Why IT does not matter

Matthew Lawler

13 Feb 2018 Matthew Lawler lawlermj1@gmail.com 1

 What is in this presentation for
+
you?
• Do you want to know where your industry is
headed?
• How will you skill up to face the coming
challenges?

from 'Does IT matter?' by Nicholas Carr 2

+
Does IT Matter? book report

• Love the quotes by Carly and Ballmer.

• This was published in 2004, now 8 years old.
• This book provides the economics for cloud
computing.

from 'Does IT matter?' by Nicholas Carr 3

+
What does IT mean?
We will separate the I from the T.
• This is a fuzzy term.
• Information ->
• Basis of Business Advantage
• Technology ->
• All of the means used to store, process and
transport information in digital form.

from 'Does IT matter?' by Nicholas Carr 4

+
Agenda
• Technological Transforms
• Laying Tracks
• An Almost Perfect Commodity
• Vanishing Advantage
• The Universal Strategy Solvent
• Managing the Money Pit
• A Dream of Wonderful Machines

from 'Does IT matter?' by Nicholas Carr 5

+
Technological Transforms
(the rise of a new business infrastructure)
• More Capital Expenditure is now spent on IT
than all other types of Capital Expenditure
combined.
• IT 'delivers tremendous strategic value'
(Microsoft)
• But does it really?

from 'Does IT matter?' by Nicholas Carr 6

 What is the basis of competitive
+
advantage?
Real meaning of strategic
• That is, what makes a business resource strategic?
• Not ubiquity, but scarcity.
– You gain an edge over rivals only if you have something they
cannot have.
– Distinctiveness determines a company's profitability.
• Do all investments increase returns?
– Investments in scarce resources will increase returns.
– Investments in commodity resources will not increase returns.
• By the laws of competition, any increase in productivity of a
commodity resource will be competed away.
• That is, all the benefits will flow to the customers, not to a
company.

from 'Does IT matter?' by Nicholas Carr 7

+
Agenda
• Technological Transforms
• Laying Tracks
• An Almost Perfect Commodity
• Vanishing Advantage
• The Universal Strategy Solvent
• Managing the Money Pit
• A Dream of Wonderful Machines

from 'Does IT matter?' by Nicholas Carr 8

+
Laying Tracks
(the nature and evolution of infrastructural technologies)
• Rainhill, England, 1829
• Investors had spent 500,000 pounds on 32
miles of track.
• Current average speed was 10 mph.
• They wanted faster trains.
• So, they organized a trail with a £500 prize.
• Rocket was able to reach 30 mph.
• And the rest is history.

from 'Does IT matter?' by Nicholas Carr 9

 How to tell Infrastructural from
+
Proprietary Technology
Who gets the benefits
• Proprietary Technology can be owned by a single
company.
• The value accrues to a single firm.
• Infrastructural Technology has the most value when
shared.
• This is called the Network effect.
• That is, the value of a product increases whenever a
new member joins.
• The line can blur, especially during industry start up.
• Eg Railway lines, track gauges, couplings, etc.
• Eg Electric motors, wiring up, grid creation

from 'Does IT matter?' by Nicholas Carr 10

 What are examples of
+
Infrastructural Industries?

• Railway, Telegraph, Telephone, Electricity

• What are the impacts of Infrastructural
Industries?
• The railway reduced transport costs
substantially.
• This led to Department stores, and the death
of the local goods store.
• It also led to large scale factories, and the
death of small factory.
from 'Does IT matter?' by Nicholas Carr 11
+
Infrastructure Buildout phase
These are all short, and intense

from 'Does IT matter?' by Nicholas Carr 12

 After the buildout phase, what
+
next?
Prices crash, as usage becomes universal.

• It is obvious why customers like common

standards.
• What forces suppliers to follow common
standards?
• It is a case of being a small fish in a big pond,
rather than a big fish in a shrinking pond.
• Or, they face total exclusion from the market.

from 'Does IT matter?' by Nicholas Carr 13

+
Agenda
• Technological Transforms
• Laying Tracks
• An Almost Perfect Commodity
• Vanishing Advantage
• The Universal Strategy Solvent
• Managing the Money Pit
• A Dream of Wonderful Machines

from 'Does IT matter?' by Nicholas Carr 14

+
An Almost Perfect Commodity
(the fate of computer hardware and software)
• Is IT an infrastructure technology?
• What is Overshooting?
• This is the process of by which the performance of a
technology product exceeds the requirements of most
users.
• This opens the door for cheaper alternatives.
• It also explains Open Source, and cloud computing.
• For example, Older OS -> Windows -> Linux -> JVM
• Or Windows Outlook -> Thunderbird -> Google Mail
• See Clayton Christensen “The Innovator’s Dilemma”

from 'Does IT matter?' by Nicholas Carr 15

 There's something special about
+
software
There’s nothing special about software
• The economies of scale in Software are extreme.
• There are very high fixed costs to create software.
• There are very low incremental costs to distribute
software.
• Once built, it is done.
• 'Customers cannot find 5% difference between SAP,
Peoplesoft, and Oracle' 1998
• As a non-physical good, software does not suffer decay.
• Therefore, the only hope for replacement income is
obsolescence.

