Softpanorama (slightly skeptical) Open Source Software Educational Society

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Two Views on IT in Commercial Enterprises: Utility vs. Competitive Advantage

Enterprise customers can be classified into two large groups:

• Those who view their IT operations as an important part of their competitive advantage.
• Those who view IT operations as important but mostly irrelevant to competitiveness part of corporate infrastructure and are interested mainly in cutting costs of operating IT infrastructure.

IT as a competitive advantage

IT is "information technology" after all and better technology usually means higher profitability.  Proponents of this view think that IT has deeply transformed today's business world. And top brass noticed new possibilities to outsmart competitors with better more advanced IT systems. That's why capital expenditure devoted to IT has increased dramatically over the years and is still tremendous in spite of the current economic situation. Moreover IT tools are no longer considered limited to low-level employees and mid-level management. They are more and more used by executives who try to grasp changing business situation, anticipate problems and at the end increase the competitive edge over others due to better grasp of the whole picture of the enterprise. This development is similar to related developments in modern armies where command and control functions tremendously benefited from better "up to a second" communication and visualization technologies of the modern battlefield.  It also create more problems increasing the possibilities of micromanagement. Army suffers from it most but modern enterprise is not exempt. On the contrary the danger of micromanagement in modern enterprise in general and IT organizations in particular is very noticeable and probably exceed the danger of micromanagement in the army: it is like a new organizational cancer.

In this sense IT tend to become more strategic as capabilities of computers and software grow and the ability to find and use this competitive edge is an important as having better patent portfolio and better technology. In some sense IT is becoming part of the technology.  A significant element of company's competitive edge can come  from introduction of better then used by competitors IT technologies or using known more modern technologies faster then competitor. Also IT-related architectural decisions related to communication are very important for the competitiveness of the company.  Email, instant messaging groupware are not just tools, they are part of the glue that holds large company together. That means that bad architecture of the network for a large multinational company is a big drag on everything as it tends to isolate subdivisions and actually stimulates intra-corporate "struggle for independence" which can take pretty devastating forms. 

IT as a loss leader

Proponents of this view often claim that IT be standardized to a level similar to electrical supply network. Professor Nicholas G. Carr from famous Harvard Business School (the school which with just pure economic advice managed to destroy Russian economics better the Hitler armies did ;-) is the leader of this school of thought. He wrote  a controversial and influential paper  IT Doesn't Matter paper published in the May 2003 edition of the Harvard Business Review (see also my critique of Carr's views at Obscurantism in Information Technology: Nicholas Carr's "IT Does not Matter" Fallacy and "Everything in the Cloud" Utopia ).

While his hypothesis about all software moving to "in the cloud computing" providers is extremely questionable and his idea about disappearance of local datacenters is simply naive,  this line of primitive thinking is quite popular (the paper itself is now available on Internet from Nicholas Carr site and other sources) and can be called "keeping IT on the level of the lowest common denominator")

As information technology has grown in power and ubiquity, companies have come to view it as evermore critical to their success; their heavy spending on hardware and software clearly reflects that assumption. Chief executives routinely talk about information technology's strategic value, about how they can use IT to gain a competitive edge. But scarcity, not ubiquity, makes a business resource truly strategic--and allows companies to use it for a sustained competitive advantage. You gain an edge over rivals only by doing something that they can't. IT is the latest in a series of broadly adopted technologies--think of the railroad or the electric generator--that have reshaped industry over the past two centuries. For a brief time, these technologies created powerful opportunities for forward-looking companies. But as their availability increased and their costs decreased, they became commodity inputs. From a strategic standpoint, they no longer mattered. That's exactly what's happening to IT, and the implications are profound. In this article, HBR's Editor-at-Large Nicholas Carr suggests that IT management should, frankly, become boring. It should focus on reducing risks, not increasing opportunities. For example, companies need to pay more attention to ensuring network and data security. Even more important, they need to manage IT costs more aggressively. IT may not help you gain a strategic advantage, but it could easily put you at a cost disadvantage.

Later  in the second paper he tries to justify this point of view using exactly the botched analogy with electrical utilities forgetting about vast difference between the supply of energy and the supply of computer power:

"...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..."

He might be right in a sense that IT alone does not provide competitive advantage and that staggering sums were wasted on useless IT projects with zero or negative return. At some point of dot-com boom US companies devoted almost 50% of their capital spending to IT. Many poured millions into not only useless but harmful to business systems. Unrealistic SAP/R3 deployments when decisions were made on the strength of SAP brand name without objective analysis which enterprise functions SAP/R3 does great, which mediocre and which horrible,  is one such example. Actually more the one company wrote down sums as big as 50 millions on failed ERP projects.  Several companies went down after "Mao-style technology overhaul", often connected with large-scale, badly thought out SAP/R3 deployments. Some like AT&T Wireless and, possibly, Compaq were acquired by competitors after such a fiasco. 

