Nicholas Carr - If you think that you know you're going to innovate your way  using technology to a competitive advantage that's going to be lasting, I think  you're fooling yourself.  

Dan Farber - Nicholas Carr stirred up a hornet's nest with his essay, IT doesn't  matter, published in the Harvard Business Review last year. I  

Speaker 3 just hope every one of my competitors listens and follows that  strategy. I just pray that they are.  

Speaker 4 You know, the Harvard Business Review article that was written that  says IT doesn't matter anymore is absolutely dead wrong.  

Dan Farber - He's now expanding on his original work in a new book entitled,  does IT matter? information technology and the corrosion of competitive  advantage. Nicholas Carr joins us to talk about his controversial views on  business, and IT Thanks for joining. Me very happy to be here now. It's been  about a year since you first published your essay entitled, IT doesn't matter.  Now you have a new book out called, does IT matter? Why change from that  bold, declarative statement to a question? Well,  

Nicholas Carr - there's, there are two reasons. One, not very interesting, and  that's just a commercial reason that the publisher wanted a title that would, you  know, reflect back on the article, since it's received a lot of attention, but not  repeat it. So that's the more prosaic reason. But more important, I think, is that  in the book, I'm trying to look a little more broadly at how information technology  affects business and business strategy. So not just on, on what it means for IT  management itself, but for for other aspects of strategy, and how it influences  other business processes, and in some cases, I think, neutralizes old kinds of  advantage. So it's just taking a broader look at the question.  

Dan Farber - Now, do you in any way regret that first title? IT doesn't matter.  And have you softened your stance at all in terms of that IT is merely a  commodity input and that it doesn't provide any strategic advantage to  enterprises?  

Nicholas Carr - Well, I haven't. I still, you know, even as I looked more deeply at the question in writing the book, I think it only further convinced me that, indeed,  for most companies, it really should be treated as a Commodity input, that  there's very little opportunity to use the technology to distinguish yourself in  some way that that you can defend over long periods of time. I think in most  cases, competitors or vendors, as might be the case, are really quite adept at 

copying any technological innovation. So at that level, you know, no, I'm not  backing away from the original argument. I'm trying to make it a bit stronger, I  think, in the book. But  

Dan Farber - I have many critics, and let me read what some of those critics  said when you first published that original essay. Steve Ballmer, the CEO of  Microsoft, called it hogwash. Scott McNealy, the CEO of sun, said, to get an  advantage, I need to know more about what happened in the last six hours than  my competitor. It won't happen through smoke signals. IT is critical to make that  happen. And then finally, Carly Fiorina, the CEO of HP, said that you're dead  wrong. What are those people missing? Well,  

Nicholas Carr - you know, I think in in one sense, they know that they don't want my ideas to be broadly disseminated among among buyers are broadly  accepted among the buying community. Those three companies obviously sell a lot of technology into businesses, and have, over the years, promoted their  technologies, as have many vendors as being critical to competitive advantage.  So I think some of the reaction is purely reflects the economic realities and the  marketing realities of not particularly liking some of my messages. What  

Dan Farber - are the biggest misperceptions that you see from your article that  have been put out in the marketplace? The biggest  

Nicholas Carr - misperceptions of what I'm saying? Do you mean Right? Some  of it is definitional. I think there's, you know, in the article and in the book, I make quite clear that I'm talking about the technology, the hardware, the software, the  

networks. A lot of, I think a lot of the criticism looks beyond that and says, well,  people or companies can use the technology. Some companies can use the  technology more intelligently than others, and I think that's certainly true and  very important point, but it that's also true with any business resource. So that  point in and in and of itself doesn't really tell you whether the resource itself is a  provides any kind of strategic advantage or has any kind of strategic value. So I  think you know some of the criticism is is more definitional than anything else.  Now,  

Dan Farber - many of your critics will say that they can understand part of the  argument that technology is becoming a commodity at certain layers, but there's innovation happening at other layers, and that combining technology and  innovation really does lead to some competitive advantage. And give examples  of companies like Dell or Walmart. Now, how do you perceive those companies  compared to the rest of the pack, where they seem to be ahead because they  use technology effectively? Well, 

