budget Overvie

wInformationWe

ek 500 IT dollars spend

and 2004 spending forecast

  2001 2002 2003 2004

Average I.T. dollars spent $484M $320M $353M $369M

Average I.T. budget as a % of revenue 3.99% 3.39% 3.66% 3.65

Note: Additional data from previous

InformationWeek 500

surveys.Data:

InformationWeek Research

survey of InformationWe

ek 500 executives

"It's time to play catch-up," says Boise Cascade's Egan, noting that the company's biggest IT projects during the coming year will include rewiring networks and putting in new phones--not exactly sexy stuff. At the same time, Boise, which is closing a $1.2 billion acquisition of retailer OfficeMax Inc., is spending less time than ever upgrading its enterprise apps, Egan says, partly because of a longer lag between major product releases. "I hope that's a trend that continues," he says. "Upgrades offer no direct benefit to our business. In proportion to the amount of effort it takes, we'd rather not do it."

Automaker DaimlerChrysler AG has extracted more than $300 million from its IT environment over the last three-plus years, senior VP and CIO Sue Unger says, in part by standardizing E-mail software and middleware (on IBM's WebSphere) and reducing the number of servers the company uses. Five years ago, servers were dishing up only about a third of their capacity. "That was unacceptable," she says. Ambitious E-business plans also have been partly to blame for overspending. The world's No. 3 automaker wrote lots of contracts tied to a large number of users hitting applications and to a large amount of computing required to run those apps. "You end up thinking you'll have all these customers using it, and then you don't and you pay too much," Unger says. Since then, DaimlerChrysler has become "more clever" about writing IT contracts, she says.

Out of an average IT budget of $353 million for InformationWeek 500 companies, 32% went to salaries and benefits, 20% to application development, about 17% to buying new products and technology, and 15% to paying for IT services. Three percent went to research and development and 13% to miscellaneous expenses. Average spending on new products and technology declined to $60.2 million from $62.2 million, or 19.5% of budgets last year.

Some companies are looking for innovation as well as cost savings when they sign services deals. J.P. Morgan Chase & Co., a $43.4 billion-a-year financial-services company, expects a seven-year, $5 billion outsourcing deal with IBM signed this year to yield usable research and development into distributed computing, as well as shift 4,000 IT workers and consultants from Morgan Chase to IBM. "We wouldn't do the deal exclusively for economics," says head of technology John Schmidlin.

About the same number of companies as last year say their IT departments sell technology products to other companies (23% this year versus 26%), while the number of organizations selling IT services slipped to 21%, from 28%. In one notable example, The Boeing Co. last month spun off an anti-spam software company called MessageGate Inc., which emerged from Boeing's efforts to control junk mail on the company's computer networks.

It's a sign of the times, however, that companies champion even the newest technology in pursuit of budget-trimming, rather than new features for users. Of the 89% of InformationWeek 500 companies using XML and Web services in production or testing, four in five say their goals include faster, cheaper integration of data, and nearly three-quarters seek operational savings or the ability to ax some computing platforms. Three-quarters of companies say they're live with Web-services projects, and another quarter are testing the technology. Fewer sites, though, use XML for data exchanges with customers or suppliers: 64% this year, down from 75% last year.

The most popular technologies among companies on the list this year include data-warehousing software (cited as widely deployed by 95% of companies), Windows 2000 PCs and servers (named by 95% and 82% of respondents, respectively), Java-based apps (93%), and enterprise-resource-planning software (92%). One big reason for deploying these technologies is the ability to share information more quickly within and among companies. "The banner for us is information integration," says Roy Dunbar, CIO and VP of IT at Eli Lilly & Co. "This dictates which technology we use, the extent to which it's customized, and the extent to which it's used globally." Customer-relationship-management software plays a big role in this integration as Lilly, like most drugmakers, searches for the most effective way to market and sell medications to an increasingly savvy customer base that has several choices for just about any ailment.

CRM is also a priority at drugmaker Wyeth. The company's goal is to better target sales calls by understanding not just how many prescriptions a physician writes, but what kinds. "If Wyeth has a product that addresses a particular condition, we want to avoid calling on a physician who doesn't see patients with the problem that that drug treats," CIO and VP Bruce Fadem says.

