March 24, 2006
The Trends Underlying Enterprise 2.0
I have an article in the spring 2006 issue of Sloan Management Review (SMR) on what I call Enterprise 2.0 -- the emerging use of Web 2.0 technologies like blogs and wikis (both perfect examples of network IT) within the Intranet. The article describes why I think this is an important and welcome development, the contents of the Enterprise 2.0 ‘toolkit,’ and the experiences to date of an early adopter. It also offers some guidelines to business leaders interested in building an Enterprise 2.0 infrastructure within their companies.
One question not addressed in the article is: Why is Enterprise 2.0 is an appealing reality now? It’s not because of any recent technology breakthrough. Blogs, wikis, and RSS have been brewing since the 1990s, and folksonomies and AJAX since the early years of this decade. Is it just that technologists and entrepreneurs needed a bit of time to absorb all of elements and combine them into useful tools? That’s certainly part of the story, but focusing only on technology components risks missing the forest for the trees.
In particular, it misses three broad and converging trends, all of them concerning the changing relationship between those who offer technologies and those who use them. The trends are:
Simple, Free Platforms for Self-Expression The great journalist AJ Liebling observed that "freedom of the press is limited to those who own one." In the mid 1990s, the World Wide Web put a multimedia printing press and a global distribution network in the hands of everyone with a bit of bandwidth, a bit of money (for site hosting fees), and moderate technical expertise (for coding HTML pages and uploading them to servers). Millions of people and companies took advantage of this opportunity. Hundreds of millions of people did not, however, even though they had Internet access.
Lots of these people, of course, had nothing to say or no desire to take advantage of the printing press offered by the Web. Many others, however, were daunted by the combination of time, expense, and technical skill required to set up and maintain their own web site. I grabbed the domain name mcafee.org many years ago (before the good people at McAfee, Inc (no relation, sadly) got to it), but I never did anything with it. My few attempts at coding HTML and maintaining a decent page, let alone a decent site, taught me that it was a lot of work, and I had plenty of other things to do.
The $10-20/month in hosting fees weren’t a big deal for me, but they were for people with a desire to express themselves but no disposable income, or no credit card. The Web, however, was not irrelevant for these people. It was in fact incredibly useful, because of free email accounts they used whenever they could get in front of a computer. When my brother and I went trekking in Madagascar a few years ago we met some great guides. When we asked how we could get in touch with to plan our next trip the answer was usually something like "You can call this number. It’s my sister’s husband’s brother’s mobile; he’s the only one with a phone. Or here’s my Yahoo! email address." We chose option B.
This example shows an important distinction. For about a decade companies have been providing users around the world with free Web-based communication channels like email and instant messaging. These channels have been valuable for people from Cambridge to Antananarivo. But the information exchanged via these channels isn’t persistently visible, so it’s not consultable -- it doesn’t form part of the huge ongoing reference work that is the Web.
Usenet groups are multi-party conversations that take place on archived, widely visible, and searchable platforms. In February of 2001 Google bought a Usenet archive (dating back to 1975!) and made it as searchable as the rest of the Web.
At about the same time, another kind of Web-based platform was gaining steam: blogs. Blogs are essentially hassle-free Web sites; they free up content generators from having to worry about HTML tags, cascading style sheets, ftp, and all the other nagging details that kept me from ever putting up a site at mcafee.org. So now I’m using the HBS blogging environment (provided by pMachine‘s ExpressionEngine) to put content on the Web; I worry only about the content, not about the work of putting it on the Web so it looks professional.
In 2003 Google put freelance Malagasy tour guides on even footing with me by buying blogger and making it free to blog. As a result, Liebling’s limits now apply only to those with no bandwidth or limited rights of self-expression. The birth of free blogs is a big deal. With five minutes of effort at a site like blogger or typepad anyone can build themselves a worldwide platform for self-expression. They can contribute text, audio, photos, and videos to the Web. Whether you believe that this is a good thing or a bad thing reveals something about your view of human nature.
Emergent Structures, Rather than Imposed Ones. As technologists were building the new platforms they were also rethinking their roles, and making a fundamental philosophical shift. Instead of imposing their own ideas about how the platforms should be structured, they started working hard to avoid such imposition, and to build tools that let structure emerge. The history of Wikipedia provides a great example of this shift.
Wikipedia is justly famous as an online encyclopedia that anyone can edit or extend (a future post will talk about Wikipedia in more detail, and explain why I feel about it the way the critic Randall Jarrell felt about Whitman’s poetry: "There are faults in this passage, and they do not matter." ), but it didn’t start that way. The goal was always to create a free online encyclopedia, but the first attempt by founders Jimmy Wales and Larry Sanger was called Nupedia. As its Wikipedia entry states...
"... Nupedia was characterized by an extensive peer review process designed to make its articles of a quality comparable to that of professional encyclopedias. Nupedia wanted scholars to volunteer content for free. Before it ceased operating [in September of 2003], Nupedia produced 24 articles that completed its review process (three articles also existed in two versions of different lengths), and 74 more articles were in progress."
