Nicholas Carr said “Scarcity, not ubiquity, makes a business resource truly strategic.” His infamous paper IT Doesn’t Matter(1) makes the point that since everyone can buy the same information technology, it is a commodity and therefore doesn’t matter from a strategic perspective. But Carr missed a key point – deriving value from information is not just about technology, it is about how effectively an organization uses the technology. It’s easy to buy technology; it’s more rare to find organizations that are able to apply it effectively.  Those that do, have a distinct competitive advantage.

Another way to ask the question is “do organizations that spend more on IT have better productivity?” Research data suggests the answer is yes.  The chart below from Brynjolfsson and Hitt’s 2000 paper(2) shows a positive relationship between technology expenditures and organizational productivity (each point is a separate company). That said, the slope is not very steep – spending four times as much on technology does not yield four times the productivity.

What is more interesting is how much variation there is in productivity at all points of the curve. Some companies have a productivity of .5 while others have a productivity of 2.0 (four times more productive) for the same level of investment. Weill and Aral in their 2005 research paper IT Savvy Pays Off(3) offer an explanation for this high degree of variation.  Their research shows that organizations that do a better job of managing the IT portfolio and maximizing returns from investments, demonstrate a high level of “IT Savvy”. The paper goes on to define IT Savvy firms as those that demonstrate five mutually reinforcing practices and competencies:

• IT for Communications: Intense use of electronic communications such as email, intranets, and wireless devices for internal and external communications.
• Internet use: Wide use of internet solutions for functions such as sales force management, employee performance measurement, travel and expense management and training.
• Digital Transactions: High degree of digitization of common transactions such as sales, customer service and purchasing.
• Company-Wide IT skills: All staff have skills to use IT effectively. There are strong technical and business skills among IT staff and strong IT skills among business staff.
• Business Management Involvement: Senior management demonstrates commitment by championing key IT initiatives.  Business-unit managers are heavily involved in IT decisions and IT staff are effective at measuring and communicating the business value of IT investments.

The last two bullets are the most significant. IT DOES matter, but it’s not just about technology.  Organizations that have a strong alignment between usiness and IT demonstrate superior results and have a compelling advantage over their competitors.

References:

1) Nicholas Carr, IT Doesn’t Matter, Harvard Business Review, May 2003
2) Brynjolfsson, E. and L. Hitt (2000). “Beyond Computation: Information Technology, Organizational Transformation and Business Practices.”, Journal of Economic Perspectives
3) Peter Weill and Sinan Aral, IT Savvy Pays Off: How Top Performers Match IT Portfolios and Organizational Practices, May 2005, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=779345