Does IT Matter?

In the May 2003 edition of the Harvard Business Review Nicholas Carr sent tremors through the business world with a divisive essay, boldly titled “IT Doesn’t Matter”. While the sensational title was effective in capturing readers’ attention and spurring controversy, Carr’s central thesis is decidedly more nuanced than his audacious opening salvo. Instead of arguing for information technology’s (IT) total irrelevance, Carr states that IT has become a commodity input for businesses—due to its ubiquity and diminishing costs—and therefore must be managed as such. His contention is not that IT does not matter in an absolute sense, but that it is far less relevant to a firm’s high-level strategy than it once was, and no longer serves as an important differentiator. Carr further argues that a firm’s IT must now be managed not as a strategic resource, in which its investment value is maximized, but as a commodity resource, in which its costs and risks are minimized. The following paper will provide a detailed summary of Carr’s controversial essay, examine some of the varied reactions that it generated and conclude with a discussion on IT in the current business environment, particularly as it relates to the fundamental question: Does IT matter?

Summary
”What makes a resource truly strategic—what gives it the capacity to be the basis for a sustained competitive advantage—is not ubiquity but scarcity.” –Nicholas Carr, “IT Doesn’t Matter”

Nicholas Carr begins his controversial essay “IT Doesn’t Matter” with a brief synopsis of the rapid proliferation of IT which, he contends, began with Intel engineer Ted Hoff’s invention of the microprocessor in 1968 and, as of 2003, culminated in more than $2 trillion in annual IT spending. Carr points out that IT’s impressive reach has been ushered in by broad acceptance from top-level executives, who “routinely talk about the strategic value of information technology, about how they can use IT to gain a competitive edge, about the ‘digitization’ of their business models” (Carr, pg. 42). However, Carr quickly concludes that managers have committed a major fallacy in equating potency and ubiquity with unbridled strategic value. Instead, Carr suggests that IT’s growth trajectory follows that of the steam engine, electricity, and the telephone, in which early innovative zeal is eventually quieted by the emergence of a ubiquitous commodity, a mere “cost of doing business that must be paid by all but provide[s] distinction to none” (Carr, pg. 42).

Central to Carr’s argument is the notion that IT has become an “infrastructural technology”, a resource so broadly used that it is a requisite function of business rather than a strategic differentiator. He states that “the technology’s potential for differentiating one company from the pack—its strategic potential—inexorably declines as it becomes accessible and affordable to all” (Carr, pg. 44). Carr draws sharp comparisons between the development of railways, electric power and IT, stating that each has progressed through a pattern of rapid investment, excess capacity, falling prices and commoditization. Carr concedes that, like other infrastructural technologies, early uses of IT created significant competitive advantages through the development of proprietary IT systems, citing successful cases such as American Hospital Supply (AHS), American Airlines, Federal Express and Mobile One. However, he argues that even these early proprietary advantages were eroded by the standardization of personal computing, networking and packaged software, pointing out that AHS’ proprietary system eventually became an operational burden. “As for IT-spurred industry transformations,” Carr continues “most of the ones that are going to happen have likely already happened or are in the process of happening” (Carr, pg. 47). Carr’s point here is well-crafted, as he uses historical examples to articulate a critical element of his argument: the commoditization of IT was inevitable and it now requires a shift in strategic resource allocation.