Nupedia’s 7-step peer review process was heavily biased toward Ph.D holders and other alleged "true experts in their fields," and was evidently elaborate and daunting. In a talk, I heard Wales say that even he was intimidated at the thought of submitting an article to it.
In late 2000 Wales was introduced to wikis, which are (again, according to Wikipedia) "a type of website that allows anyone visiting the site to add, remove, or otherwise edit all content, quickly and easily, often without the need for registration." Wikis were invented by Ward Cunningham, who’s most frequently-repeated quote is "What’s the simplest thing that could possibly work?"
A wiki was introduced within Nupedia on January 10, 2001 as "a little feature." By January 20, the newborn Wikipedia had about 600 articles. It now has over 1 million in English alone, and over 3 million across all languages. The simplest thing, evidently, is working.
Why is this? There are a number of reasons, both technical and social, which are explained in the SMR article and will be considered in later posts. One of the main ones is that the shift from Nupedia to Wikipedia was a huge reduction in the amount of structure in the content creation and editing process. The structure was intended to act as a barrier to bad content, but instead it acted as a barrier to all types of content, and to broad participation. When this structure was abandoned—when Wikipedia’s philosophy became explicitly ‘non-credentialist‘ and one of "making it easier to correct mistakes, rather than making it difficult to make them" -- the project took off and became something legitimately astonishing.
Yahoo!’s purchase, in late 2005, of del.icio.us provides another example of the same broad shift in philosophy. Early in its history Yahoo!’s founders said that it stood for ‘Yet Another Hierarchical Officious Oracle," poking fun at themselves but also revealing their vision of the business. Yahoo! attempted to organize the Web’s content hierarchically, placing individual sites into pre-defined categories like Health, Arts, and Computers, and into sub-categories within them.
The company employed taxonomists to create and update this structure. Taxonomy is the science of classifying things, usually hierarchically. Carl Linnaeus’s classification of living things—by kingdom, phylum, class, order, family, genus, and species -- is perhaps the best-known example. Taxonomies are developed by experts, and then rolled out to users to help us make sense of the world and relate things to each other.
I used to use Yahoo!’s taxonomy of the Web a lot. I stopped when I sensed that the Web was becoming too big and growing too fast for the taxonomists to keep up with, and when I saw that it was more productive for me to enter free text into Google than to navigate through Yahoo’s hierarchy (which still exists, but appears pretty far down on Yahoo!’s home page. It doesn’t appear to be a major part of their business any more).
I didn’t pay much more attention to Web categorization schemes until I started hearing about del.icio.us, which is based not on an up-front taxonomy developed by experts, but instead on a ’folksonomy‘ -- a categorization system developed over time by folk. My SMR article explains how the del.icio.us folksonomy arises and why it’s useful. For now the important point is that del.icio.us’s founder didn’t want to impose his view of the Web’s structure on users; he wanted to let them develop a structure on their own. The same philosophy is used at popular sites like Flickr (for sharing photos) and YouTube (videos).
In late 2005 Yahoo! bought del.icio.us; this move can be seen as an acknowledgment that categorization of online content is still valuable, but that users themselves might be the best categorizers.
Order from Chaos If everyone from Malagasy tour guides to HBS professors starts blogging, making edits at Wikipedia, and uploading photos to Flickr, isn’t chaos the inevitable result? Won’t we simply drown in information as hundreds of millions of people take advantage of the freedoms of the new online printing presses?
Amazingly enough, the answer to these questions seems to be a simple ‘no.’ This is because in addition to building platforms for self-expression and overcoming their previous tendencies to impose structure, the technologists of Web 2.0 are providing a third valuable service -- they’re rolling out tools that help us filter, sort, prioritize, and generally stay on top of the flood of new online content.
As described in the SMR article, these tools include powerful search, tags (the basis for the folksonomies at del.icio.us and flickr), and automatic RSS signals whenever new content appears. As I type these words I don’t know the best site to serve as the link behind the abbreviation ‘RSS’ in the previous sentence. To find this site, I’m going to type ‘RSS’ into Google and see what pops up (sure enough, the Wikipedia entry for ‘RSS’ was pretty high in Google’s results). I also don’t know the URL of the page I’m using right now to type this blog entry. I do know that it’s on my del.icio.us page, tagged as ‘APMblog,’ so I can find it whenever I want. And I don’t know what work my three collaborators on a research project are doing right now; I just know that when any of them has some results to share or a new draft of the paper they’ll post it on the project’s wiki (which is powered by Socialtext) and I’ll immediately get an RSS notification about it.
These examples are not meant to show that my professional life is perfectly organized (that assertion would be worse than false; it would be fraudulent) or that we’ve addressed all the challenges associated with the growth of the Web. They’re meant instead to illustrate how technologists have done a brilliant job at three tasks: building platforms to let lots of users express themselves, letting the structure of these platforms emerge over time instead of imposing it up front, and helping users deal with the resulting flood of content.
