IT as Commodity and its Contribution to Productivity

There were two interesting articles about IT and productivity in the Harvard Business Review this past year: Nicholas Carr’s “IT Doesn’t Matter” (May) and Diana Farrell’s “The Real New Economy” (October).    (OK)

Carr’s title is a bit misleading. It’s not that IT no longer matters at all; it’s that IT is less important (for most companies — a subtle, but important disclaimer) from a strategic standpoint, because it has become a commodity. Carr writes:    (OL)

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. You only gain an edge over rivals by having or doing something that they can’t have or do. By now, the core functions of IT — data storage, data processing, and data transport — have become available and affordable to all. Their very power and presence have begun to transform them from potentially strategic resources into commodity factors of production. They are becoming costs of doing business that must be paid by all but provide distinction to none. (42)    (OM)

IT, according to Carr, is infrastructural technology, and like the infrastructural technology of the past (e.g. railroads, power grid, etc.), once it’s built-out, the potential competitive advantages for individual companies go away. Just as most companies don’t develop strategies centered around usage of electricity, neither should they invest considerable resources into developing strategies centered around IT.    (ON)

Based on this argument, Carr proposes three “new rules for IT management”:    (OO)

  • Spend less    (OP)
  • Follow, don’t lead    (OQ)
  • Focus on vulnerabilities, not opportunities    (OR)

He closes his article by saying:    (OS)

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. (49)    (OT)

The “vast majority of companies” is the only disclaimer in the entire article, but it’s enough to appease me somewhat. Carr is absolutely right. Most companies are not in the position to leverage IT in innovative and strategic ways, because they lack the in-house expertise. This is evident in how most companies overspend on IT — for example, on upgrading PCs and software too aggressively.    (OU)

However, while many things we associate with IT have indeed become commoditized, I still don’t think it’s right to call IT as a whole a commodity. Perhaps the problem is with the breadth of the term; we need something more concrete in scope.    (OV)

This is somewhat evident in Farrell’s article, where she addresses the famous Productivity Paradox. In the past 10 years, national productivity numbers have increased significantly, and yet, upon closer examination of the data, Farrell did not find a significant correlation with investments into IT. According to Farrell, a combination of innovations in technology and business practices is responsible for the productivity increase. These productivity increases intensify competition, which then starts this cycle of innovation anew.    (OW)

Farrell concedes Carr’s point about the rapid diffusion of IT eroding individual competitive advantage. However, she also notes that coupling IT with more unique capabilities restores that advantage.    (OX)

Farrell concludes her article by identifying three common practices in companies that have successfully invested in IT:    (OY)

  • They targeted investments at productivity levers that mattered most for their industries and themselves.    (OZ)
  • They carefully thought through the sequence and timing of investments.    (P0)
  • They didn’t pursue IT in isolation; instead, they developed managerial innovations in tandem with technological ones.    (P1)

This last point is crucial. IT is inherently different from other infrastructural technologies in that its potential for coevolution is enormous and still largely unexplored.    (P2)