The Last Nick Carr Story Ever - Promise (But it's a corker)
- 10 September, 2004 12:53
Far too many of Nick "It Doesn't Matter" Carr's critics didn't bother to read past the headline of his Harvard Business Review essay. Now, in his new book, Carr posits an even more depressing scenario. Perhaps it's worth more than a casual squiz and a heap of knee-jerk reactions.
If the IT community thought Nicholas Carr's "IT Doesn't Matter" article damaged their cause, then they should not rest easy just yet. His recent book includes an even more worrisome message, which no one seems to have noticed. When they do, it will be fireworks all around.
In Does IT Matter? Information Technology and the Corrosion of Competitive Advantage (Harvard Business School Press, 2004) Carr makes the provocative statement that IT not only fails to add to competitive advantage, it can actually destroy it. If that is not enough to worry already anxious executives, he suggests a possible scenario where "a very different and altogether less attractive economic dynamic" may play out. "The stock of jobs may begin to decline, unemployment may drift upward, the supply of goods may outstrip demand, prices may drop, and the divide between the wealthy and the poor may grow wider and deeper."
And all this is brought about by the commoditization of IT?
The book is largely an elaboration of the arguments from his contentious article published in the Harvard Business Review in May last year. The shortish essay created a furore, triggering discussions and arguments that are still flowing today. Many of the more vituperative responses were inspired by the piece's uncompromising title, with some commentators making it painfully obvious that they had read no further than those first three words.
When he visited Australia in May for this magazine's CIO Agenda 04 conference, Carr told CIO that the book's less provocative title was his publisher's idea, but he has not resiled from his earlier views. The book's subtitle is his own, and by discussing "information technology and the corrosion of competitive advantage", he believes, as he told us, that "the fundamental argument from the article I still think is correct, and I haven't moved away from that".
The argument itself has been discussed, dissected and in some instances discarded many times: that information technology (both hardware and software) is growing increasingly commoditized and, as such, offers little differentiating and competitive advantage to individual companies, particularly for early adopters who find that the time span between their taking up pioneering technology and their competitors buying the same items more cheaply is diminishing at an increasingly rapid rate.
The initial responses concentrated on whether IT has become commoditized. This centred on the nature and the level of customization and in-house development that goes on today. Most commentators seemed to agree that certainly hardware and much (if not all) software has become packaged, off-the-shelf, commoditized product that anyone can purchase. The argument then moved on to competitive advantage, and the role of innovation in ensuring advantages are produced and maintained. It was often said that it is that top 10 percent of customization that organizations put into commoditized products that makes all the difference, and companies like Wal-Mart, Amazon, Google and other icons of the post-boom days were regularly referenced.
Many critics came to a view that can be paraphrased as: "It ain't what you have but the way that you use it that counts." In other words, it is not the technology as such but the talent, skills and strategy applied to it that creates competitive advantage. This, in effect, seems to support Carr while trying to refute him at the same time.
The book repeats these issues, taking a more detailed and contextual approach than the original article's fairly brutal eight pages.
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Role of the CIO
Carr's views have been greeted with groans, particularly from vendors, which is not surprising when he advocates such things as management spending less on IT and concentrating more on vulnerabilities than opportunities. The reaction to the book has generally lacked the quantity and the vitriol of the response to his article (Don Tapscott's piece in this magazine as recently as June this year notwithstanding).
There is a whiff of hurt pride and vested interest about some of the responses, but Carr is first to admit that the reaction from CIOs themselves has been "less reactionary; more thoughtful. Certainly not all CIOs are positive, but I think even those that are negative see that they agree with some things".
Whether that is true of the mixed future he foresees for that audience remains to be seen.
"If there's a silver lining in the commoditization of IT, it's that the balance of power is tipping away from the vendor and toward the user. With competition among suppliers intensifying, IT buyers are now in a position to throw their weight around much more aggressively - negotiating contracts, for example, that ensure the long-term viability of their PC investments, tie payments to actual usage, incorporate tough service-level agreements and impose hard limits on upgrade costs," Carr says. "And if vendors baulk, companies should be willing to explore cheaper solutions, including open source applications and barebones network PCs, even if it means sacrificing features."