As the SMR article discusses, the important question for business leaders is how to import these three trends from the Internet to the Intranet -- how to harness Web 2.0 to create Enterprise 2.0. Future posts will have more to say on this topic.
I’ll end this post with an anecdote that showed me that these three trends are not yet well understood by many business leaders. Last week I was teaching in an executive education program for senior executives - owners and presidents of companies. I assigned a case I wrote about the internal use of blogs at a bank, and also gave one additional bit of homework: I pointed the participants to blogger and typepad, and told them to start their own blogs and report the blog’s URL to me.
What they reported instead was that they had no intention of completing the assignment. They told me how busy they were, and how they had no time and no inclination to mess around with blogs (whatever they were). Out of two classes of 50-60 participants each, I got fewer than 15 total blog URLs.
Trying to turn lemons into lemonade in class, I asked some of the people who actually had sent a URL to describe the experience of starting a blog. They all shrugged and said it was no big deal, took about five minutes total, didn’t require any skills, etc. I then asked why I would give busy executives such a silly, trivial assignment. In both classes one smart student piped up to say "To show us exactly how trivial it was." At that point, class discussion became interesting.
March 20, 2006
Three Technologies, Three Opportunities: a Framework for IT Leadership
How can business leaders better guide their sizeable IT investments and decipher IT’s noisy signal? Where and how should they intervene in the work of getting IT up and running within their companies?
I advocate a two-part approach that first of all places work-changing technologies into three categories (based on their impact), then specifies three activities where the involvement of business leaders is either important or essential. Three tech categories times three activities makes IT leadership sound like a full-time job, but it’s not. In the 3x3 matrix of the framework I propose some cells entail a lot of work, others don’t.
Three Types of Work-Changing IT
When considering any new IT that will be visible to end users, a powerful question is "What is this technology intended to change?" Answers can be placed pretty cleanly into two groups: "It’s intended to facilitate the work of a single person (or task, job, function, or role)" and "It’s intended to facilitate interactions among multiple people (or tasks, jobs, etc.)." Both email and ERP facilitate interactions, though, so one further distinction is important: between IT that enables unstructured interactions (email) and IT that brings structured interactions like business processes (ERP). So asking "what changes?" yields three possible answers, and three IT categories:
Function IT (FIT), which facilitates standalone tasks. Spreadsheets and word processors are perhaps the most common FITs; they help analysts and writers, respectively, with their work. Function technologies also exist for specialists such as design engineers, statisticians, architects, photographers, and poker players. In fact, there are few types of knowledge worker today who don’t have FITs available to them. Function IT is not intended to connect interdependent people and tasks; instead, it’s often ‘software you can use when you’re not on the network.’
FIT case example: In 2001 Ducati Motorcycle’s racing subsidiary announced that it would start competing in the Moto GP racing circuit with the 2003 season. Bike designers began in November of 2001 by building many different ‘virtual engines’ using simulation software. These simulations quickly convinced the design team that a two-cylinder engine would not be powerful enough, and that the company needed to build the first four-cylinder engine in its history. The first physical engine was built in August of 2002, and two months later a motorcycle was racing around a track. In its inaugural Moto GP season Ducati was the second-winningest manufacturer, and its two riders finished fourth and sixth in the overall standings.
Network IT (NIT), which enables unstructured interactions. Network technologies let people and groups come together, share information, and collaborate without specifying the terms of the collaboration. My email client, for example, doesn’t tell me what information I can send, or who I can send it to. The WWW is similarly unconstrained in most countries.
Network technologies fall into two groups: channels and platforms. Channels like email, IM, and SMS allow one party to send information to another privately. Outside of the sender(s) and receiver(s), no one can see the information transmitted over channels, or even know that a transmission took place.1 Platforms, on the other hand, make information visible and permanent. bulletin boards, usenet groups, and blogs with comments are all examples of NIT platforms. ‘Web 2.0’ brought new platforms like Wikipedia, Flickr, del.icio.us, and MySpace. (A later post will be devoted to bringing Web 2.0 techs inside companies, and so creating what I call Enterprise 2.0)
NIT case example: By the end of 2005 the investment bank Dresdner Kleinwort Wasserstein (DrKW) had introduced three network technologies for internal use: group messaging software that logged all conversations, employee blogs, and a company-wide wiki, which is a simple website that anyone can contribute to or edit at any time without needing permissions or HTML skills.
IT staffers were the early users of these tools, but they soon started spreading throughout the bank. People used the messaging software to instantly ask a question of all the derivatives traders in New York, for example, or all the telecommunications analysts around the world. Individuals blogged, and posted comments to each other’s blogs. And some directors saw the wiki as a way to reduce email overload, and so encouraged their teams to post agendas, to dos, and work in progress to the shared online space instead of passing them around as email attachments.
