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IT doesn't matter, part 8
January 12, 2007
This is the eighth and final installment of the article "IT Doesn't Matter." Part 1 is here.
Given the rapid pace of technology’s advance, delaying IT investments can be another powerful way to cut costs – while also reducing a firm’s chance of being saddled with buggy or soon-to-be-obsolete technology. Many companies, particularly during the 1990s, rushed their IT investments either because they hoped to capture a first-mover advantage or because they feared being left behind. Except in very rare cases, both the hope and the fear were unwarranted. The smartest users of technology – here again, Dell and Wal-Mart stand out – stay well back from the cutting edge, waiting to make purchases until standards and best practices solidify. They let their impatient competitors shoulder the high costs of experimentation, and then they sweep past them, spending less and getting more.
Some managers may worry that being stingy with IT dollars will damage their competitive positions. But studies of corporate IT spending consistently show that greater expenditures rarely translate into superior financial results. In fact, the opposite is usually true. In 2002, the consulting firm Alinean compared the IT expenditures and the financial results of 7,500 large U.S. companies and discovered that the top performers tended to be among the most tightfisted. The 25 companies that delivered the highest economic returns, for example, spent on average just 0.8% of their revenues on IT, while the typical company spent 3.7%. A recent study by Forrester Research showed, similarly, that the most lavish spenders on IT rarely post the best results. Even Oracle’s Larry Ellison, one of the great technology salesmen, admitted in a recent interview that “most companies spend too much [on IT] and get very little in return.” As the opportunities for IT-based advantage continue to narrow, the penalties for overspending will only grow.
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. If, like many executives, you’ve begun to take a more defensive posture toward IT in the last two years, spending more frugally and thinking more pragmatically, you’re already on the right course. The challenge will be to maintain that discipline when the business cycle strengthens and the chorus of hype about IT’s strategic value rises anew.
This article originally appeared in the May 2003 edition of the Harvard Business Review. The ideas are developed further in the book Does IT Matter? Information Technology and the Corrosion of Competitive Advantage.
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Comments
Nick,
Most of the chief executives that I deal with now accept your view, that IT is a commodity item, and very few believe that it can be the basis for competitive differentiation. CIO’s, of course, are still fighting an increasingly futile rear guard action.
This change in opinion by chief executives will have a considerable impact on organizational structures. Many companies have already outsourced/off shored a significant part of their corporate IT activities and within the next few years the remainder will go down that path. Historically however, corporate IT has proved very weak at negotiating and managing these outsourcing deals. As a consequence the negotiations will increasingly be transferred to the greater expertise in purchasing and facilities management. The strategic issue of how IT should support the business in broader terms can and arguably should be handed over to the operational arms of the business.
Under this scenario the corporate IT department disappears, along of course, with the CIO role. To return to your favourite analogy; if you don’t have a corporate electricity department you don’t need a chief electricity officer.
Posted by: Greg Quinn ![[TypeKey Profile Page]](http://www.roughtype.com/nav-commenters.gif)
at January 17, 2007 08:55 AM
Nick,
your article seems just as relevant today as it was when you first wrote it - if not more so! From what I am seeing in my everyday consulting role within the IT industry, I think you are exactly right.
FYI - I have posted a review on my Technology News blog here.
Posted by: Brett Ryland at September 17, 2007 06:11 AM
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