Making a case for IT

“Making the Case for IT”

• “We continue pumping $2 trillion
annually into information technology to
pursue competitive advantage and spur
productivity.
• But extracting strategic value and
productivity from IT has become
increasingly challenging.”
Key Premises of Nicholas Carr’s Argument
 “IT Doesn’t Matter”
• IT apps (applications) used to be developed
in-house
– $M & years of effort
– Scarce resource
– Proprietary advantage
– Today IT apps are commodity

• Infrastructure more valuable when shared

– Early adopters can have competitive advantage
– But rest of competitors catch up
 Key Premises of Nicholas Carr’s
Argument

• Widespread adoption of Internet-based

technology standards has provided the

perfect channel for quickly disseminating IT

applications throughout an industry.

 “IT Doesn’t Matter” (cont’d)

• Open standards (Internet, HTML)

perfect channel for distribution of apps

– New apps quickly become commodities

– Low cost of adoption and switching
– Window of opportunity very small for
proprietary advantages
 “IT Doesn’t Matter” by Carr

• Carr concludes that executives should:

• (1.) spend as little as possible on IT.
• (2.) concentrate IT investments on driving cost
savings.
• (3.) follow rather than lead when adopting new
IT, allowing others to bear the risk and cost of
testing new technologies.
• (4.) concentrate on managing risk, rather than
searching for IT opportunities.
 Views
• John Seely Brown, Xerox:
– Overestimate strategic value
– Overspent on IT
– Need to control expenses : Capex + Opex
– Risk management , reliability, security
• Brown and Hagel
– IT catalyst for differentiation
– Gap between IT potential and business
realization
• Gurbaxani
– “scare resource” : managerial capability not IT
• Strassman
– Low TCO helps adaptation
 “IT Doesn’t Matter” by Carr

• Carr’s arguments seem to be based on the

traditional mainframe-based + client-server
approach to building IT infrastructure.

• Executives that fail to recognize the new

economics of emerging “On Demand IT
infrastructures” can quickly find themselves at
serious disadvantage.
 “IT Doesn’t Matter”

• Agreement among many that IT focus often

wrong
– Unthinking assumption that in-house, proprietary
developments necessarily best

• But strong reaction arguing for value of IT

as force for innovation
– Analysis suggested Carr was focusing on
mainframe-style development

– SDLC vs iterative, spiral development

– IT could support virtuous circle of innovation,

productivity & increasing ROI
Building the Business Case
for IT
 IT Value Framework
– Identifies 3
categories of (3)

benefits that can

be used to define
the business case
(2)
for IT:
• (1.) value-enabling
• (2.) value-creating
• (3.) value-sustaining. (1)
 Building the Business Case for IT

• IT Investment Category that

drives business value:
– Achieve Proprietary Advantage
– Drive Profitable Growth
– Leverage Infrastructure
– Create Options
Leveraging Infrastructure and
Creating Options
Leveraging Infrastructure & Creating Options

• 2 Key Components
– IT operations
• Data center
• Network
• Call centers…
– Supporting enterprise processes
• Procurement
• ERP
• Finance
• HR…
 Leveraging Infrastructure
• Most enterprises still need development to reach best-
of-class status in IT operations
– Historically no organized plan
– Grew by accretion

• Strong move to offshoring IT

– Different from outsourcing
– Companies own offshore resources
– Data centers in countries with high expertise but low
salaries
• India, Brazil, China?