from 'Does IT matter?' by Nicholas Carr 16

+
IT will never be mature
We drink from the fountain of youth, or do we?
• 'A second distinguishing feature of the
development of the computer industry, after
the decline in price, is the unprecedented
speed with which diminishing returns set in’
• See Robert Gordon, “Does the New Economy
Measure up to the Great Inventions of the
Past”

from 'Does IT matter?' by Nicholas Carr 17

+
Agenda
• Technological Transforms
• Laying Tracks
• An Almost Perfect Commodity
• Vanishing Advantage
• The Universal Strategy Solvent
• Managing the Money Pit
• A Dream of Wonderful Machines

from 'Does IT matter?' by Nicholas Carr 18

+
Vanishing Advantage
(IT’s changing role in business)
• Two researchers looked at 370 US Companies during 1980s.
• They discovered that
• 1. IT had contributed to total output.
• 2. IT investments had a high rate of return from capital.
• 3. Little evidence of an impact of IT on supra-normal profit.
• That is, the companies IT investments maintained
competitive parity, but they did not get competitive
advantage.
• Instead, customers gained the benefits.
• See Hitt and Brynjolfsson “ Productivity, Business
Profitability and Consumer Surplus”

from 'Does IT matter?' by Nicholas Carr 19

+
Sometimes, killer apps happen
(but the effect does not last forever)
• In 1962, American Airlines (AA) rolled out Sabre
reservations system.
• Sabre
• 1. Reduced reservations time to a few minutes
• 2. Reduced error rates from 8% to 1%
• 3. Cost $30 million
• 4. Provided 25% ROI (return on investment)
• What happened?
• The rest of the industry played catch up, while AA
had an advantage for a decade.
from 'Does IT matter?' by Nicholas Carr 20
+
Standards are critical
• In early 1970s, grocery chains were developing
their own machine readable codes.
• Then they formed a consortium to agree on
standards.
• They chose the IBM Universal Product Code
(UPC).
• All chains moved to the new standard, which is
still with us today.
• Other examples: Internet, FTP, etc.

from 'Does IT matter?' by Nicholas Carr 21

+
There are always tears before bedtime
• Or why must bubbles burst?
• A series of stages occur:
• Period -> Focus
• Installation -> Mainly on building technology.
• Turning point -> Stock market bubble burst,
after major investments.
• Deployment -> Mainly on institutions and
regulations.
• See Carlota Perez “Technological Revolutions and
Financial Capital“

from 'Does IT matter?' by Nicholas Carr 22

+
Agenda
• Technological Transforms
• Laying Tracks
• An Almost Perfect Commodity
• Vanishing Advantage
• The Universal Strategy Solvent
• Managing the Money Pit
• A Dream of Wonderful Machines

from 'Does IT matter?' by Nicholas Carr 23

+
The Universal Strategy Solvent
(the IT infrastructure’s corrosive effect on traditional
advantages)
• ‘Technological change is a great equalizer, eroding
the competitive advantage of even well
entrenched firms and propelling others to
forefront’ Michael Porter, Harvard
• Time to fulfill customer order by region in days

• See Mark Cotteleer, “Empirical Study following

Enterprise IT Implementation” Harvard
from 'Does IT matter?' by Nicholas Carr 24
+
Strategy and the Internet
• The internet
• 1. bolsters buyer bargaining power
• 2. reduces barriers to entry for competitors, as sales force
not needed
• 3. creates new substitutes for products
• 4. intensifies competition, as harder to maintain
proprietary barriers
• 5. expands geographic markets, bringing more competition
• All of these things will 'make it more difficult for companies
to capture these benefits as profits’
• See Michael Porter “Strategy and the Internet”

from 'Does IT matter?' by Nicholas Carr 25

+
Firms and the Internet
Will they get smaller or bigger?
• 'The significant questions would appear to be why the allocation of
resources within a company is not done directly by the price
mechanism of an open market’
• Ronald Coase, Nobel laureate
• A company will do activities internally if internal cost < market cost
+ transaction cost.
• So what happens when a new infrastructure such as telephones
which reduced communications costs?
• In this case, telephones reduced both internal and market costs.
• The net result of cost reductions from telephones, railways, etc led
to the creation of very large firms.
• So what impact will the Internet have on firm size?
• Still not clear, but it is not the nirvana that some imagine.