Nicholas Carr - I think, I think there are advantages, and I think they, both of  those companies, have been very adept users of technology. There's no no, no  question about that. But I think to reduce their competitive advantage to just a  matter of superior use of technology actually does them a disservice, because I  think their advantage flows from very distinctive basic business models, which  both developed before a lot of their innovative use of technology, and what  they've gone on to do is, I think, use technology, as well as many other  resources, many other processes, to to further their advantage, to strengthen it.  But it's also, you know, it's also important to realize that I am talking about a  progression over time, where as IT becomes more standardized, more  homogenized. As innovation shifts from the user group to the vendor group, its  ability to provide distinction that can be defended you can innovate with it. The  question is, how long can you keep those innovations proprietary? Over time,  your ability to do that fades, I think, as as we see the technology evolve, so even with with Dell and Walmart, you know, if you look, look at when they first did  some of their most distinctive technological work, it's now been quite a long time ago, and I think, you know, even since then, I think the ability to use technology  distinctively and then defend that distinctiveness against competitive replication  has diminished now.  

Dan Farber - People talk about web services and adaptive supply change and  concepts like RFID, radio frequency identification. Walmart, for example, is  using RFID to differentiate itself from its competitors these days. Don't you  consider that a use of technology that leads to competitive  

Nicholas Carr - advantage. I think actually, all of those things you've just talked  about are good examples of how commoditization is accelerating. I mean, look  at RFID and what Walmart is doing with it. Walmart is going out to its suppliers,  

which in essence, form the, you know, the consumer products industry, the  retailing industry, and is telling them, you know, within a year, we want you to be  quite far along in your adoption of RFID. What's Walmart doing? Walmart is  seeking to commoditize RFID, to roll it out and get it as broadly accepted and  adopted and ubiquitous in the industry as possible. Why is it doing that?  Because as the biggest company and as the cost leader, it knows that any  productivity gains will fall disproportionately to itself and to its bottom line. So,  you know, that's an example, I think, of a new technological innovation that is  going to be commoditized very rapidly, is going to become kind of the new  barcode system. And so is more of an example of the commoditization trend,  rather than anything else. And I think  

Dan Farber - for those leaders, IT might become a commodity, but it still 

provides them with an edge.  

Nicholas Carr - You know, I think if you're looking at it through Walmart  standpoint, and you in other words, a company that is so dominant of it on its  supply chain, so dominant in its industry, that it can, it can afford to go out and  simply by means of scale, get advantages from all sorts of commodity  resources, including IT. So I think that's true, and if you're in that position, that's  a great position to be in. I don't think that's a position that most companies are  in. However, now you use  

Dan Farber - the term corrosion in your subtitle, information technology and the  corrosion of competitive advantage. What do you see as the corrosive parts of  IT today? Well, the corrosion  

Nicholas Carr - message is an example of what I meant earlier, when I was  talking about how I look in the book at some broader impacts of information  technology. And so it's interesting as we see the progression of commoditization  through the IT world. You can trace it from, say, hardware, fairly standardized  hardware, to more complex hardware, on to software, again, fairly simple  software, and then to more complex enterprise applications. The interesting  thing is that now we're seeing it extend all the way into processes, and so for  very trendy processes.  

Dan Farber - Are you saying that business processes and activities like  business process outsourcing are commoditizing services?  

Nicholas Carr - They're, I would say they're commoditizing the processes  themselves. In other words, if once you outsource a process, you're you're  giving it away to a vendor who can do the same thing for many different  companies into including your competitors. And so for very transaction, intensive processes, ones that are are built, you know, that incorporate IT very strongly.  What we might be seeing in the next wave is the commoditization of actual  business processes at that level. And so if you, if you're a company that has.  Has, has distinguished itself by being superior on some transaction intensive  process. You could see that, you know that advantage, that traditional  advantage, corrode as the outsourcing of IT processes kind of brings many  different companies to competitive parity.  

Dan Farber - You say that IT is closer to the end of its build out than it is to its  beginning, and that's a sign that things will become more commoditized. Don't  you think there could be another phase of IT that could resurrect it into more of a growth mode, in a way that could compare to 20 years ago? 

Nicholas Carr - Well, first of all, I just want to make a distinction that I'm talking  about the business use of IT, as opposed to the consumer markets. I think the  consumer market for IT is, you know, is probably on the verge of all sorts of  innovation and advancement. But I think, you know, if you look at the business  world and how businesses use IT, and it's fairly in many ways, it's very fairly  prosaic. I mean, most companies share a certain number of processes that they  use to gather supplies, to make their product or service and to deliver that  product or service to customers. And I think a reality of the application of IT to  automate those processes is that diminishing return sets in very quickly. So you  know, the big gains, particularly productivity gains, come fair from fairly early on  versions of the technology. It may it may take quite a bit of time, and it usually  does to change your organization and processes to take advantage of those  technologies. But once the once the process has been automated, the additional returns from new advances in the in that process automation go down very  quickly. So I think we'll continue to see infrastructural innovation. I I think that the IT infrastructure that's shared by all companies will become more robust, more  reliable, more efficient. But those advances, those innovations, will be shared by all companies. They're not going to be able to be held proprietarily by a single  firm.  