Enterprise IT (EIT) , which imposes structured interactions. There have been lots of attempts to ‘carve up’ the EIT space into ERP, SCM, CRM, eProcurement, etc. but these applications really have the same goal, just with different organizational footprints.
Structure can be imposed at two different levels: data and process parameters. EDI and XML are EITs at the data-only level; ERP, SCM, and CRM impose structure on both data and business processes.
EIT case example: In 2002 the retail drugstore CVS became concerned about poor service and long wait times at the pickup counters of its pharmacies. The first step in its prescription fulfillment process, an automated safety check for drug interactions, occurred one hour before the desired pickup time. This was immediately followed by an automated insurance status review. Both of these steps generated many exceptions; drug safety exceptions were handled by pharmacists in consultation with prescribing physicians, while insurance exceptions were managed by technicians in consultation with customers, payors, and physicians. Many of these exceptions were not resolved by pickup time, leading to customer frustration and dissatisfaction.
CVS business leaders decided to change the order of the two steps, and to perform the insurance review during prescription dropoff while the customer was still present. This let technicians work with customers to correct simple exceptions such as date of birth errors and changes in employer, and to tell customers if more complicated problems would prevent reimbursement. The change also allowed pharmacists to conduct the safety check as part of their normal quality control work on each prescription, instead of as a separate step. The new fulfillment process was quickly rolled out across CVS’s more than 4,000 locations, and led to substantial improvements in customer satisfaction with wait times and pharmacy service.
There are also a few hybrid technologies: Knowledge Management systems impose structure on data, but not on how people use the data. Groupware, on the other hand, establishes processes for sharing information, but does not pre-define what kind of information can be shared.
Why is it helpful to divide work-changing technologies into FIT, NIT, and EIT? The shallow reason is that most corporate applications fall pretty neatly into one or another category. The deep reason is that differences among the three technology types help explain IT’s noisy signal -- the fact that outcomes appear to be all over the map in important areas like performance benefits, the organization of work within and across companies, IT project outcomes, and competitive position. A large part of the reason that IT’s signal is so noisy is that it’s really the combination of three different signals -- from FIT, NIT, and EIT.
Later posts will explore differences in these categories, the good and bad reasons to use IT to impose structure, and other topics related to FIT, NIT, and EIT.
3 Areas of Involvement
Another major reason for IT’s noisy signal is that some companies are simply better than others at using and leveraging technology. As discussed in an earlier post, these differences are due to organizational factors, not technical ones. This means that the primary responsibility for IT success rests with those in charge of shaping organizations, in other words business leaders.
So where and how can business leaders intervene with IT? They have three main opportunities, corresponding to three different points in the life of an IT project: selection, adoption, and exploitation.
Selection is the work of deciding what new work-changing IT, if any, to acquire. Selection is a critical subset of IT portfolio management, or stewardship of a company’s IT assets. As I’ll describe in a later post, decision makers in many companies think their selection process does not work well, that IT purchases are not well-aligned with business needs, and that a large fraction of IT spending is wasted. A major reason for this dissatisfaction, I believe, is that many companies have a predominantly ‘outside-in’ approach to IT selection. They start outside the company by scanning the landscape of available technologies, then decide which of them to bring in. I advocate the opposite -- an ‘inside-out’ approach in which companies start inside by understanding what they need IT to do, then look out at the IT landscape.
During selection, the link between the inside and the outside is the idea that different technologies deliver different capabilities. Companies start inside by analyzing what new or enhanced capabilities they need and where they need them, then look outside for the IT that will provide them. The categorization of work-changing IT into FIT, EIT, and NIT becomes relevant and powerful here because the three technology types provide dissimilar capabilities, without a lot of overlap. FIT brings greater experimentation capacity, precision, and labor substitution, EIT provides the ability to design, standardize, and monitor processes and organizations, and NIT delivers forums for collaboration, the expression of judgment, and archiving of both the practice and outputs of knowledge work. I’ll elaborate on each of these in later posts.
What’s more, all the different ‘flavors’ of FIT, NIT, and EIT are basically just variations on the theme of providing these capabilities. There are huge differences, of course, between a 3-dimensional CAD system and poker software (both FITs), between email and a wiki (both NITs), and between ERP and an expense reporting system (both EITs). But from a business leader’s point of view, each of these pairs is more similar than dissimilar because both technologies in the pair provide the same set of capabilities. Within each category, technologies differ primarily in their ‘footprint’ -- the portion of the company that they cover -- and in their ease of adoption and exploitation. Beyond that, from a business leader’s point of view, they’re all birds of a feather.