We should not equal unqualified management and resulting failures with IT role as a whole.  IT is strategic to the company when it provides a realistic picture of the "battlefield" in which the business operates.  In this sense Carr views are too primitive and the analogy with the electric power too superficial. IT is more like the nerve system of organization.

In any case profits come from only from scarcity and the ability to use IT technology profitably is a scare resource largely depending on the management ability to organize and direct IT talent pool for worthwhile business-critical projects.  I would argue that in many large corporations IT department don't know how properly to use IT technology and instead is engages in useless or harmful projects just because they are too isolated from business units, lack critical IT talent and first of all enterprise architects (people who can make the technology tick). Moreover due to this isolation many IT departments staff the business units is burdened with arbitrary and useless procedures ("standard desktop" is one such dirty word in business units) and badly implemented or useless enterprise systems. For example some corporate email implementations are less functional and less flexible then freely available Google Gmail systems, do not integrate instant messaging, list servers and blogs functionality, have low quality or too strict spam filtering, etc.

Modern trend of merging IT organizations with logistics or enterprise planning might help to bridge the gap between business units and IT but still the key is the management talent and technological IQ that a particular organization possesses. If it is zero or, worse, below zero no reorganization can help and in such cases outsourcing is probably a blessing. 

If  IT organization have both management and architectural talent then bringing it closes to business units via, for example,  merge of IT with logistics can end "splendid self-isolation" and break the habit of behaving like feudal warlords, trying to monopolies and misuse available computing resources. Here is one relevant joke about university computer centers that is fully applicable to large enterprise environment: 

Todd's Humor Archive Computer Center Humor (reproduced with minor variations):

Computing Center [n], is an organization whose functions are

1. To impede wherever possible the development and usefulness of computing in the company or University.
    
2. To gain the lion's share of funding, spend it largely on obsolete, bloated and otherwise inappropriate IT Solutions, and convince the businesses/campuses wherever possible to spend funds on the same.
    
3. To oppose vigorously any new, useful and popular technology for three years or more until nearly everyone on the business/campuses and elsewhere in the world is using it, then to adopt that technology and immediately attempt to centralize and gain complete and sole control of it [for example, Blogs, Wiki, Web hosting, Instant messaging,  Webmail, ssh, etc].

All-in-all nothing can replace talented people as only they can discover and utilize before others new possibilities of processing enterprise data or improving logistics or something else and improve the profitability of the business. Modern hardware (when a server priced around $10K can have a terabyte of  (non-mirrored) disk space and a blade rack can have terabyte of RAM if we count the RAM on all blades) and software provides ample possibilities for that.

I think that a successful and innovative IT implementation should reflect the best internal business processes of a particular company and as such are by-and-large unique for a particular company. No amount of money spent on SAP/R3 can replace clear and strategic use of IT resources to outsmart competitors and to cut overhead.  Moreover excessive centralization of all functions impede IT efficiency creating something like "socialism in one particular company".  To know were centralize and were decentralize certain IT function requires strategic vision from higher management as well as high level of architectural skills of IT personnel and as such is more complex (but at the same time more profitable) then copycat decisions about implementation of some ERP system.

Unfortunately Carr's paper and later books (which are mainly rehash of his paper with no new major insights; he continue to defend his questionable analogy between electrical utilities and IT)  served as a kind of ideological support of outsourcing and offshoring frenzy in 2003-2006. But if you outsource IT, then any adaptability you want from IT for running your business becomes a contract negotiation and this side effect alone makes Carr's central argument that "when overcapacity is combined with redundant functionality, the conditions are ripe for a shift to centralized supply" very questionable. Moreover it really smells well-developed socialism, Brezhnev-style ;-). 

It would be a very interesting field experiment if  the computing center for HBS was offshored  to some remote, preferably  former socialist, country. After all management gurus seldom need any software except Microsoft Office and will not suffer too much, but I think they will definitely learn something new about corporate red tape, fine art of wasting centralized resources, power of IT bureaucracy,  useless but strangulating procedures and helpdesk tickets that need a week to be resolved or even addressed  :-).

The value of Solaris and Linux for IT innovators and IT cost cutters

Solaris and Linux are attractive for different reasons to those two groups with the first group taking most advantage of advanced features of the OS and the second taking most advantage from low total cost of ownership, stability and reliability. 

Some features of Solaris, for example security and features connected with UltraSparc hardware are attractive to both groups: for example low power consumption is a big issues in datacenters that use about one megawatt-hour of energy a month or more.

Virtualization capabilities, RBAC and the hardware healing capabilities build into OS that help in many cases to avoid complex and expensive cluster-based solutions are definitely more attractive to the first group.

Enterprises that are considering their IT infrastructure as a utility tend to be more receptive to linux. Linux also is more suitable for enterprises which consider outsourcing as it can work on larger range on Intel hardware and it is easier to train and hire linux specialists in developing countries.

Created Jan 2, 2005.  Last modified: May 22, 2008