Some 41% of InformationWeek 500 companies say they've taken measures to share real-time data about their operations with employees and external users. Another 36% share such information just with insiders. Thirty-five percent say their white-collar workers use business-intelligence tools such as online analytical processing or data mining, up from 32% of companies last year. "There's more and more demand for real-time, dynamic information," says Jackie Barretta, VP of IS at Con-Way Transportation Services, a $2 billion-a-year trucking unit of CNF Inc. Previously, Con-Way's IT department built software to answer business questions using "canned" daily reports. Now, in a more competitive market, making the best bids requires less formula and more customization, eased by new software that complements old Cobol code with Java. "Customers are doing a lot more competitive shopping," Barretta says.

InformationWeek 500 companies are relatively well-armed against the security threats making ever more frequent appearances: 98% report using antivirus software, and 84% run intrusion-detection systems. But sophisticated safeguards for users are rarer: Only half of companies employ one-time passwords, access tokens, or smart cards, and just 10% of sites use biometric techniques.

One area where companies aren't spending is on personnel. They're reluctant to add workers, yet they're trying to squeeze more productivity out of the ones they have--even while cutting back on outside help such as temp workers and consultants. Just over three-quarters of InformationWeek 500 companies say they used temp workers or IT contractors this year, compared with 84% last year and a whopping 94% in 2001. Yet just 4% say they expect hiring to increase significantly in the next year, though more than one-quarter expect some increase. Nearly half the companies say they expect no change in staffing levels, and 19% say they plan to hand out pink slips. DaimlerChrysler expects to continue hiring college grads for IT jobs, CIO Unger says. But the company isn't bringing more highly paid technicians on staff. "We get more experienced talent through consultants," she says.

Overall, though, outside help is falling out of favor. While IT budget money earmarked for salaries and benefits rose by 4% over last year, to an average of $113.2 million, money spent on consultants and outsourcers declined 3%, to $51.7 million on average. Companies spent

nearly 32% of their IT budgets on salaries and benefits during the past 12 months, up from 28% last year, and about 15% on consulting and outsourcing, versus 18% in 2002.

Washington Mutual, a $19 billion-a-year bank, has developed its internal IT expertise at the same time it's built a new company network and upgraded 50,000 PCs, all funded by an IT budget increase of less than 5%, says executive VP and CIO Jerry Gross. The company is relying more on its own employees--IT staffers get 40 hours of training a year--and less on service providers to manage its wide area network. "We have more focus on owning what we're building so the intellectual property is Washington Mutual's," Gross says.

It's out with the consultants at PeopleSoft Inc. as well, says David Thompson, senior VP and CIO. The software company, which is fending off a hostile takeover bid from Oracle, is installing more servers to host its applications and generate revenue, in spite of an unchanged IT budget, by renegotiating telecom contracts and cutting down on consulting. Yet PeopleSoft also revealed last month that it would lay off up to 1,000 workers next year as part of a $150 million to $200 million cost-savings plan following its acquisition of J.D. Edwards & Co.

Even as they're stripping away perks from the boom days of 2000, such as telecommuting and stock-option awards, InformationWeek 500 companies are giving workers more laptops, handhelds, and cell phones, replacing worn PCs, and upgrading networks in an effort to extract more productivity from IT staff. Sun Microsystems' pursuit of lower staffing costs may be extraordinary by any measure. Some 15,000 employees at the computer maker, including the CIO, don't have permanent workspaces. "I don't have an office," says Bill Howard, senior VP and CIO. "But my admin does."

Howard estimates "hotelling" saved Sun about $65 million last year, plus another $4 million in power costs. By next month, the company plans to offer users an online session to access their files from anywhere in the world. "All the books that I used to have in the office that I never looked at are now at home," Howard says. It's a plan that's indicative of a period when innovation means cutting back as well as doing more.

--With John Foley and Larry Greenemeier

here is some additional information from Pak Hari on the additional reading recommendation for the assignment.

"Coorporate Information Strategy and Management" by Linda Applegate, 6th edition.

Reading 1-1 " IT Doesn't Matter "