As commoditization, utility services and outsourcing (and particularly business process outsourcing) continue apace, CIOs will primarily play the role of relationship managers or even that of "chief utility officer". One commentator of Carr's original article decried this vision as making CIOs' work extremely boring.
Carr sees the "virtual IT department" as quite a possibility (although he is no fan of the virtual company, which he views as entirely dangerous to corporate wellbeing). "I think it's hard to deny that that is the trend," he says. "How long it takes and how it manifests itself in individual companies is going to be all over the place." All of this works against the self-image that many CIOs are trying to build for themselves as strategy makers rather than strategy implementers. Carr warns that "trying to create this idea that people think they have to live up to is probably more destructive than constructive".
Carr stresses that IT management is not alone in this situation. "Human resource departments are in the same position. You can't fulfil your strategy without the right set of people, but the actual task of bringing in those people is not in and of itself strategic."
He does, however, throw CIOs one grain of hope, portraying them as the controlling hand, the voice of reason that comes between the lofty visions of executives and the even loftier promises of vendors.
"CIOs need to lead the way in promulgating a new sense of realism about the strengths and limitations of IT. Realism is particularly important in IT planning," Carr says. "The continuing assumption that IT has strategic value often leads to over-optimistic predictions of the returns from new investments, leading companies to spend too much too soon.
"When assessing spending proposals, it's not enough to run return-on-investment calculations. CIOs also need to lead the way in getting their organizations to think clearly about how competitors will respond and what those responses will mean for margins and profits. In particular, they need to take a hard look at whether projected cost savings or productivity gains will end up on their own company's bottom line or in the hands of customers. And they need to objectively assess whether any anticipated revenue gains are truly defensible."
But the most frightening - and to date least discussed - scenario that Carr raises is that of a major disruption to the economies of nations, heralding the potential for a new and global depression. And IT apparently has a major role in bringing this dire situation about.
In a chapter of his book entitled "The Universal Strategy Solvent: The IT Infrastructure's Corrosive Effect on Traditional Advantage", Carr discusses the levelling impact of automation, commoditized IT and especially the Internet.
"Any traditional advantage in prosecuting a particular activity or process, from setting type to designing componentry to providing customer service, will tend to dissipate as that activity or process is automated. As businesses adopt similar systems, best practices turn into universal practices, and performance converges."
He describes a late 1990s study by Mark Cotteleer of the Harvard Business School on a manufacturer's global adoption of a single ERP package. Before the new system was put into place, variations in order lead times among three regions (the US, Europe and Asia) were pronounced, with North America well behind the other two. Two years down the track, those differences had largely disappeared - the US was now ahead, and Europe and Asia's lead "had been obliterated, apparently forever".
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Carr suggests that if this can happen within one company, it can easily happen between different, competing companies. The homogenizing effect of IT is in place.
He particularly notes Bill Gates's comment, in his book The Road Ahead, that the Internet is the foundation for "friction-free capitalism", of perfect competition without barriers, leading to a "shopper's heaven".
"What Gates failed to point out is that a shopper's heaven is a business executive's hell," Carr responds. "When it comes to markets, friction is often just another word for profit."
"By erasing many traditional operating advantages and making companies' processes and prices more transparent to customers, IT threatens to become a kind of universal solvent of business strategy, speeding up the natural forces that over time push companies toward competitive parity . . . As buyers become more powerful and business processes and systems more homogeneous, only the strategically astute companies will be able to rise above the competitive free-for-all."
But that's only the half of it.
In the final chapter of his book, entitled "A Dream of Wonderful Machines - The reading and misreading of technological change", Carr broadens his picture beyond intra-company operation and inter-company competition to look at the global economy and the impact of the increased productivity that everyone says IT will bring. (The most recent "State of the CIO" survey published in these pages had increased productivity as the number one impact IT would have on the enterprise.)
"It's not about CIOs or IT departments or even the [IT] industry; it's about the nature of information technology. Particularly in a knowledge-based service-based economy where the physical assets of your company become relatively less important, IT increasingly defines the way you do some basic processes in your business. The software literally defines the process," Carr says.