Adoption is the process of getting a new piece of technology into the hands of its users so they can start to work with it. Some elements of IT adoption, like testing, are highly technical, and have no real role for business leaders. Leaders, in fact, often have little to do in the adoption phase of FIT and NIT efforts (although there are some important exceptions to this, as I’ll discuss in a later post). EIT adoptions, however, are a different story. They typically require the deep and sustained involvement of business leaders precisely because they are efforts to impose new ways of working on interdependent people and groups. This makes EIT adoption a particularly difficult type of organizational change effort, and one that requires a great deal of management and leadership. As I’ll discuss in a later post, a big part of the reason for IT’s noisy signal is the challenge of adopting EIT.
Exploitation is the art of getting the maximum benefit possible from the FIT, NIT, and EIT that a company has adopted. I use the word ‘art’ because exploitation is the least well-understood of a business leader’s three IT-related roles. I’ve seen some brilliant examples of IT exploitation, and a later post will describe them and use them to develop principles, but much work remains before we have the complete playbook on how to leverage technology.
Together, selection, adoption, and exploitation define a set of ‘contact points’ between business leaders and function, network, and enterprise IT. A company’s IT success is largely determined by what happens at these contact points.
Some of the text of this post is taken from an upcoming Harvard Business Review article.
1Companies can monitor the email and IM traffic of their employees, but few if any make this traffic widely visible.
March 11, 2006
Returns to IT Investments: Noisy Signals
The previous post described the large and steady increases in the IT intensity of the US economy over the past twenty years. So what have companies received from all the money they’ve spent on computers, software, and networks?
For a long time it appeared that in the most obvious area -- productivity growth -- companies were getting nothing from all their IT. As the Nobel Prize-winning economist Robert Solow observed in 1987, "We see evidence of the computer age everywhere except in the productivity statistics."
IT vendors and CIOs everywhere started to breathe a bit easier in the mid 1990s when a steady stream of rigorous research found clear, strong, and positive links between companies’ IT investments and their subsequent productivity growth rates. Erik Brynjolfsson and Lorin Hitt’s 1996 paper "Paradox Lost? Firm-level Evidence on the Returns to Information Systems Spending"1 was one of the first in this stream. In it, the authors explained why earlier research had not found a strong IT-productivity relationship:
"... we attribute the different results to fact that our data set that is more current and larger than others explored. We conclude that the productivity paradox disappeared by 1991, at least for our sample of firms."
Later work found strong and positive links between IT and other critical outcomes like market capitalization . In recent years the weight of evidence for IT’s positive aggregate impact has become so strong that some formerly skeptical scholars like Northwestern’s Robert Gordon have changed their views.
This research, however, also revealed a troubling aspect of the returns to IT investments: on average they were positive, but in aggregate they were all over the map. The graph below, reproduced from Brynjolfsson and Hitt’s 2000 paper "Beyond Computation: Information Technology, Organizational Transformation and Business Practices"2 shows the relationship between IT stock and productivity for a large sample of US companies; each company is a separate data point.
Of course, there’s no such thing as a guaranteed return to any investment except T-bills so we should expect to see these data points to be somewhat spread out, but this much (keep in mind that the axes on the graph above are logarithmic, not linear, so they make the spread appear much smaller than it actually is.)? My old engineering professors at MIT would have said that the IT investments shown the figure above are definitely generating a signal (the positive average return) but that there’s also a lot of noise (the large spread of the data points).
The same pattern holds when researchers have looked at performance outcomes other than productivity growth: the average return is positive, but the variation is so great that the positive average shouldn’t provide much confidence to business leaders. Furthermore, IT generates noisy signals not only when we look at company performance, but also when we examine a few other important areas:
The organization of work within companies. In a large company-level study, Brynjolfsson, Hitt, and Stanford’s Tim Bresnahan found that IT investment levels were positively associated with workplace attributes like team-based work organization and individual autonomy.3 Their findings seem to support Tom Malone‘s predictions in The Future of Work -- that decisions will be pushed downward and centralization will decrease. However, as Daniel Robey and Marie-Claude Boudreau wrote in a review of research on the organizational impact of IT:
"... over many years researchers have discovered information technologies to be associated with seemingly polarized pairs of social outcomes: empowered employees… and oppressed employees... extended hierarchy… and reduced hierarchy… organizational rigidity… and organizational flexibility… increases in staff and radical downsizing."4
The organization of work across companies. In 1987, Malone and his colleagues Joanne Yates and Robert Benjamin made a very clear prediction about the broad impact of IT: "information technology will lead to an overall shift toward proportionally more use of markets -- rather than hierarchies -- to coordinate economic activity"5 Their argument was that since markets generally have higher coordination costs that hierarchies, and since IT lowers coordination costs, than all other things being equal more IT should lead to more use of markets.
