Information Technology: Value Creator or Commodity?

Only a few years ago, companies put a high priority on coming up with innovations in information technology. A new solution, software program or piece of hardware could almost guarantee these companies a competitive advantage, at least in the foreseeable future.

 

Yet as companies started to realize that information technology was becoming a necessary part of their businesses, these windows of opportunity for short-term advantage began to disappear. IT innovation became easily duplicated, and IT, while clearly necessary, began to look like just another commodity.

 

Indeed, members of a panel on “Creating Value through IT: Is There Value In It?” held during the Feb. 27 Wharton Technology Conference, noted, ironically, that as companies’ information technology spending has increased, investment in IT, at least on a percentage basis, has gone down.

 

“By some measures, IT is 50% of corporate capital spending,” said Steve Berez, vice president, IT Practice, at Bain & Co. “Yet the majority of the dollars a company spends on information technology” – about 85%, he estimates – “is for commodity software and hardware … while maybe 15% will go into finding something innovative.” The question, Berez added, is whether that 15% is going to produce a strategic advantage. “The 85% better be working or you will not keep up with your competitors. But the other 15%, who knows?”

 

Business writer and consultant Nicholas Carr was skeptical that innovations in information technology are worth the effort these days. “When does information technology innovation make sense?” he asked. “I think for the vast majority of companies, it won’t. There is a little fairy dust at the top [when it comes to innovation], but it’s mostly an illusion … That 85% Steve talks about is moving to 86-88-91%; it is the IT you need to keep your company going that everyone else has,” he said. For the most part, companies that think they “can innovate their way to success” are wasting their money.

 

Perhaps a decade or go, a company could get a competitive advantage by innovating, Carr added. For example, the first banks to use online or computerized banking may have won over a number of new customers. “Now banks virtually give that away. It’s just a commodity everyone has.” Another example, he said, is Reuters, the news and financial information service, that was the first to come out with a big computerized network. Now every local newspaper is on the Internet. 

 

According to Carr, what has changed is that companies rely on vendors – either software or hardware companies or consultants – to keep them current with IT rather than the companies themselves innovating for advantage. “Companies realize that retaining parity is necessary, but they are looking at IT as a commodity input. The trend is that they are getting away from thinking they can innovate their way to competitive advantage.”

 

Still, even Carr admitted there are counter examples. He cited Wal-Mart, which has the resources and corporate drive to achieve an even greater advantage through innovation than it already has. Matthew Carey, vice president of Wal-Mart’s technology and information systems division and a conference panelist, noted that Wal-Mart does 90% of its information technology in-house – a huge percentage given that many companies, large and small, are moving more toward outsourcing or using IT consultants.

 

Wal-Mart also has the advantage of being so big that its customers have to comply with its standards rather than try to impose other ones on Wal-Mart. “Wal-Mart is one of the rare exceptions,” said Carr. A company of its size can actually get vendors to do some of the innovative work for them. If a company wants to sell to Wal-Mart, it might well take on that extra IT work in order to get Wal-Mart’s business.

 

Carey, for his part, did not deny the contention, noting that Wal-Mart wants to work with its suppliers to have everyone on board with the same IT systems. “We provide tools for suppliers, sometimes at a fairly significant cost to us,” said Carey. “We feel then they can leverage this and use the data to both our advantages. It may be hard to measure, but when we do a business review with a buyer and this system [is in place], then you don’t have to debate the data. It saves time. That’s where good IT can help.”

 

Wal-Mart’s big current information technology push is Radio Frequency Identification (RFID), a wireless tracking system that includes small homing devices on each product that allow a computer to track where it is at any time. Most of the work, according to Carey, is being done in-house, although it is still in the experimental stage. Eventually, the dream is that RFID markers will be placed on nearly every consumer item, from peanut butter jars to boxer shorts to automobiles. They will be able to track inventory from container ship to rural store shelf and thereby help Wal-Mart understand consumer buying preferences – and maybe even how the customer uses the item after it leaves the store.

 

Privacy issues aside for now, RFID is in its infancy, even at Wal-Mart. The company can track pallets, or cases, of goods, not individual items, through RFID. “Our initial tests were to do everything, but we are now focused on that transit functionality [tracking items from the supplier to the warehouse] first,” said Carey. “That will have the highest return on investment for us … As far as at the store and item level, if I showed you what a shelf-reader [the RFID device put on shelves that will be able to read the labels on individual items] looks like, you would say, ‘You’re going to put that in 4000 stores?’” he said with a laugh. “There is no way we are ready with that yet.”

 

But Wal-Mart is definitely moving toward that end. According to Carey, his technology group sits in on every major meeting, from marketing to sales to company strategy, unlike at other companies. No one in the upper echelons of the company should be misinformed about the status of anything from RFID to a malfunctioning accounts payable software program in Colorado . “In a lot of cases, we try to help the weakest store manager, the weakest district manager,” said Carey. “We target the most inefficient part of the process in IT to see how to solve it. If the process works there, it will probably work elsewhere in the system.”

 

In the end, said the consultants on the panel, it is no longer about information technology itself in the modern company, but about how companies function overall. If Wal-Mart, for example, is getting things done in IT, it is because the managers know how to run a company.

 

“Software is a tool. It is configurable,” said Chakib Bouhdary, vice president, value engineering, at SAP America . “It all comes down to how it is being used and how you measure its value. We have seen the same software being used by two companies in the same industry. Some use it to their advantage. Some make a mess of it.”

 

According to Berez, Bain first looks at a company to find out where it has gone wrong using what is, for the most part, standardized IT. “We start with what differentiates you as a business,” he said. “We do customize software for a client. But in the end, it’s how good a company is in all areas that will aid managers in using IT.”

 

Carr agreed, noting that as information technology gets commoditized, it is ever more incumbent on companies to learn to use it well. There is no longer room to make mistakes. That may sound like a defensive position, he added, but it is no different than how competitive businesses have functioned with raw materials for ages. “If I deliver a ton of the same type of flour to one bakery as another, the first may make something wonderful out of it and the other may manage it poorly and get horrible results,” said Carr. “It is the same with IT now. Management matters. Company culture matters. One company may manage IT better than another. That doesn’t tell you anything about the strategic value of the IT itself.

 

“That’s why I suggest that looking at the IT iceberg, with the small portion at the top left for innovation, may lead to foolish spending,” he added. “You can say, ‘Hey, I can get ahead if I get that tip of the iceberg.’ I would contend that you should look at the 90% underneath, or you will fall way behind.”

 

Even Wal-Mart, with all its potential in IT innovation, understands this point. “What we have found is that maybe 70% of the budget is just keeping the lights on, [taking care of what] we already have that we still need,” said Carey. “A lot of what you do is make sure that the company maintains its business. You have to keep the lights on every night.”

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