"I think the danger when the software becomes commoditized, and one step further becomes outsourced, the process too becomes commoditized. I don't think this is unusual when a new technology comes along, it neutralizes some of the advantages you once had. The danger with IT is its neutralizing effect is potentially so great, because it's built into so many processes."
Following on from a small sidebar in his original article (entitled "Too Much of a Good Thing", largely ignored at the time), Carr draws parallels between current investment in IT with over-investment in railroads in the 1860s. In this breakout he writes: "In both cases, companies and individuals, dazzled by the seemingly unlimited commercial possibilities of the technologies, threw large quantities of money away on half-baked businesses and products. Even worse, the flood of capital led to enormous over-capacity, devastating entire industries."
The depression of the latter half of the 19th century was brought on, he says, by the railroad boom, and the development of the steam engine and the telegraph. This helped produce not only widespread industrial over-capacity but a surge in productivity, setting the stage for two (in the book he says three) decades of deflation, collapsing prices and evaporating business profits. "Companies watched the value of their products erode while they were in the very process of making them."
New technologies often have unexpected effects, and some of those unexpected effects can be quite negative, Carr says. "Something that we all take for granted as a positive, like increased productivity, can have negative implications. If you increase productivity too quickly - more quickly than your economy grows - then you're going to put a lot of people out of work."
In a downbeat final paragraph for his book, he warns: "We should not be complacent about the intensification of deflationary pressures, the shift of skilled technical jobs to low-labour-cost countries, and the erosion of traditional competitive advantages. While information technology isn't changing everything, it is changing many things. Some of the changes are for the better and some are for the worse, but all demand close and clear-eyed attention."
Not everyone agrees, of course, and Carr says he is yet to hear from historians and economists on his prognosis. But his views are definitely in stark contrast to those expressed by Steve Ballmer, CEO of Microsoft, at his company's May 2003 Tech Ed event in San Diego. Ballmer is no fan of Carr. Soon after the original article appeared, Ballmer responded: "Our fundamental response to that is: hogwash." He then went on to say: "We look out there like kids in a candy store saying: 'What a great world we live in.' "
This view of the world was mirrored in a more recent speech where Ballmer observed: "I think the next 10 years will bring more positive change and innovation than in the last 10 years. We have a chance, all of us in this room, to change the world in a positive way." He reportedly included natural language, artificial intelligence and improved search, mobility and interoperability as the main areas for innovation. He also said that IT is probably the top transformer of society today, in addition to health-care and education.
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"BS" Detector
Carr told CIO that the inspiration for writing his original article and subsequently the book was "reading through a lot of vendors' marketing material [where] a common theme repeated over and over again is 'IT is the core of strategic advantage in the digital age' and every system that's sold is presented as a potential source of strategic advantage". He says these sorts of comments roused his "in-built bullshit meter".
In his book, he refers to the "veneration of IT", which he described to CIO as "a sense of renewal and transformation, touted as not only making our business better but the world better. The big technological developments tend to attract over-exaggerated hopes.
"A lot of arguments that say there's going to be another wave are based on faith. A lot of people, particularly technologists - they said it a lot in the 90s but they keep saying it now - say that IT is the biggest technological revolution of all time. And I think if you look at electricity, I'm sorry, but electricity changed people's lives and changed how businesses operated in a much more fundamental way than computerization."
Which scenario is likely to be right - the global depression or Ballmer's IT candy store?
Probably (hopefully?) neither.
As Carr said in his original article when referring to his comparison of the 19th century depression with the environment that exists today: "We can only hope the analogy ends there . . . It's a very different world today, of course, and it would be dangerous to assume that history will repeat itself. But with companies struggling to boost profits and the entire world economy flirting with deflation, it would also be dangerous to assume it can't."
More recently he told CIO: "As business processes become more based on the IT underpinning and as the Internet allows you to accomplish them anywhere, almost by definition, I don't think you can be sanguine that everything is going to work out.
"The American economy has been extremely resilient and to underestimate its resilience is probably a good way to be wrong, so I'm trying not to be a doomsayer. I'm just saying you can get ill effects as well as very good ones. But society tends to in general focus on the good effects and tries to ignore the dooms."
Judging by the reaction to Carr's article and now his book, he can rest assured that society is definitely not ignoring the dooms. At least, not all of them.