Business Value, Competitive Advantage, and the Role of IT

The ideas expressed by Nicholas Carr in a recent article in the Harvard Business Review, and examined by Art Jahnke in a CIO.com “Sound Off” column, have stirred a long-running religious debate concerning the role of IT in business.

Specifically, Carr argues that the ubiquity of IT systems has largely neutralized the competitive advantage that innovative businesses have historically gained from IT. Essentially, Carr says, IT systems have become commoditized, to the extent that competing firms are on a level playing field when it comes to deployment of IT.

From Compass’ perspective, Carr’s thesis is correct in certain respects, but fails to address some critical realities of today’s business environment, and, taken at face value, poses some significant risks.

Carr rightly states that the pervasive nature of IT systems renders innovation through the ownership of proprietary IT (as in the early days of Sabre) largely obsolete. However, that does not make IT a non-strategic investment. One could argue that it makes IT more strategic, because it’s so much more closely integrated with business activity than ever before.

In a broader sense, Carr’s perspective (shared by many, to be fair) is limited in that he views IT as somehow a separate entity that contributes to business success to a greater or lesser extent. Today, IT is as essential to business operations as are employees. (And you don’t debate whether or not employees are a strategic investment.) With such an approach, IT can be seen as one of many resources the business has at its disposal to gain competitive advantage. The business gathers its pool of resources, considers the capabilities that can be generated, and develops the best strategy. Based on the results, the strategy is evaluated and the resources replenished. IT should be part of this ongoing cycle, from operations through to strategic planning, rather than an independent factor.

One of the most striking characteristics of business in the last ten years has been that the use of IT resources and overall IT spending have grown dramatically, while IT costs, on a per unit basis, have declined. Increased cost efficiency and growing IT volumes have not, however, produced a corresponding boost in business productivity.

The lack of demonstrable improvement in business efficiency despite significant investment in IT infrastructure, systems, and operations has fomented senior management disillusionment with IT. The fact that the strategic value of the investment is also questionable exacerbates the problem.

A key factor shaping this environment has been lack of accountability for IT usage – resources are used because they’re there. If the IT solution is an integral part of the business (rather than an independent entity), business accountability for IT usage becomes more feasible.

IT a Commodity?

Carr’s assertion that IT has become commoditized, and that best practices for IT management are standard across business enterprises, also bears examining. In analyzing over 200 outsourcing deals, Compass has seen a 150 percent price variance for so-called “commodity” products and services.

Similarly, Compass observes a dramatic range of variability in IT management practices related to efficiency in terms of cost, quality, and productivity. As such, a business that views IT as a non-strategic commodity is a business that risks falling behind.

While everybody has access to the same IT resources in terms of hardware, software, and to an extent, skills, it’s not the resources that make the difference – it’s how they’re deployed and managed. The key is how IT is matched with people, skills, and strategy to generate the things a business can do. That’s what builds competitive advantage. The purchase of a bit of hardware is a commodity transaction, but as soon as you turn it on, put software on it, run it, and do something with it, the concept of commodity goes away.

Put differently, IT has never been strategic. The use of IT has always been and will continue to be strategic.

Drawing a clear distinction between IT operations and IT solutions is essential. Specifically, IT operations should be seen as the “factory” responsible for the delivery of the solutions in the most efficient manner possible, in terms of lowest cost at the required level of quality. The IT solutions are the Information Systems (IS) deployed to support the business.

Creating value in this “Strategic IT” space can happen in two ways:

First, through a “top-down” translation of strategy into operational requirements. Business models can define the level of operational performance needed to satisfy the strategic direction of the business, including what IS support should be implemented at the appropriate organizational levels. Making this link between operations, strategy, and IS support is essential to achieving the necessary level of change, and to realizing value from IS investment.

A second and complementary strategy analyzes the root causes of efficiency problems within an organizational unit and/or within business processes, including the impact of IS support. This analysis addresses three critical questions:

1. Is IS support lacking in areas where it could advantageously be implemented?
2. Is IS support appropriate to the functions performed?
3. Is IS support under-utilized due to a mismatch between business process configuration and the IS functionality?

To appreciate the operational and strategic importance of IT, consider this real-world scenario: Several years ago, Safeway was the first UK food retailer to introduce customer loyalty cards. Competitor Tesco followed suit, but its superior IT infrastructure enabled higher margins and new opportunities. Safeway recently abandoned its loyalty card initiative, because the business return was not commensurate with the investment. Tesco, meanwhile, has leveraged customer data mined to expand into home shopping, financial services, and other areas. Therefore, while Tesco was not first to innovate, it has developed a sustained advantage.

The strategic use of IT as demonstrated by Tesco requires efficient IT operations. But Safeway also has very efficient IT operations. So why did Safway’s scheme ultimately fail and Tesco’s succeed? It was the appropriateness and efficient utilization of Tesco’s IT solution that enabled sustainable advantage.

The key to gaining advantage from IT in the future will be to constantly evaluate business requirements and tailor IT initiatives and existing IT capabilities to meet those requirements. The winners will be those that let business strategy drive IT solutions that improve business operations.

Nigel Hughes, based in Guildford, UK, directs Information Systems Value Realization services globally for Compass.