1. business and industrial

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.
Institute for Strategic Change · www.accenture.com/isc
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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Institute for Strategic Change · www.accenture.com/isc
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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Institute for Strategic Change · www.accenture.com/isc
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].
With more than 75,000 people in 47 countries, Accenture
works with clients in nearly every major industry worldwide.
Through the integration of consulting and outsourcing,
Accenture:
• Identifies critical areas with potential for maximum
business impact.
• Innovates and transforms the processes in those areas.
• Delivers performance improvements and lower operating
costs by assuming responsibility for certain business
functions or areas—and Accenture holds itself accountable
for results.
Accenture generated net revenues of $11.6 billion for the
fiscal year ended August 31, 2002. Its home page is
www.accenture.com.
Copyright © 2003 Accenture. All rights reserved. Accenture, its logo, and Accenture Innovation Delivered are trademarks of Accenture.
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