This ‘Electronic Markets Hypothesis’ (EMH) has been widely accepted, and it looks like there’s ample evidence to support it. A lot of activities and processes that used to be done internally are now being outsourced, both domestically and internationally, with the result that companies are being ‘hollowed out’ to some extent. Malone, Brynjolffson, and their colleagues found a link between IT and reduced company size in a 1994 study , and Wharton’s Ravi Aron has clearly documented the key roles that IT plays in facilitating outsourcing and offshoring. As he shows in a recent HBR article, not only does technology reduce communication costs so much that it’s essentially free to send knowledge work all around the globe, but IT also ensures that work can be codified, measured, and monitored. These capabilities are essential; they give outsourcers confidence that their work can be performed halfway around the world without sacrificing control and oversight.
But are outsourcing arrangements really examples of electronic markets? To many, they look like hierarchies split across two firms rather than stereotypical markets—forums in which many parties come and go at will and use the price mechanism to continually match supply and demand. By this definition, eBay is clearly an electronic market, and a spectacularly successful and important one.
But in the B2B world, how many eBays are there besides, well, eBay? The dot-com era saw the birth of hundreds, if not thousands, of B2B exchanges and industrial emarketplaces. Investors greeted them with enthusiasm (publicly traded emarketplaces had a combined market capitalization of $100 billion at one point), as did many analysts, journalists, and academics. The only ones who didn’t jump on the emarketplace bandwagon, it turned out, were the industrial buyers and sellers who were supposed to use them and provide their revenue. Companies stayed away from B2B exchanges in droves, and the overwhelming majority of them have closed down (remember Chemdex, which became Ventro?) or changed into vendors of procurement software (like Covisint and Sciquest). Only a few scrappy survivors, like Alibris in the book industry and Shipserv in shipping, survive as industry-specific neutral emarketplaces.
A later post will dive into the reasons underlying the emarketplace meltdown and revisit the EMH. For now, suffice it to say that lots of work is still being carried out within hierarchies instead of across markets, and I believe this is the case not in spite of IT, but in part because of IT. I have, in other words, an ‘Electronic Hierarchies Hypothesis.’
IT adoption efforts. It’s relatively easy to get some types of IT up and running. Projects to adopt email, Office, CAD systems, instant messaging, and calendaring have their headaches, but they rarely fail utterly, cause organizational chaos and infighting, or bring down entire companies. Efforts to adopt technologies like ERP, SCM, and CRM, however, generate very noisy signals. Sometimes they go smoothly and deliver powerful new capabilities (as was the case at Otis Elevator, Cisco, and CVS), and sometimes they drive companies out of business (like Foxmeyer Drug) or handicap them severely (as at Nike and Hershey’s). Studies have found failure rates of 30-75% in efforts to adopt enterprise systems, depending on the technology investigated and the definition of failure.
ERP is clearly more technically challenging than email, but virtually everyone who’s studied the noisy signal of IT adoption efforts (myself included) has concluded that technical factors don’t explain much of the difference between successes and failures. As a study by Joe McDonagh concluded, "economic and technical considerations are unlikely to feature prominently when IT fails to deliver."6 In a later post, I’ll provide a non-technical explanation for why some IT projects are so much nastier and failure-prone than others.
Competitive Advantage: Finally, IT’s signal appears to be noisiest in exactly the area where business leaders most want a clear answer: competitive impact. IT academics, myself included, have written many case studies about specific technologies or applications that appeared to give their adopters a real leg up on the competition. In some cases, however, a return to the scene of the case years later revealed that the former differentiator had turned into just another legacy system. One study, conducted by William Kettinger, Varun Grover, and Albert Segars, found that of 30 companies adopting systems widely identified as ‘strategic,’ only 7 had higher market share and profits in two later time periods.7
In other cases the technology was clearly competitively valuable -- so valuable, in fact, that all competitors also acquired it as quickly as possible. Wharton’s Eric Clemons labels IT like this a ‘strategic necessity’ and points to bank ATMs as a prime example.8
Nick Carr looked easy availability of IT and its steadily falling prices, and concluded that "IT Doesn’t Matter" for competition -- that it’s clearly a strategic necessity to have some technology, but rarely if ever a good idea to pursue competitive advantage via IT. The smart strategy, he argued, was to get in place a cheap, stable, and secure infrastructure for IT (just as for electricity, dial tone service, and other utilities) and then stop thinking about it. In his words, "IT management should, frankly, become boring."
At a time when large US corporations are spending close to 5% of revenue each year on IT, it’s vital to get some clarity on the noisy signal of information technology. My work, and this blog, are aimed at doing just that. The next post will start to lay out a framework business leaders can use to think through the impact of IT on their companies, to help understand why IT signals are so noisy, and to identify where and how they can intervene to obtain maximum benefit and advantage.
1Brynjolfsson, E. and L. Hitt (1996). "Paradox Lost? Firm-level Evidence on the Returns to Information Systems Spending." Management Science 42(4): 541-558.
2Brynjolfsson, E. and L. Hitt (2000). "Beyond Computation: Information Technology, Organizational Transformation and Business Practices." Journal of Economic Perspectives 14(4): 23-48.