Carr’s solution to the commoditization of IT also requires a profound shift in managerial thinking, as he states: “when a resource becomes essential to competition but inconsequential to strategy, the risks it creates become more important than the advantages it provides” (Carr, pg. 48). As such, he suggests three “New Rules for IT Management”. First, spend less. Carr contends that studies have shown that big IT investments are not directly correlated to financial success and wasteful IT spending could become a dangerous hindrance to a firm’s overall strategic intent. Carr’s solution is to scrutinize and streamline IT spending, advocating strict cost management, “more rigor in evaluating expected returns from systems investments, more creativity in exploring simpler and cheaper alternatives, and a greater openness to outsourcing and other partnerships” (Carr, pg. 48). Carr’s second New Rule is to follow, don’t lead. Essentially, Carr’s point here is that the commoditization of IT, along with the rapid obsolescence implicit in Moore’s law, has removed many of the first-mover advantages conferred by aggressive IT outlays, therefore making patience a critical virtue. Finally, Carr’s third New Rule is focus on vulnerabilities, not opportunities. Here Carr argues that while the upside potential of IT erodes, the downside risks skyrocket. He advocates a shift in managerial thinking that focuses on protecting the firm from IT outages, glitches and security breaches, which pose a threat to the organization far greater than any opportunity currently created by IT.
Fundamental to Carr’s argument is the notion that the development, maturity and commoditization of IT requires, above all else, a shift in managerial thinking and strategic resource allocation. Decoupling IT with strategic advantage, Carr argues, is a psychological shift that needs to occur because ubiquity has rendered IT a core function of operation rather than a strategic differentiator. As with any other commodity, Carr concludes, IT costs must be minimized and its downside risks systematically mitigated. This shift in thinking will require managers to exercise discipline and pragmatism in order to avoid shouldering the high costs of wasteful, sloppy resource management.

Reactions

Not surprisingly, Carr’s bold assertion of IT’s diminished relevance raised the ire of many scholars, and led to a flurry of spirited responses. In total, a valuable discourse emerges from the contrasting viewpoints, one that illustrates the divisive nature of IT’s role in business and articulates the managerial challenges and nuances of effective strategic resource allocation.
Michael Schrage, co-director of MIT Media Lab eMarkets Initiative, was quick to provide a scathing dissection of Carr’s contention that IT does not matter. Writing in CIO magazine, Schrage argues that the emergence of a commodity does not necessarily precipitate reduced relevance. He theorizes that if three similar companies within an industry recieved $100 million or equal access to the most talented labor, they would surely generate vastly different financial returns. Why? Not because capital and talent do not matter, Schrage argues, but because management matters more. “It’s not free and easy access to a commodity that determines its strategic economic value to the company; it is the way that commodity is managed that determines its impact. Management matters” (Schrage, 2003). Schrage’s central point is that a resource’s value cannot be measured in isolation, but instead by the strategic and financial value that a skillful management team is able to extract from it, regardless of scarcity or ubiquity. “The idea that companies can divorce their resources” he continues, “—no matter how cheap, powerful and ubiquitous—from the act of managing them is patently absurd” (Schrage, 2003). While Schrage concedes that firms have indeed spent wastefully on IT in the past, he suggests that this is a flaw of management, not a signal that IT has lost its strategic value. Finally, Schrage argues that the skillful management of IT can “profoundly transform the economics of innovation, segmentation and differentiation for most businesses” (Schrage, 2003). A critical point, he contends, that Carr blatantly misses.

In a letter to the editor of the Harvard Business Review, renowned management consultant John Hagel III and John Seeley Brown, former Chief Scientist at Xerox, offered perhaps the most fully developed response to Carr’s article. Initially, the authors praise Carr’s article, stating that it “effectively captures the zeitgeist of senior managers of large enterprises” (Hagel & Seely Brown, 2003), and acknowledge Carr’s point that sloppy IT expenditures have typically done little for the bottom line. However, the authors build to a critical divergence with Carr, arguing that his position is “potentially dangerous, for it appears to endorse the notion that businesses should manage IT as a commodity input because the opportunities for strategic differentiation with IT have become so scarce” (Hagel & Seeley Brown, 2003). Hagel and Seeley Brown suggest that the more broadly held this viewpoint becomes, the more damaging it will be. Carr’s fundamental argument, they continue, is false because “IT by itself rarely, if ever, confers strategic differentiation. Yet, IT is inherently strategic because of its indirect effects—it creates possibilities and options that did not exist before” (Hagel and Seeley Brown, 2003). The authors add a finer point to this argument by suggesting that IT is inextricably linked with human intelligence, and it is the nature of this relationship that determines strategic value. “IT may become ubiquitous,” the authors concede “but the insight required to harness its potential will not be so evenly distributed. Therein lies the opportunity for significant strategic advantage” (Hagel and Seeley Brown, 2003). Like Schrage, Hagel and Seeley Brown seem to indicate that the key aspects of IT fall with management of the resource rather than with the resource in isolation. However, Hagel and Seeley Brown go further, articulating how IT’s interplay with management, resource allocation and business processes contribute to the incremental creation of strategic value.