– Security issues
 Analyzing the Options Value of Investments in IT
Infrastructure
In financial terms, a IT option provides
securities option gives the executives the right to
owner the right (as distinct pursue value-added IT-
from the obligation) to buy enabled business
a security at a fixed, opportunities at a lower
predetermined price (the cost, more quickly and
exercise price) on or with less inherent risk
before some fixed date throughout the useful
(the maturity date). life of the technology.
Analyzing the Options Value of Investments in IT
Infrastructure
Important features of Features of an IT option
securities options that that determine value
determine value include include

(1)the nature of future (1)the cumulative value from

benefits (risky projects business opportunities
often generate the highest that could potentially be
returns); and pursued

(2) the length of time you (2) The ability to pursue

have to exercise the option riskier opportunities
(the longer the time frame where there is a higher
the greater the value of potential return
the option).
(3) the length of time for
 Scenario: MedCo
• Internet-enabled remote-
monitoring service

– Patients’ devices would send

data to center
– Health-care workers would have
access
– Objective: Improve clinical
outcomes at lower cost
 Scenario: MedCo

• Need to invest $300M over next 5

years
– Devices
– IT infrastructure
– Remote-monitoring apps
– Launch into market
 Scenarios for MedCo Patient Monitoring Investments

represents an investment that

executives of a medical device
company are considering as they
evaluate a business plan launch
a new Internet-enabled remote
monitoring business

• investing $300 million over a 5 year period to develop the monitoring device.
 Leveraging Infrastructure and Creating Options
• MedCo A executives plan:
• 24 months:
– $150 million invst
• 18 months:
– proprietary remote
monitoring business
applications and
– user interface will be built
for an additional $25
million.
• Final 18 months:
– $125 million will be spent
doing custom installation.
– high cost of custom
integration at each physician
office and customer site
limits adoption resulting in
cash flow of only $600 million
by year 13
cash flow curves of two investments:
 MedCo Scenario B
• Leverage existing IT
infrastructure
• Launch in 2 years instead
of 5 years
• Cost $25M instead of
$300M
• Cheaper development of
apps by using ‘Net-
compliant open standards’
• Faster rollout
Comparing MedCo A and MedCo B Patient
Monitoring Investments
 Leveraging Infrastructure and Creating Options

• supposing the same

– network,
– database,
– call center, and
– remote monitoring infrastructure
• could also be leveraged to pursue other
value-creating business opportunities.
MedCo B Leverages Infrastructure and Exercise Options
1. Data sold to health
Benefit care providers
2. Enhance pacemaker
building
3. Web based
application for
children of patients
(payment basis)
the cumulative value
4. Tele monitoring of
created by business other diseases
applications built on the
infrastructure.
Result:
Cost  Hi productivity of IT assets
 Top lines grow
the cumulative investment in IT
applications and infrastructure
The Value of Leveraging Infrastructure and Exercise Options

Result:
 New appls can be built faster
 Hi productivity
 Top lines grow
Leverage Infra
Projects & initiative
•Leverage shared services, centers
of excellence, offshoring, and
outsourcing to ensure delivery of a
best-in-class lean, yet flexible,
infrastructure (ex: data centers;
networks; PC and devices; and
supporting processes such as ERP,
HR, Finance, etc.).
•Create IT development, deployment
and operating processes that
decrease the cost, time, and effort
needed to launch value-creating and
value-sustaining IT applications.
Metrics
•Decrease total cost of
ownership of current
infrastructure and
operations.
•Improve asset
productivity ($ of sales
generated by each $ of
infrastructure assets).
•Decrease IT
infrastructure and
operations costs as a
percent of revenues.
Driving profitable growth
 Driving Profitable Growth

1. Can enhance revenue-

generation
2. Can launch new IT-enabled
services or products
– Leverage value of collected
information
– Not only use profitably inside
firm
– Can sell information for profit
• Aggregated, anonymized data
Projects & initiative Metrics
•Improve new product development •Increase IT
process to increase speed to market contribution to net
and effectiveness of new product income.
launches.
•Increase IT
•Improve customer facing processes contribution to
to increase customer satisfaction, revenues while holding
loyalty, lifetime value, and demand. constant or decreasing
•Develop information and support for expenses.
business analytics.
•Shift expenses ratio
•Improve customer segmentation and from fixed to variable.
personalization.
• •
Proprietary Advantage
 Achieving proprietary advantage

• Entry into new markets

• Exit from shrinking markets
• Loyal investors to be attracted
 Achieve Proprietary Advantage
Projects & initiative Metrics
•Differentiate products (e.g., info •Increased market
value-added; price). share.

