Research Note IT Value Issue One · June 19, 2003

Why IT Still Matters Jeanne G. Harris and Jeffrey D. Brooks

Jeanne G. Harris is an associate partner and senior research fellow with the Accenture Institute for Strategic Change. Her research focuses on using information technology to deliver business value. She can be reached at +1 312 693 7633 or jeanne.g.harris @accenture.com. Jeffrey D. Brooks is a research fellow with the Accenture Institute for Strategic Change. His research focuses on business applications of information technology. He can be reached at +1 617 454 8644 or jeffrey.d.brooks@accent ure.com.

After years of investing in information technology (IT), executives are understandably weary of costly IT initiatives and skeptical about its strategic value. Some recent articles argue that senior executives should view IT as a commodity, like electricity, rather than as a strategic business issue.1 The Accenture Institute for Strategic Change recently completed a study examining the contribution of information technology to future value creation in high value-creating organizations. Up to a point, we agree: Some IT does not matter from a strategic business perspective. After all, few companies ever gained competitive advantage by processing the payroll on time.2 Many business functions are merely a necessary cost of doing business and IT is never more important than the business functions it supports. Indeed, executives that adopt the notion that IT is a commodity may be able to save their companies from investing in low value-added activities. However, we believe that many will eventually find themselves at the mercy of more innovative competitors.

While some key aspects of IT are becoming commoditized, there is significant evidence that some IT does matter from a strategic business perspective. Wise executives will manage the commoditized portions of IT accordingly and consider a variety of highly effective alternatives, including outsourcing the data processing component or an entire business process. Executives need to discriminate between commodity IT projects and IT-enabled business initiatives that can produce top-line value in one of three different ways (see sidebar: How IT Helps Create Value): • Operationalizing competitive advantage • Creating new IT-embedded products and services • Enabling indirect value creation Skeptical executives need to be wary of three myths promulgated by those with a stake in commoditized IT products and services. These myths blur the distinction between easily replicable IT infrastructure and distinctive ITenabled capabilities with strategic business value. Challenging these IT myths will help

1. Nicholas G. Carr, "IT Doesn't Matter," Harvard Business Review (May 2003). 2. Unless they were in the business of processing other companies' payrolls, such as ADP.

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Sidebar: How IT Helps Create Value Research from the Accenture Institute for Strategic Change shows that there are really three ways IT creates value for an organization: • By operationalizing competitive advantage • By creating new IT-embedded products and services • By enabling value from indirect benefits which impact overall competitiveness Operationalizing competitive advantage Information technology can be an important element of a strategy to develop a competitive advantage. In information-intensive businesses, a highly efficient IT infrastructure is the key to low cost operation. For businesses like GEICO, this cost position provides a competitive advantage that is difficult for other companies to overcome. Similarly, some home mortgage providers are using IT as a critical element of their strategy to radically redesign the loan approval process. By slashing the time to approve a loan from weeks to minutes, these organizations are creating a powerful differentiator. Some writers find such competitive advantages unimportant because they are generally unsustainable, since a competitor can acquire the same software and build a similar capability. But what exactly is wrong with a three to five year competitive advantage? Any competitive advantage requires ongoing investment: a state of the art manufacturing plant requires ongoing maintenance and periodic upgrades to stay ahead of the competition. Why should business innovations involving IT be held to a different standard? Creating new products and services As information technology becomes cheaper, easier to use, more integrated and more mobile, new products and services become feasible. A pacemaker can communicate with a physician during implantation and to ensure ongoing proper operation. In addition, a sanitized version of the same information can be shared with the manufacturer. The research and development department synthesizes the data during product improvement programs while sales can use the summarized data to learn how to recommend the best product for different types of patients. A shirt can inform the washing machine of the correct settings to prevent fading. As information technology becomes embedded in products and services, companies will discover new sources of competitive advantage from effective early adoption. Enabling indirect value creation There is significant empirical evidence that companies realize significant gains from prudent IT investment. Academic and business researchers have found strong positive relationships between IT investment and operating efficiency, company performance and competitive advantage. Recent studies of company spending find a strong relationship between IT investment and shareholder value growth.

