Is IT capable of providing a sustainable competitive advantage, as it has for American Airlines, Dell Computer, FedEx, and Wal-Mart, or is it a necessary—but not distinguishing—function that should be managed to operate smoothly at minimal cost (like word-processing, or accounts payable)?
This is actually an enormously controversial question. Famously, Nicholas Carr published "Does IT Matter?" three years ago, arguing that IT had become a commodity like electricity: Necessary to get work done, but providing a competitive advantage for no one. If you adopt Carr’s view, other recommendations follow:
- IT becomes more of a threat than an opportunity, in the sense that "bad" IT or unavailable IT (your email servers crash, your backup site is compromised) is more serious than incremental improvements to IT (WiFi in more conference rooms);
- You should be a "fast follower" rather than a leader in innovation—pioneers get arrows in their backs, and copycats reap the same benefits at a fraction of the cost; and
- Enhancements to IT are essentially steps up the arms’-race ladder: Nobody comes out ahead, everybody spends more and has more throw-weight, only to stay even with the competition..
I would propose a more nuanced view. IT is neither sinkhole nor savior, but, as we learn in law school, the answer to the question "Does IT Matter?" depends on why you’re asking.
McKinsey chimes in, (also here), and the key insight I want to share is that "IT" is not an undifferentiated mass, a homogenous blob of spending.
Consider it, instead, a portfolio of investments.
This is what we know about portfolios:
- Their composition derives entirely from your firm’s investment objectives: Are you trying to merely defend your niche, invest in rapid growth and aggressively gain market share, or enter new markets entirely?
- Depending on your answer to that question, your portfolio of IT investments will typically build on a base of relatively conservative, risk-averse incremental improvement, or
- You’ll place a few bets on buying, or developing, more cutting-edge ways of doing what you’re already doing, or
- You’ll experiment with things you don’t do at all, today.
The other thing we know about portfolios is that over time, they change; and your IT spending profile should change as your firm’s strategy evolves. Ideally, you’ll go from new initiative to consolidation, to capitalizing upon sudden market opportunity, to deepening bench strength, to… You get the idea.
Evalute your IT investment portfolio in terms of its proportionate contribution to what McKinsey calls:
- Staying in the race
- Winning the race
- Changing the game
Think of staying in the race as Treasury bills: Preservation of capital, and market share. Winning the race are your growth and small-cap stocks: Bets on some uncertainties, but most of which, history instructs, will pan out overall.
And changing the game? Venture capital.
Venture capital investments, as we all know, strike out far far more often than they hit it out of the park. But the overall return to a diversified portfolio of VC investments can be supra-normal. The key is discipline, and when you ask your IT department to incubate some blue-sky projects as if they were VC-backed, you need to be prepared to abandon certainty, abandon perfection, and abandon predictability.
One of two things will happen:
- They and you will try, fail, refine, prove the concept, refine, deliver an emphatic result, and deploy; or
- They and you will try, fail, refine, fail again, rethink, fail again, and move on.
I don’t believe there’s a third possibility.
Are you ready to think of your IT investment as a portfolio and not an undifferentiated line item?
Indeed, “IT” is not monolithic and for many reasons cannot be meaningfully “rolled up” into a single dimension of operational resource. We get the intellectual comfort of trying to do that from thinking about corporations as if they were buildings instead of systems, where we need to go out and buy X amount of concrete or X amount of nails. But because corporations are systems, their “composition” is more properly understood as the set of enabling terms of their behaviors. So as a business driver, technology is an environmental factor, more akin to regulations or geographies, where the challenge is this: to manage their potential impacts to levels of effectiveness and value by incorporating their inherent risks and opportunities into the company’s operational behaviors.
Using a portfolio approach explicitly presents the logic of that incorporation. But here’s a heads up. Who should control the portfolio?
Don’t be fooled by the apparently simple formula of having a CIO report to the CFO. Managing a portfolio is both a strategic discipline and a disciplined strategy. The goal is to achieve certain kinds of outcomes, but the supporting process is to manage constraints. Just as you hold your CFO accountable for interpreting the financial environments both external and internal to the company, you’ll need to hold a CTO responsible for interpreting the technology environments inside and out.