•Enter new markets or increase •Increased brand value

market spend from existing and awareness.
customers.
•Increased market
•Launch new IT-enabled businesses. capitalization.

•Increase barriers to entry or

switching costs.
Create Options
 Create options

Projects & initiative Metrics

Identify opportunities to decrease Metrics depend on the
the time and cost of pursuing type of
future option.
• value-enabling,
• value-creating, and
• value- sustaining opportunities.
 IBM

1990: 2nd most profitable company globally

1991-1993: loss $ 16 billion
1985-1993: John Akers, CEO
1993: Lou Gerstner, CEO ( not a techy)
1995: OK again
2003: Leader in IT again (IBM global services and Servers)
2003 : # 2 in software
2003 : Revenue : $89 billion, Profits: $7.6 billon
 Leveraging Infrastructure at IBM: IT Operations
data centers from 155 to 11, which
feed into three “megacenters.”
 
• Developed a single global Internet
network to replace 31 incompatible
networks, reducing network operating
costs by over 50% while
dramatically increasing network
accessibility, functionality, and reach.
Shifted to “open source,” common
standards for information processing
(Linux) and from proprietary to
industry standard enterprise
applications (SAP, PeopleSoft, Siebel).
50% reduction in TCOp for data
center and network
operations and internal enterprise
application development and
maintenance.
Direct cost savings in internal IT
expenses of over $2 billion per year
beginning in 1997.
 
IBM spent $100 million between
1994 and 1996 to reengineer its IT
infrastructure processes; ROI on the
investment
Cost cutinininfrastructure wasyear
IT : $ 2 Billon/ less
than 1 year.
 Leveraging Infrastructure at IBM: IT Operations

Redesigned system development  

processes to enable modular design
and reuse.
 
global applications from  
16,000 to 5,200.
 
60% reduction in IT professional  
headcount;
128 CIOs to 1.
 
Leveraging Infrastructure at IBM: Enterprise Support Processes
Streamlined, integrated, and centralized
IT-enabled enterprise processes (e.g.,
procurement, enterprise resource planning,
HR, payroll, finance).
Outsourced activities and processes where
IBM was not best-in-class
(e.g., HR, physical warehouse, inventory
management, selected logistics).
Financial centers from 67 to 8
Financial applications from 145 to 55.
Accounting cycle time from 187 to 7 days.
eEnabled ; number of suppliers to33,000;
electronic purchases reached 95%.
$7 B in direct savings/ year
$2 B in cost avoidance/ year
from SCM
Cash generation increased by $8 B
from SCM cost savings.
 
HR, Payroll, Finance cess costs
reduced over 50%, representing
almost $1 billion in direct cost
savings per year.
Purchasing expense/Revenue ratio
from 3.2% to 1.5%.
 
Leveraging Infrastructure at IBM: Enterprise Support Processes

Centralized and integrated the SCM and outsourced to

IBM Global Services; 19,000 employees managed
procurement, inventory, and logistics for over $47
billion in parts, equipment, and services
Buying from 35% to 0.2%.
Supplier quality from 85% to 99%.
Purchase order processing from 30 days to1 day.
Ability to “sense and respond” to customer demand
enabled IBM to quickly meet unexpected rise or
fall in demand for products.
Supplier, employee, and partner satisfaction
scores doubled

Winner MIT Process Improvement Award and

Purchasing Magazine Medal of Excellence.
 Driving Profitable Growth at IBM :rev generate
Benchmarked new product development
process and
found slow time to market
(85% of projects at least 1.25_ longer
than best-in-class) and development
expense ratio that was over 2_ higher
than best-in-class.
Redesigned hardware/software research
and new product development processes
to reduce time to market
and lower development costs.
 