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IT Value · Issue One · June 19, 2003

management minimize attention paid to low value-added tasks and increase the focus on IT investments that make a real difference.

Myth #1: Information technology is a low-cost commodity that all companies have or can acquire. Reality: Only some IT has become commoditized. Those who argue that IT is a commodity tend to focus on hardware and networks. We agree that mainframes and network connectivity are (or will soon be) commodities. Even the hardware vendors (IBM, Compaq, Cisco and Dell) acknowledge as much. The Internet is everywhere; bandwidth and processing power are increasing, and their cost continues to drop. Most elements of an organization's underlying IT infrastructure (maintenance, hardware, user support and software tools) convey little competitive value. Similarly, the IT applications that support ancillary business functions convey little competitive or synergistic value. Managers of these functions will sensibly focus upon minimizing cost, maintaining service levels and reducing risk. In many companies, these functions have been less than optimally managed and the growing popularity of IT outsourcing attests to the very real business value this option can provide. However, commodity computers and connectivity cannot be equated with the specific information they contain and the unique business processes they enable. To do so is like arguing that since corrugated boxes are a commodity, all products shipped in boxes are commodities too. There is strong empirical evidence that companies realize significant gains from prudent IT investment. Accenture and academic researchers have found robust positive relationships between IT investment and operating efficiency, company performance and competitive advantage.3 Recent studies of company spending even find a strong relationship between IT investment and shareholder value growth.4

Nevertheless, IT value is not created equally; there are clear winners and losers because companies vary greatly in their ability to wring business value from IT investments. High performing businesses consistently get up to 40 percent more value from their IT efforts than their competitors, an "IT value premium," based on how they target, manage and implement IT initiatives.5 To maximize the value of IT investments, companies must distinguish between IT commodity projects and those that enable value creating business initiatives (see sidebar: Revised Rules for IT Management).

Myth #2: Business processes are embedded in easily replicable and updated software applications, making best practices equally available to all companies Reality: IT value lies in companies knowing how to tailor IT solutions to enable unique, strategically important business processes. It is true that many standard business processes are becoming embedded in easily replicable and updated software applications. Indeed, most transaction-based software applications are on their way to becoming commodities. Many companies take advantage of the best practices inherent in enterprise system software, and, for them, applying new "best practice processes" represents a significant business improvement. However, our research shows that the most successful companies also elect to target a few strategic areas that are critical to their business success and do these things differently with the aid of information technology. Focusing on a few ITenabled, industry-specific, company-unique solutions remains a potent source of competitive advantage. Moreover, many knowledge-intensive business processes (such as R&D) have just begun to be transformed by information technology.

3. See Erik Brynjolfsson and Loren Hitt, "New Evidence on the Returns to Information Systems," working paper, Sloan School of Management, MIT, 1993; Erik Brynjolfsson and Loren Hitt, "Computing Productivity: Firm-level Evidence," working paper, Sloan School of Management, MIT, 2002; Erik Brynjolfsson, Loren Hitt, and S. Yang, "Intangible Assets: How the Interaction of Computers and Organizational Structure Affects Stock Market Valuation," working paper, Sloan School of Management, MIT, 2003; and Erik Brynjolfsson, "The Productivity Paradox of Information Technology," Communications of the ACM 36 no. 12 (Dec 1993): 66-77. 4. Mark Anderson, Rajiv Banker, and Sury Ravindran, "The New Productivity Paradox," Communications of the ACM 46 no. 3 (March 2003): 91-94. 5. Weill, Peter, "Managing the IT Portfolio: Business Value Targets, Investment Benchmarks & Evidence for Pay Off", CISR Sponsored Board presentation (6 November 2002), Cambridge, Mass.; Weill, Peter and Broadbent, Marianne, Leveraging the New Infrastructure: How market leaders capitalize on IT (Boston: Harvard Business School Press, 1998), Chapter 3. 6. Pimm Fox, "Tapping the Right Tools, "Computer World 36 no. 17 (22 April 2002): 43.