3Bresnahan, T. F., E. Brynjolfsson, et al. (2002). "Information technology, workplace organization, and the demand for skilled labor: firm-level evidence." The Quarterly Journal of Economics CXVII(1): 339-376.
4Robey, D. and M.-C. Boudreau (1999). "Accounting for the Contradictory Organizational Consequences of Information Technology: Theoretical Directions and Methodological Implications." Information Systems Research 10(2): 167-185.
5Malone, T. W., J. Yates, et al. (1987). "Electronic Markets and Electronic Hierarchies." Communications of the ACM 30(6): 484-497.
6McDonagh, J. (2001). "Not for the faint hearted: social and organizational challenges in IT-enabled change." Organization Development Journal 19(1): 11.
7Kettinger, W. J., V. Grover, et al. (1994). "Strategic information systems revisited: A study in sustainability and performance." MIS Quarterly 18(1): 31-58.
8Clemons, E. K. and M. C. Row (1991). "Sustaining IT Advantage: The Role of Structural Differences." MIS Quarterly 15(3): 275-292.
March 08, 2006
IT Investments: The Big Ramp Up
It’s patently obvious that US businesses use a lot more IT now than they did ten or twenty years ago, but has the increase been sharp or steady? Spiky or smooth? And while it’s true that there’s more IT inside companies now, it’s also true that there’s more of everything else, too -- more people, more buildings, more capital equipment. Businesses in a country with a growing labor force and a growing economy would be expected to have more of all of these inputs over time. So it’s important to analyze the growth of IT over time in the context of the growth of everything else.
The US Bureau of Economic Analysis divides the US economy into 63 industries and publishes data on fixed assets by year for each of them. This ‘Tangible Wealth Survey,’ which is currently available for 1987-2004, tracks assets in three broad categories -- IT, physical plant (like factories and office buildings), and equipment. The BEA also tracks employment by industry.
These data have a few nice properties. They’re defined and captured consistently over time by the same entity, and they’re independent of whether companies expense or capitalize their assets. They’re also available in both current and historical dollars.
So what do they reveal about the rise of IT over time? The figure below shows the amount of corporate IT per full-time employee (FTE) across the entire US economy from 1987 to 2004 (this graph uses historical IT costs, which are lower than current ones). By this measure, IT intensity in American business more than tripled within twenty years, from $800 per employee to over $2600 (click on the graph to see a bigger version).
The graph also shows that from 1987-1995 US businesses added IT at the constant rate of about $84 per worker each year. The line remains pretty straight from 1995-2000, but its slope increases; businesses gained about $230 of IT per worker annually during this period. US companies definitely stepped on the gas pedal of IT during the latter part of the decade, but they didn’t slam it to the metal. The increase in IT intensity is steady, rather than bursty.
The ‘tech wreck’ of 2000 and recession of 2001 interrupted this steady increase for only two years. By 2004, IT per FTE was the highest it had ever been.
The figure below is another view of smoothly increasing IT intensity throughout the economy. It plots IT’s percentage of total spending on tangible wealth each year, together with the equivalent percentages for equipment and plant (the three values for each year sum to 100). IT’s share of the total increased over 10% during this period. This growth is remarkably linear, and the post-2000 dip vanishes (this is because investment in all types of fixed asset slowed down for a couple years.).
Taken together, these graphs show clearly that IT has become a much more important component of the US economic engine over the past twenty years. This blog examines that component, explores how it works, and discusses how to get the most out of it.
March 06, 2006
Introduction: Content and Goals of This Blog
This blog discusses the impact of information technology (IT) on businesses and their leaders. As I’ll show in the next post, there has been an enormous increase in the amount of IT used by companies over the past twenty years. Investment in IT has been particularly heavy since the mid 1990s, when both the Web and commercial enterprise software appeared, then spread like wildfire.
The ‘computerization’ of our economy and our business world has caught virtually everyone by surprise; I don’t think anyone really anticipated the levels of innovation and investment we’ve seen over the past twelve years. Since 1994 I’ve had the amazing opportunity to study what happens as companies work to select, adopt, and exploit the technologies available to them.
The leaders of these companies have been operating on much tighter deadlines than academics. They’ve had to act—to make large investments, then organize and execute adoption efforts that can be astonishingly complex. And since the landscape of available technologies keeps changing, they’ve had to do this work again and again.
Most executives and managers don’t have technology-heavy educations or backgrounds, so getting involved with IT means entering unfamiliar terrain. It often feels like hostile terrain. Technologists can appear to speak entirely in jargon and acronyms, and much of the advice and writing about IT seems to be some variant of "This new technology is so powerful and popular that if you don’t obtain it quickly, you’ll be left behind by the competition."
In these circumstances, two approaches to IT are seductive to many business leaders. The first is to delegate responsibility for technology decisions and results to the CIO, the IT department, consultants, a task force, a project manager, and/or technology analysts. The second is to adopt the contrarian position that ‘IT Doesn’t Matter;’ that as Nick Carr neatly summarized in a 2003 Harvard Business Review article, IT is "a cost of doing business that must be paid by all, but provides distinction to none."