• Abandoned project expense
decreased by over 90%.
• Warranty expense to
revenue decreased by 25%.
 
• New product development
cycle time: 67% faster time
to market.
• Decreased product
development expense ratio
by 50%, generating cost
savings of over $1.6 billion
annually.
 Driving Profitable Growth at IBM: BA based
Developed knowledge management, content,
collaboration, and Web portal infrastructure
and tools to enable knowledge workers to
develop personalized knowledge
sharing and business analytics
IBM Global Services developed a Web-based
knowledge sharing portal to leverage its
consultants’ expertise during
period of rapid growth.
Partnered with Siebel to reengineer Customer
Relationship Management (CRM) processes and
link to intranet portals.
68% of employees rank the intranet as
preferred channel for doing business.
Consultant intranet led to
decreased consulting engagement
time by 40–80%, increased
revenues per consultant by 20%,
and improved consulting margins
by 400%.
eLearning saves $350 million per
year on employee education (12%
YOY savings).
Internal intranet, content
management, and collaboration
tools become products and
generate double-digit revenue
growth in 2003.
Driving Profitable Growth at IBM :BA based
Leveraged shared services
infrastructure and expertise to
deliver services to internal IBM
customers and to offer significant
enhancements to its data center
outsourcing
business.
Launched new offerings related to
business transformation
outsourcing, e-business and Web
services.
• IBM Global Services revenues
exceeded $46 billion
in 2004, up from $15 billion in 1992 and
36 billion in 2002.
• Linux-based (open standard) server
market revenues
grew at 35% per year.
Server revenues grew at 32% and
contribution
margin increased to 31%.
 
 Driving Profitable Growth at IBM :Offerings
• Leveraged partnerships with best-in-
class software and
services firm (e.g., Fidelity in pension
fund administration,
ADP in HR, SAP in enterprise resource
planning, and
Siebel in customer relationship
management) to launch
Business Transformation Outsourcing
(BTO) services business.
By 2003, 22 of 25 new business
offerings had transitioned from new
ventures to high-growth businesses.
• Software revenue increased to $14.2
billion in 2003, up from $11.1 billion in
1992
• Four new product offerings generated
over $1 billion in revenues annually and
three additional new businesses
doubled their revenues.
 
• In total, IBM revenues grew from $64
billion in 2002 to over $96 billion in 2004.
• Profits increase from $3 billion in 2002
to over $8 billion in 2004
 Creating Proprietary Advantage at IBM
Built IBM Global Services into the Worldwide Global Services market
number 1 global IT services provider. estimated to reach $14 trillion in
  2010; BTO market estimated to
exceed $100 billion
in 2006.
 
Launched unique BTO service offering • Market share: number 1 in services
in 2002 and servers; number 2 in software
(e.g., P&G signs a $400 (behind Microsoft).
million/multiyear contract; Sprint  
signs a multibillion/5-year contract).
 
Launched unique Business Innovation 2003 market capitalization = $159
Services offering in 2004 and closed billion (second to Microsoft); P/E
several high profile, ratio=4.42 (number 1 in the industry).
multimillion dollar client engagements.
 
Strategic Grid
 IT strategic grid (McFarlan)

Factory Strategic
Operational impact

• (use IT heavily for • (dependent now and in

 Top mgmt
hi
day-to-day the future on IT for the involvement
operations, performance of day-to-  BFSI
• but IT not viewed day operations and
as a competitive • for competitive
advantage ) advantage
)
Support Turnaround
• General
 not heavily dependent mgmt
lo involvem
(primarily for support upon IT at present
activities)  but may look to IT to ent
improve competitive
posture in the market

lo hi
Strategic impact
 IT strategic grid (McFarlan)

Factory Strategic
Operational impact

• goal: Improve • goal: Transform orgn

hi
performance of core /industry
processes • Leadership : CxO, Board
• Leadership : Biz • PM : Change
unit executives Management
• PM : BPR