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Sidebar: Revised Rules for IT Management After concluding that IT no longer has strategic merit, Nicholas Carr, in the May 2003 issue of Harvard Business Review, proposes three "New Rules for IT Management" (summarized below "IT Commodity Rules.") We agree that these tactics make sense for IT commodities, but we think his rules only apply to a subset of IT investments. Companies that view all IT as mature infrastructure may indeed lower their risk of failure in the present. Their oversimplified thinking, however, will leave them more vulnerable to future business failure than their more innovative and strategically-minded rivals. The Accenture Institute for Strategic Change has examined the contribution of information technology to future value creation in high value-creating organizations. We have learned that these organizations approach information technology differently than their competitors in a few key respects. Companies that win with IT do not win with IT alone, but by carefully selecting their IT investments to align with their business strategy, and executing successfully. To maximize the value of remaining IT initiatives, we recommend companies also adopt our "IT Value Rules."

IT Commodity Rules

IT Value Rules

Spend less. Studies show that the companies with the biggest IT investments rarely post the best financial results.

Spend wisely. Financial leaders and laggards both spend less on IT than average companies. The key is not just to spend less, but to focus your investments on IT that creates business value.

Follow, do not lead. Moore's Law guarantees that the longer you wait to make an IT purchase, the more you will get for your money.

Lead selectively. Waiting to get cheaper, proven IT solutions is a reasonable strategy for low-value processes, but it guarantees you will not be a leader in any strategic processes. Leaders take calculated risks on new IT solutions in strategically important areas.

Focus on vulnerabilities, not opportunities. As corporations continue to cede control over their IT applications and networks, they "need to prepare themselves for technical glitches, outages and security breaches."

Invest in business innovation, not technology. If you treat all IT the same way, you will miss at least half its value. By all means, manage IT infrastructure with an eye to cost and risk. But examine your business strategy for innovations where IT can help create real business value.

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IT Value · Issue One · June 19, 2003

Even in the cases where IT-enabled processes are becoming commoditized, implementing IT solutions and getting value from them are not. Information technology initiatives have a 30 percent failure rate and 90 percent are delivered late, according to Aberdeen Group research.6 Surely no utility could succeed with such dismal service levels. For example, our survey of 200 large companies found clear differences between organizations that derive substantial value from their investments in enterprise solutions and those that merely spend a lot of money updating their software.7 How effectively companies exploit best practices in the software depends upon a number of factors, such as technical know-how, business integration, how business processes optimize the use of the software, and how effectively information is used and applied throughout the organization.8 In reality, IT is neither a "no-brainer" nor a crapshoot: we found that those companies that have learned how to implement IT solutions effectively succeed, and those that have not learned these lessons fail.

Myth #3: Opportunities for IT-enabled innovation are diminishing Reality: In an era of increasing standardization and efficiency, IT-enabled innovation is more important than ever People who portray all IT as a commodity argue that even the slower companies are now catching up and the leaders have little room to push further ahead. However, these assertions assume that industries are static—that processes, best practices and economic conditions have stopped changing— and nothing could be further from the truth. Sustained competitive advantage is driven largely by innovation—to take advantage of new opportunities or to adapt to changing market conditions— and the ability to successfully execute business innovation increasingly depends on IT. Not all innovations are successful; both the risks and rewards of innovation are high. Companies that focus solely on minimizing risks associated with IT will often also miss the rewards.

Indeed, many innovations are eventually duplicated by others or codified in software as a best practice. But following best practice ensures that a company will never be better than second best. Leading companies continue to invent new best practices that others will later follow. Dell and Wal-Mart, two companies cited as turning "temporary technical advantages into enduring positioning advantages,"9 continue to drive ITenabled business innovation. Dell hones its ability to match demand to supply by improving IT-enabled configurability and dynamic pricing. Wal-Mart is a leader in piloting and promoting new Auto-ID technology that promises a quantum leap in supply chain efficiency. Both companies clearly see IT-based innovation as an integral part of their long-term business strategies. As executives gain access to accurate, consistent, complete, real-time transaction data, they will strive for the same type of efficient, transparent and "frictionless" real-time decisionmaking capability and benefits that many manufacturers achieved with just-in-time manufacturing.10 In the coming decade, we believe that the IT innovations most likely to drive business value are those that help managers glean insight, manage knowledge, redesign decision making and transform ideas into action. Harrah's, for example, drives its differentiated business strategy out of superior insights derived from customer data.11 In this respect, businesses are a lot like fighter jets. There have been few major changes to core aircraft technology; the big improvements have been to incorporate intelligence into the weaponry and targeting systems. What most differentiates companies that get more value from their investments from those that who get less is their ability to use and apply information. Competitive advantage will increasingly flow to those organizations that are most adept at extracting insights from data and translating them into tangible business results.12

