Don't shell out on features you don't need, when you can make better use of standard products, says Mike Salt.
The very different objectives of users and suppliers have been underlined in an intense debate started by Nicholas Carr in his article “Is IT now a commodity?” in the Harvard Business Review.
Until recently, the belief that IT investment brings competitive edge has been a persuasive inducement to invest. But today’s business needs to know how to measure the effectiveness of IT. If IT is now a commodity investment, decisions must be simpler and this will simplify any measurement of effectiveness.
However, it is important to realise that IT is not a single product like a car or a tin of fruit. IT covers much more than the data processing of old, so it is necessary to define what we mean by IT as well as defining what is a commodity.
A commodity can be defined by saying, “Users have a choice of products which all provide a wide range of similar required functionality within a similar price range,” and IT is restricted to mainstream commercial data processing. IT, therefore, can be summarised as comprising data storage, data transport/communi-cations and data processing. The first two are now considered commodity items in the sense of the above definition.
IT is a mature market and, as with all such markets, products tend to become commodities. The question is therefore, “To what extent is the data processing market made up of commodity products?”
When return on investment from new IT was high, it was easy to determine whether a particular project was worthwhile. Now the equation is complex and we must first consider the purchase decision process.
Today, with the average return on investment being lower, the decision process is finer: the existing system may be working well and need minimal maintenance; while the benefits of a new system may be demonstrable they are likely to be small in percentage terms; the cost of a new system is often high.
The decision reduces therefore to, do you want to make a large investment with a relatively low return and associated risk or keep the existing system and use the cash elsewhere?
New data processing applications may not have more functionality but if they do, that functionality may not be of value to the user.
About 90% of the functionality provided with standard packages is not used by most users. So although it is possible, in theory, to differentiate between such products, in practice it does not bring any added value to the user. This again supports the view that these products are commodities.
There are, however, data processing applications that are not commodities, since applications exist which are particular to smaller markets.
The drive to lower costs means that wherever possible commodity products should be purchased – but with three qualifications.
The first is that when you need to replace these products, a commodity market will still exist; the second is that quality and reliability will not be impaired; and lastly, in the case of data processing, the use of commodity products does not significantly lower the potential benefits compared to tailored or bespoke products.
Competitive edge now lies more with how you use a product than with the product itself. Has the raft of indictments about Carr’s article just been stimulated by his recommendation to spend less?
What do you think?
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Mike Salt is chief executive of Technology Performance
This was first published in October 2003