Support Turnaround

• goal: Local • goal: identify & launch

lo
performance new ventures
• Leadership : Local • Leadership : Venture
level oversight incubation unit
• PM : biz silo • PM : New Venture
specific development

lo hi
Strategic impact
Nicholas Carr’s Argument as Framed on the Strategic Grid
Value Chain model
 Business-Level Strategy: The Value Chain Model

The most common generic business level strategies are:

• Become the low-cost producer

• Differentiate your product from competitors’

products

• Change the scope of competition by enlarging the

market or narrowing it to a specialized niche
 Value Chain Model

• Highlights the primary or support activities that

add business value
• A good tool for understanding strategy at the
business firm level
Primary Activities:
• Directly related to the production and
distribution of a firm’s products or services

Support Activities:
• Make the delivery of primary activities possible

• Consist of the organization’s infrastructure, human

resources, technology, and procurement
 Strategic question:

• How can IT be used at each point in the

value chain to lower costs, differentiate
products, and change the scope of
competition?
The Firm Value Chain and the Industry Value Chain
Forces that shape competition
• The Networked Economy Business Model
– Innovation model
• Digital production and distribution technologies
(broadband and wireless, networks, multimedia
content creation, etc)
– Operational model
• Integrated supply chains and buy chains
– Management model
• Team, partnerships, consortia
– Social/regulatory systems
• Ownership incentives, virtual work, distance learning,
etc)
Forces that shape competition
• Network Economy of Scale
– Are achieved when a “community” of firms shares
its infrastructure, capabilities, and customer base
to produce and distribute products faster, better,
and cheaper than competitors can

• Network Economy of Scope

– … when “community” uses its shared
infrastructure to produce and distribute new
products and services, enter new market, or launch
new business more quickly, at less cost, and more
successfully than competitors can
 Analyzing IT Impact on Strategic DM

• Can IT reengineer core value activities?

• Can IT change balance of power?
• Can IT build or reduce barriers to entry?
• Can IT increase or decrease switching costs?
• Can IT add value to existing
products/services?
• Can IT create new products/services?
Impact of IT: questions 1 of 5.
• Can IT be used to reengineer core value activities
and change the basis of competition?

– Uses IT not just to automate but also to

transform and to inform
– Benefits of conducting business online
– AHSC American Hospital Supply Corporation
– American Airlines : SABRE
– Internet to reengineer value chain
– and the basis of competition
 Impact of IT: questions 2 of 5.
• Can IT change the nature of relationships and the
balance of power among buyers and suppliers?

– AHSC
– Customers recognized the value of a multivendor
marketplace but were unwilling to put up with the
problems of using multiple different supplier systems
– AHSC became channel manager
– Electronic market places: Oracle, CommerceOne,
Ariba, …
 Impact of IT: questions 3 of 5.
• Can IT build or reduce barriers to entry?

– Consultancy companies: knowledge technology

– Technology based advantage: AHSC, AA, …
– The internet can decrease the impact: low cost, ease
of penetration
– Knowledge and community barriers are more
sustainable
– Proprietary infrastructure and channels to market are
at a particular disadvantage relative to new entrants
when they attempt to create second-order barriers to
entry (Amazon.com as new entrant with transaction,
information and community infrastructures)
 Impact of IT: questions 4 of 5.
• Can IT increase or decrease switching costs?

– Switching to another system might become

difficult and costly in proprietary systems
– With the internet switching costs are substantially
reduced  difficult to achieve customer loyalty
– Internet increased the switching cost
• Provided easy to use inexpensive financial
service software
• Won users via ease-of-use
• Hooked via simple ways of storing the
information that should be reentered if the
customer switches to a different product
 Impact of IT: questions 5 of 5.
• Can IT add value to existing products and services or
create new ones?