Carr’s argument struck a deep chord with many of the executives I’ve worked with and taught over the past couple years. They feel that they were sold a bill of IT goods by many of the advisors they relied on to help them make sense of confusing phenomena like the advent of the Web, and that a lot of the advice they got was just plain wrong (remember B2B exchanges?). And while examples of large-scale IT failures keep coming (From Foxmeyer Drug to Hershey to Nike to Overstock.com), it seems that we IT advocates keep relying on the same small set of (old) case studies—SABRE, Wal-Mart, Dell -- to bolster our arguments. Given all this, it’s both tempting and plausible to conclude that IT does, in fact, not matter and so should not be on the radar screens or to-do lists of business leaders. As Bob Metcalfe put it, "Carr’s argument just won’t stay debunked."
In a later post, I’ll share some data, findings, and conclusions from work I’ve been doing with MIT’s Erik Brynjolfsson that will hopefully drive a stake through this argument. But the goals of this blog go well beyond just taking on Nick Carr (who’s very insightful and perceptive, and who I agree with on many points).
This blog has two overlapping aims: to explain to non-technologist business leaders how, where, and why IT is having an large impact, and to articulate their roles in maximizing this impact. In other words, I’ll describe both what IT does for managers, and what managers do for IT.
After more than a decade’s research, one of my two strongest conclusions is that the most important constituency for IT success is the population of managers and executives outside the IT function (I’ll usually refer to this population as a company’s business leaders). For business leaders, delegating responsibility for some IT decisions is, to put it simply, a very bad idea. This blog will concentrate on those decisions.
This viewpoint in no way implies that the IT department or the CIO are unimportant. Their competence, professionalism, and ability to work with business leaders are critical, but as one smart CIO put it when I was talking with her about her company’s ERP effort "I can make this project fail, but I can’t make it succeed." Concentrating on business leaders also doesn’t mean ignoring users. It does mean not placing users at the center of the picture, and assuming that their ‘satisfaction’ is the quantity to be maximized, or that no technology will succeed inside a company without completely satisfied users.
The ‘parameters’ of this blog are:
Technologies that are intended to change how work is done. Business leaders typically have no significant role to play in IT efforts are invisible to end users, such as network upgrades, rationalization of redundant data centers, etc. These efforts are the domain of technologists, and should be left to them.
Technology-consuming industries, not technology-producing ones. Google, Microsoft, Skype, and SAP are fascinating companies and the competitive dynamics of their industries contain many lessons, but they’re not the focus of my work. I’m interested in how IT gets from the marketplace into companies, not how IT gets out of companies and into the marketplace. Of course, all industries are technology consumers, and I’ve studied how high-tech firms like Cisco manage their own IT. And this blog will be valuable to technology producers to the extent that it helps them understand their customers better.
Commercially available applications, rather than ‘roll your own’ systems. Most companies have gotten out of the business of writing their own applications. Instead, they buy commercial applications, then configure, integrate, and deploy them.
Companies all over the world, rather than just in the US. America has the most IT-intensive economy, and the longest period of exposure to most technologies. This does not mean that we’ve seen it all, or had all the good ideas. Some of my most eye-opening field research has taken place at companies such as Japan’s MK Tokyo taxi company, Spain’s Inditex/Zara, and Argentina’s Los Grobo. All of them are brilliant users of IT, and each of them has helped me understand that there probably is a ‘US paradigm’ for how to use IT, and that this paradigm, like any, has its flaws and blindspots. Later posts will explore each of these case studies.
My research’s other overarching conclusion is that IT matters—that it’s having a profound impact not only on productivity but also on many other things that business leaders care deeply about, including capability development, how work is organized and accomplished both within and across companies, and competitive position and advantage. Furthermore, these impacts are not largely ‘played out;’ the period of disruption and turbulence brought on by the Web, Enterprise IT, and other technology developments is not coming to a close. It’s still going on, and will continue into the foreseeable future.
This blog is devoted to describing IT’s impact and business leaders’ roles in maximizing it. I’ll explore these topics using my own research and that of other academics, as well as data, conclusions, and opinions from many other sources. I’ll concentrate on areas where I believe my work sheds new light on existing practices (such as the method used by companies to select new technologies) and theories (such as the ‘electronic markets hypothesis’—the idea that greater diffusion of IT will lead to greater use of markets, rather than hierarchies, for coordinating work). I’ll also discuss why some new technology developments are particularly important, and should be understood and considered by business leaders.
If you’re a sophisticated technologist and a believer in the power of IT, I hope you’ll find this blog useful. If you’re an IT neophyte or skeptic, I’m even more hopeful that you’ll visit this blog and participate in its community. I’m always eager to hear from people who have opinions, expertise, war stories, etc. I’d prefer that you share them widely by posting them as comments here, but please also feel free to email me.