Conclusion Executives need to recognize that IT is complex and multifaceted, and thus eschew one-size-fits-all prescriptions for managing it. Some aspects of IT are indeed becoming commoditized, and for these the aim should be to reduce cost

7. Thomas H. Davenport and Jeanne G. Harris, "As Information Flows, So Flows Value," Optimize (November 2002): 50-56. 8. Donald Marchand et al., Making the Invisible Visible: How Companies Win with the Right Information, People and IT (New York: John Wiley & Sons, 2001). 9. Nicholas G. Carr, "IT Doesn't Matter," Harvard Business Review (May 2003). 10. Thomas H. Davenport, Jeanne G. Harris, and Susan Cantrell, "The Return of Enterprise Solutions: Director's Cut," Accenture Institute for Strategic Change Research Report (14 October 2002). 11. Thomas H. Davenport, Jeanne G. Harris, and Ajay Kohli, "How Do they Know their Customers so Well?" Sloan Management Review 42 no. 2 (winter 2001): 63-73. 12. Thomas H. Davenport et al., "Data to Knowledge to Results: Building an Analytic Capability," California Management Review 43 no. 2 (winter 2001): 117-138.

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and minimize risk. However, select elements of IT can help create competitive advantage. Granted, no single IT investment can sustain value indefinitely, but in this respect, investments in IT are no different from any other kind of investment. For companies that want to remain leaders in their industry, continuous improvement and reinvestment are required to sustain competitive advantage. For companies that are not leaders, periodic investments in IT are needed just to avoid falling further behind the competition. Those unable or unwilling to match productivity improvements or process innovations are generally eclipsed or acquired by more agile competitors. Yes, the Internet investment bubble has burst, but the speculative frenzy never truly reflected the less glamorous hard work needed to turn commodity technologies into valuable proprietary assets. With the distracting hype out of the way, truly innovative companies can focus more on designing and building IT-enabled business solutions that deliver real business value.

About Accenture Accenture is the world's leading management consulting and technology services company. Committed to delivering innovation, Accenture collaborates with its clients to help them realize their visions and create tangible value. With deep industry expertise, broad global resources and proven experience in consulting and outsourcing, Accenture can mobilize the right people, skills, alliances and technologies.

About the Institute for Strategic Change The Accenture Institute for Strategic Change was founded in 1996 and conducts original research focused on business innovation. Based in Cambridge, Massachusetts, the Institute consists of management researchers working collaboratively with executives and other researchers to bring innovative and actionable ideas to decision-makers. The Accenture Institute for Strategic Change publishes its own "Research Notes" (short single issue commentaries) and "Research Reports" (in depth, comprehensive findings). In addition, it has published hundreds of articles in such leading publications as Harvard Business Review, Sloan Management Review, CIO Magazine, Across the Board, Leader to Leader and many other top publications. The Institute is often referenced in major newspapers including the New York Times, Wall St. Journal, Financial Times, USA Today, Los Angeles Times and Boston Globe. Institute researchers have taught at leading business schools including Harvard Business School, Tuck School of Management at Dartmouth College, Sloan School at the Massachusetts Institute of Technology, and the Graduate School of Business at the University of Chicago. Harvard Business School Press and other top-tier business presses regularly publish the Institute's books. We have worked with hundreds of organizations across the globe to apply our findings and ideas in order to help them accelerate and achieve their strategic visions. Its home page is www.accenture.com/isc. Please contact us at [email protected].

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