Hagel and Seeley Brown argue that IT’s unique elements emerge when combined with a firm’s unique competencies and business processes. They quickly concede that “companies that mechanically insert IT into their businesses without changing their practices for exploiting the new capability will only destroy IT’s economic value” (Hagel and Seeley Brown, 2003). They argue instead that the importance of IT lies within its implementation and within the skillful harnessing of the insight and ability to merge technology with processes. “The differentiation is not in IT itself” they continue, “but in the new practices it enables. IT does indeed matter” (Hagel and Seeley Brown, 2003). The authors sharpen this point by stating that IT’s costs cannot be minimized like other commodities because, although they may be similar in their ubiquity, the systems-based intelligence required to maximize IT’s value is scarce—unlike other commodities such as wheat and aluminum, whose value is directly related to its low costs. Hagel and Seeley Brown further argue that IT’s strategic value comes from incremental performance improvements, evolving architectures and the constant need to refine and innovate new ways of integrating technology with a firm’s specific, unique processes.
In the same issue of the Harvard Business Review, Carr posted a brief response to Hagel and Seeley Brown, stating that the key element of commoditization in IT is its easy replication, which is makes any strategic edge a fleeting advantage. He states that “processes that are tightly linked to IT systems have become easier for others to replicate as IT has become more powerful, more ubiquitous, and more standardized… Companies that try to continually pioneer new IT-based processes will certainly spend more than their slower-moving rivals, but it is doubtful that they’ll really achieve lasting differentiation” (Carr, 2003).
The perspectives provided by Schrage, Hagel and Seeley Brown were among many voices to emerge in this debate, but their responses proved both cogent and indicative of the critical issues regarding IT’s role within the organization. No one seems to dispute the ubiquity of IT, its decreasing costs, or its commodity-like characteristics. However, the key disagreement lies with the management of IT relative to other business functions, processes and strategies. Carr suggests that IT alone cannot be a strategic differentiator, while his detractors argue that it is IT’s flexibility that makes it different than other commodities and allows it to combine with unique business processes to create strategic advantages and new opportunities. The strategic value, they suggest, comes not from the resource itself—indeed no resource in isolation provides a true strategic advantage—but from the skillful deployment of that resource and the use of managerial insight to pursue value-creating opportunities that would not be possible without IT. Simply minimizing the costs of IT and managing it strictly as a commodity input, Carr’s critics say, will result in missed opportunities to create strategic differentiation.
Conclusion: Does IT Matter?

Ironically, both Carr and his detractors seem to be arguing for the same thing: an increased focus on how firms manage and optimize IT. Carr and his critics would probably concur that a firm cannot be an industry leader solely because of its IT infrastructure and capabilities, but when it comes to IT’s potential strategic value, a dividing line emerges. Carr advocates a cost-minimization, risk-management strategy while Schrage, Hagel and Seeley Brown, etc. call for a value-maximization approach to IT, with particular attention paid to business process integration and strategic resource management. In one sense, both sides argue for maximizing IT’s value, but where they differ is on the potential they ascribe to IT’s capabilities and contribution to strategic differentiation. Carr sees IT’s value as markedly diminished because innovations and processes are so easily replicated, while his critics argue that IT’s value lies in how it is uniquely integrated with a firm’s core competencies.
So who is right? In this authors view, both are correct to a degree—but with a resounding caveat: Yes, IT matters.