– Grocery stores are also in the business of selling

information (client profiles)
– Information content of existing products (cars)
– Digital distribution of books, music, and video will
dramatically alter existing publishing and
entertainment industries.
– Manure and fertilizer company provides
information.
Porter’s Model
 Porter’s Five Forces Model

In the larger environment, there are five main forces or

threats:
• New market entrants

• Substitute products and services

• Suppliers

• Customers

• Other firms competing directly

Porter’s Competitive Forces Model
 Porter’s Competitive Forces Model

IT and the Internet can greatly change the strength of

these competitive forces:

• Encourage new entrants. Example: NetFlix vs.

Blockbuster

• Increase customer bargaining power. Example:

Expedia.com and others
 Porter’s Competitive Forces Model

IT and the Internet can greatly change the strength

of these competitive forces: (Continued)

• Decrease in supplier power. Example: eCampus.com

increases the efficiency of used textbook market,
reducing publisher profits

• Substitute products. Example: online music lowers

value of record stores
 Value Creating IT Applications

• The old industry value chain

– Sequential
– Functionally organized and transitional in nature
– Vertical organization structures within organization
boundaries

• The new industry value chain

– Process based
– Integrating the enterprise activities
– Boundaries are becoming fluid
– Partnership and the rise of virtually integrated industry
 ??
• What are the implications of IT in my business
operations ?

• What are the alternative perspectives for leveraging

IT capabilities for business operations?

• Is the locus of IT competence “inside” or “outside”

the operation?

• What is the executive role of senior mgmt for

leveraging IT capabilities?

• How should IT function be organized, and what is the

role of IT outsourcing?

• What are the appropriate criteria for assessing IT

based benefits?
Strategic Business role of IT
 1). Operational Excellence

• Efficiency of operations  hi profitability

• IT/IS enabler of efficiency + productivity

• Other components needed:

• Business process change

• Management behavior
 Retail Industry

• biggest retailer on earth

• operational efficiency 
• IT /IS +
• Business process +
• Mgmt

• Sales in 2005 =285 M

(i.e., 1/10 of total USA retail sales)

Sales / per sq foot

• Sales / per sq foot = $ 28 Sales / per sq foot
= $ 12 (Others) ;
= $ 23
• IT/IS used = RetailLink System
• links suppliers to 5,289
stores globally
 2). Customer intimacy

• Customers well served  repeat buy

 top line (+)  bottom lines (+)

• The Mandarin Oriental, Manhattan 

guest preferences :
• room temp +
• frequently dialed calls +
• TV programmes+
• music…..
• etc etc,
• monitored thru a central server.
 Supplier intimacy

• Suppliers  more engaged vital

inputs  costs (-)  bottom lines
(+)

• JCPenny store (USA) sale

occurs  info  TAL Apparel Ltd
(Hongkong)  demand monitoring
done at TAL  product shipped to
JCPenny stores straight 
inventory cost = low.

• Millions of online customers +

suppliers ……….can you really know
them all ???
 3) New products, services, business models
• Business model
 produce deliver sell

• Apple Inc
• Online legal distribution of music on iPod

• Netflix
eo
e V id
in
Onl
 4) .Improved decision making
Problems:
 production …hi/low
 resource allocation…bad
 response time…poor
 Result : higher costs + customer satisfaction low

 Verizon
Digital dashboard
 customer complaint
 network performance
 Line outage
 5) .Competitive Advantage

 Doing things better than the competitors

 Charging less for superior products
 Responding to customers + suppliers in real
time
• Result : higher sales + higher profits
• derives from how businesses use the technology.
• Innovations in
• business processes +
• management +
• organization  not easily copied
 Examples

• Amazon ……..recommender system

• eBay,
• Dell, …………………..”mass customization”
• Wal-Mart
• Apple's iTunes

• have built and maintained technology-based

advantages.
 6). IT for survival

• ATM….Citibank 1977

• Toxic Substances Control Act

(1976)….exposure data for 30 yrs

• SOX….retain audit work for 5 yrs