Dan Farber - Now, you make some recommendations to companies in terms of  how they should think about information technology, how they should spend  right in fact, you say they should spend less. They should focus more on  vulnerabilities than opportunities. When you say, focus on vulnerabilities, what  do you really mean?  

Nicholas Carr - Well, when you look back and you look how other infrastructural technologies have evolved in their business use, you see that at some point  they cease to provide, you know, the basis for competitive advantage. They're  still extremely important in the sense that all companies have to maintain  competitive parity, and usually you have to continue to invest a lot of money, but  their their ability to set you apart from the pack disappears it. And when we  when you go through that process, then I think what we see is that that the real  managerial key shifts from, you know, innovation and in capitalizing on new  opportunities to risk management, cost management, the more prosaic but very  important aspects of management. And so I think, you know, I think a good way  to look at it for companies is that you're not going to get a competitive advantage through the distinctive use of technology, of IT anymore, but you can certainly  put yourself at a disadvantage by using it sloppily, by not paying attention to  things like security and other vulnerabilities. So that's that's what that means. 

Dan Farber - And you also say the company should not be first movers in  adopting new technologies,  

Nicholas Carr - right in general. I mean, one thing that Moore's law tells us is  not only that technological capabilities are going to go up, going to advance at  an astronomical pace, but also that the cost of those capabilities are going to go  down equally quickly. So if you can't get an advantage from the innovative use  of IT that you can defend for some significant period of time to to pay back those upfront higher costs of being an innovator, then it makes a lot of sense to wait,  let the costs come down, let let your competitors make the mistakes, take the  risks, and as the technology standardizes, becomes more reliable, as its cost  goes down. You can get, you know, the same level of capability for a lot less  money, if you just have a little bit of patience. So you're  

Dan Farber - saying that the tortoise beats the hare in most cases. Yes, right?  Well, you posed a question your book where you said, you asked a question.  You said, Would you rather have a toilet or a computer, an interconnection, an  internet connection or light bulb. Is that really the right way to frame the  question? Or the problem is, it is really not a choice between a light bulb and a  computer.  

Nicholas Carr - No, nobody's really going to have to make that choice. That was in a, you know, in the last chapter of the book, when I look more broadly at how,  at our expectations about new. Technologies and how they tend to outrun the  realities. And so, you know, what we've heard a lot, particularly in the late 90s,  but we continue to hear it, is that, you know, information technology is the  represents the most transformative technology in history. And you know, I would  just argue that that's not true at all, in that, you know, if you look at the way you  live your life, or you look at the way businesses operate, earlier technologies  had them, like electricity, for instance, had a much more dramatic impact. So  when I say, you know, if somebody put a gun to your head and said you can get  rid of your television, I mean, you can get rid of your PC, or you can get rid of all  your light bulbs in your house, you'd probably get rid of the PC.  

Dan Farber - Well, finally, I'd like to ask you about outsourcing and how  companies are moving more offshore, becoming more modular, trying to get to a more frictionless enterprise, right? How does that fit into your model?  

Nicholas Carr - Well, I think it's further evidence of the commoditization of IT,  because what we're seeing with information technology now very closely maps  what we saw with many manufacturing industries, say 20 years ago, where the 

products become much less differentiated. Companies compete on cost, and so  they start looking for the lowest cost supply. And just as we saw, many  manufacturing jobs be transferred to low labor cost countries. We're seeing the  same thing happening with IT. And of course, it's the rise of the Internet which  gives you the ubiquitous communication platform you need to coordinate that  work that's making it all possible. But I think it's, you know, it's completely  consistent, and kind of represents the next wave of commoditization of not only  of IT hardware, but of software, and even now, services.  

Dan Farber - Well, Nick, thanks very much for speaking with me today.  Nicholas Carr - Thanks, Dan. Been a pleasure.  

Dan Farber - We've been speaking with Nicholas Carr. I'm Dan Farber. Thanks  for watching. 



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