from 'Does IT matter?' by Nicholas Carr 26

+
Agenda
• Technological Transforms
• Laying Tracks
• An Almost Perfect Commodity
• Vanishing Advantage
• The Universal Strategy Solvent
• Managing the Money Pit
• A Dream of Wonderful Machines

from 'Does IT matter?' by Nicholas Carr 27

+
Managing the Money Pit
(new imperatives for IT investment and management)
• What happens when a utility fails?
• In California in 2000, misguided regulations
led to an electricity shortage, and blackouts.
• Companies lost more than $100 million, and
threatened to leave the state.
• When a resource becomes essential to
competition, but inconsequential to strategy,
the risks it creates become more important
than the advantages it provides.
from 'Does IT matter?' by Nicholas Carr 28
+
4 Rules
What a CIO should focus on
• 1. Spend less (reduce risk, and exploit
commodity prices)
• 2. Follow, don't lead
• 3. Innovate when risks are low
• 4. Focus more on vulnerabilities than
opportunities

from 'Does IT matter?' by Nicholas Carr 29

+
Follow, don't lead
Performance not related to IT spending per employee

• See Alinean “IT Spending Efficiency”

from 'Does IT matter?' by Nicholas Carr 30

+
Agenda
• Technological Transforms
• Laying Tracks
• An Almost Perfect Commodity
• Vanishing Advantage
• The Universal Strategy Solvent
• Managing the Money Pit
• A Dream of Wonderful Machines

from 'Does IT matter?' by Nicholas Carr 31

+
A Dream of Wonderful Machines
(the misreading of technological change)
• What would rather do without?
• Your computer or your toilet?
• Your internet or your lightbulbs?
• What is most essential?
• Are we really in a 3rd industrial revolution, or is
it still the 2nd industrial revolution?

from 'Does IT matter?' by Nicholas Carr 32

+
What happened to the new economy?
There is ‘No correlation’ between IT investment and
performance.

• The IT sector is 8% of economy, and had 36% of total

productivity growth.
• The Sales sector is 24% of economy, and had 40% of total
productivity growth. (Sales = Retail, wholesale, brokerage)
• So, from 1993 to 2000, 32% of economy produced 76% of
the productivity growth. The rest of the economy had little
growth.
• Would this productivity growth continue in a recession?
• Yes. It would lead to lower prices, so it may not be pleasant.
• See McKinsey Whatever happened to the new economy?

from 'Does IT matter?' by Nicholas Carr 33

+
Death of the CIO
• Or Whatever happened to the Chief Electricity
Officer?
• What special business knowledge does a CIO
have?
• Nothing.
• If you want to be a CIO, look in the rear vision
mirror for the CFO or COO.
• And what about the IT department?
from 'Does IT matter?' by Nicholas Carr 34
+
Death of the layman
• Laymen were building electrical engines who
did not understand Faraday’s or Maxwell’s
equations!
• What happened? Engineers studied the maths
and took control.
• Why? The engines built by Laymen exploded
and people were electrocuted, and the
Laymen were sued.
• Any parallels today?
from 'Does IT matter?' by Nicholas Carr 35
 Is it important to know these
+
things?
Is it important to be able to prove programs? (also
productivity and parallelism)
• Computation Theory using models of computation
– Turing machine
– Lambda calculus
– Combinatory logic
– mu-recursive functions
• Theory of set, model, recursion and proof
• And …
– Type theory
– Category theory (Monads, Functors, morphisms, etc)
– Automata theory
– Number theory
– Graph theory
– Computational geometry
– Quantum computing theory

from 'Does IT matter?' by Nicholas Carr 36

+
Whither Data Warehousing?
That is, is there a long term future here?
• Why must data be copied? Can’t persistent databases be built?
– A persistent data structure is a data structure that always preserves
the previous version of itself when it is modified.
– Structures that are not persistent are called ephemeral.
– 'Purely Functional Data Structures' by Chris Okasaki explains how.
• Can scalable databases be built? Is data parallelizable?
– Commutativity analysis is a technique for automatically parallelizing
programs.
– Commutativity analysis analyzes a program to discover when functions
commute - i.e. generate the same result regardless of the order in
which they execute.
– A commutative function means => a + b = b + a.
– If all of the functions required to perform a given computation
commute, the compiler can automatically generate parallel code.
– This is the mathematical idea behind mapReduce.

from 'Does IT matter?' by Nicholas Carr 37