Carr’s warning about the commoditization of IT is worthwhile and his central point is a very important one (in spite of his article’s unfortunate, provocative title). It is clear that over-zealous IT spending can be, and has been, dangerous. Simply investing in and owning a vast amount of IT does not translate into a direct strategic advantage or differentiation, and dependence on IT indeed places an increased emphasis on risk management. And yes, ubiquity and replication make advantages in IT harder to come by. However, Carr’s argument falls short in his notion that these characteristics make IT less relevant when, in reality, they make IT, and its various uses, more relevant. As Hagel and Seeley Brown aptly point out, the fact that IT has become more ubiquitous elevates the importance of a firm’s tacit IT knowledge and IT uses. Because IT is flexible, evolving and iterative a firm must integrate IT into its unique processes to arrive at a combination of technology and business process that cannot easily be replicated by a competitor. The examples of Wal-Mart and Dell have been cited exhaustively throughout this debate as cases in which IT was combined with unique business processes to create a strategic advantage beyond a rival’s immediate capabilities. IT’s role is that of an enabler, a catalyst and a conduit to every element of a firm—one that can increase speed, flexibility and innovation—and its upside potential does not warrant the simple classification as a commodity input, and management should not treat it as such.

I’m reminded of the local real estate organization that I worked for as a Marketing Consultant. This firm refused to systematically allocate capital to IT expenditures, choosing instead to only sporadically (even begrudgingly) upgrade equipment, processes and software. The firm’s IT department consisted of one overworked individual who served merely as a technical maintenance person, spending time on small fixes just to keep outdated equipment functioning. As a result, a number of inefficiencies emerged, resources were wasted and individuals were often inconvenienced. There is no doubt that the dollar value of such inefficiencies would have caught the eye of top managers, had they been calculated. The point here is two-fold: firstly, sending a cost-minimization signal to managers of IT (as Carr does) will surely result in inefficiencies and missed opportunities, and, secondly, as Schrage eloquently points out, the problem and the solution lie with managerial choices, not IT itself.

In summary, IT’s value is maximized through its integration and alignment with business processes, organizational structure and high-level strategic intent. The danger of treating IT as a commodity input, by minimizing costs, is that it will not be capable of enabling or expanding with the organic strategic and organizational changes necessary for a firm to respond to a flexible external environment. The case of the Shanghai Bell Corporation aptly demonstrates this point. As the firm sought to reorganize its organizational structure to more effectively compete and grow, its poorly integrated IT systems became a bottleneck that restricted the success of its changes (Long, Nah, Zhu, 2003). While Carr’s counterpoint regarding IT’s easy replication holds some true merit, one need not look further than the competitive success of Netflix for a contrary example. Netflix changed the dynamics of the video rental market by combining relatively mundane IT and information systems—such as an online transaction system, an advanced web interface and an old-fashioned snail mail delivery method—with an effective brand, aggressive marketing and an innovative business model. As a result, Netflix is thriving while Blockbuster, its primary competitor, looks for ways to cut costs and scrambles to gain a foothold in the online marketplace, simply by copying the Netflix IT-based business model. Netflix combined IT with its unique core competencies and therefore gained a tremendous first-mover advantage which its competition has yet to fully replicate, despite having access to the same IT. Indeed, IT is a critical element of organizational success because of its power to integrate with and enhance organizational structures, business processes and unique core competencies, thus creating distinctive incremental strategic advantages at all levels of the firm. IT’s ubiquity is not a sign of diminished relevance, but rather a harbinger of its increased value across every function of an organization. A fact that places increased emphasis on two scarce IT-based resources that can create true strategic value: insightful resource allocation/integration and a nuanced understanding of IT’s strategic value by a firm’s managers.


References
Carr, N. (2003). "IT Doesn't Matter," Harvard Business Review, 81(5), May 2003
Hagel III, John and Seeley Brown, John, (2003, July) [Letter to the editor]. Harvard Business Review. Retrieved online at: http://hbr.harvardbusiness.org/2003/07/letters-to-the-editor/ar/1
Long, Y., Nah, F. F-H., and Zhu, Z. (2003). Enterprise-wide strategic information systems planning for Shanghai Bell Corporation. Annals of Cases on Information Technology. 2003. Vol. 5; p. 431-447.
Schrage, Michael, (2003, August 1). Why IT Really Does Matter. CIO, pp. 1.
Gray, Paul (2006). Manager’s Guide to Making Decisions about Information Systems. New Jersey: John Wiley & Sons, Inc.