IT is becoming less about creating innovative business solutions and more about how technology comes together to address a business problem.
Nicholas G. Carr's article in the May issue of Harvard Business Review ("IT Doesn't Matter"), sent shockwaves through the technology world as vendors and consultants scampered to refute his suggestion that commoditization had made technology irrelevant. Noticeably silent in this debate have been business executives who grew tired and impatient with technology long ago. While they haven't spoken out, their changing buying behavior says loud and clear that Carr's arguments are more on target than the IT industry is willing to believe.
Recent customer surveys and a surge in new outsourcing arrangements, ranging from an assortment of managed services to more ambitious utility-computing services, suggest that enterprises large and small are more interested in information solutions via services than technology for its own sake. These trends suggest that our industry is entering a new era that may bring back an old acronym—IS—in a new form to replace the timeworn IT label.
Anyone who has been around our industry since the 1980s can remember the acronym battles that were fought over information technology versus information systems. To the untrained eye, the terms seemed interchangeable. But to many industry veterans they held significantly differing meanings.
Proponents of "IT" viewed new hardware platforms and software tools as the centerpiece for creating innovative business solutions, and they built their world around the latest features and functions of technology products. Advocates of "IS" tended to take more pride in how various technologies came together as an integrated architecture to address a business problem.
The real distinction between these two perspectives was nearly impossible for most casual observers to discern, but eventually the IT banner won out. That was until the dot-bomb hit and the IT industry's fortunes began a downward spiral that still may not be over, especially if Carr is right.
Forrester Research's latest survey, in April and May, of executives, directors, and managers at 877 companies in North America with company revenue of at least $500 million found that technology spending will grow only 1.3% in 2003, down from the 1.9% forecast in a similar survey by the research firm in March. Forrester's findings echo similarly pessimistic results from studies conducted by Merrill Lynch, IDC, and others.
On the other hand, Forrester found that 11% of companies say they intend to spend more than they had originally budgeted on services in areas such as IT-strategy consulting, architecture planning, and even Web-site design. This supports even more upbeat forecasts from all of the research firms regarding the growth opportunities for various forms of IT outsourcing.
The Yankee Group predicts worldwide spending on IT outsourcing [including all kinds of network and computing functions] will grow 10% to 12% annually through 2006, and business-process outsourcing will grow 12% to 20% per year during that same period.
IDC estimates the worldwide application-infrastructure provider outsourcing and managed-services markets will experience five-year revenue growth from 2002 to 2007 of about 17.6%. In the United States, the revenue is expected to rise 11.5%.
Gartner expects the proportion of North American enterprises taking advantage of new utility-computing services will double, from 15% in 2003 to more than 30% in 2006.
Even if these forecasts prove to be exaggerated like so many others in the past, my interviews with IT decision-makers and vendors indicate that the movement from information technology to the "new" IS is undeniable.
There are three key forces driving the demand for services: complexity, cost, and a focus on core competencies. Technology continues to be too complicated and frustrating for most companies. Financially strained organizations need to reduce spending. Companies also are refocusing on their primary business and casting aside ancillary activities like IT. Converting internal operating expenditures into external service agreements lets businesses amortize their IT spending.
Whether it's packaged application services such as Salesforce.com's or managed transport, security, and storage services from myriad telecom and more-specialized service firms, the demand for turnkey technology solutions is growing.
Implications of this growth will be profound. Technology leaders of the past will be the components makers of the future. The new market leaders will be the service providers (XSPs) that will be the primary channel to market for aggregated technologies and applications.
Technology companies will have to fundamentally change the way they develop and deliver their products if they want to continue to sell directly to the majority of their past customers. IBM, the recognized leader in this transformation, has spent more than a decade readjusting its operations to meet this challenge, and it's still planning to invest another $10 billion in R&D over the next five years to fully address the issues involved.
Repackaging products into services is only the tip of the iceberg for technology vendors. Refocusing R&D labs, restructuring go-to-market strategies and mechanisms, and restating value propositions and marketing messages will all be stepping stones to reorienting corporate cultures and retraining company personnel to adopt a services mentality rather than a technology orientation.
IT decision-makers will have to become better educated about evaluating and buying rapidly evolving services. They will have to be more adept at measuring the performance of these services and managing their service-provider relationships.
Just as consumer preferences for leasing rather than buying cars has transformed the automotive industry, so too will enterprise biases toward pay-as-you-go information services radically change the technology industry. And, from the customer point of view, that wouldn't be a bad thing.
Jeffrey M. Kaplan is managing director of THINKstrategies, a consulting firm in Wellesley, Mass. He can be reached at firstname.lastname@example.org.
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