The Money Pit! Carr, Chapter 6

How Dependent are we on infrastructures? Imagine having no running water -- How about no electricity --

What happens when power fails? How about the 2003 power failure? –Technology failure –Hurricanes

How about the transport system? –UPS strike –UP rail problems These are all critical infrastructures What contingency plans can we have?

Review: Proprietary to Infrastructure First, a new tech is a proprietary competitive advantage –Competitors rush to copy –Standards are established –Best practices become common Widespread adoption and it becomes an item of infrastructure –Telephone, railroad, networks, etc.

When new technology becomes an infrastructure commodity What does Carr suggest we do with commodity infrastructures? –They are essential to competing –Becomes irrelevant to strategy! –Risks of failure outweigh the competitive advantages!

Consider Electricity It is mandatory for business success –It provides no basis for competitive advantage Then how do we purchase and use it? –We prepare for failure Generator, battery backup, candles –We buy as cheaply as possible Subject to reliability

Adapting Infrastructure At first, the technology is new, un-tried –It is prone to failure, unstable –This has been typical of IT during the past 30 years. IT projects often appear to be very high risk – and modest reward at best

How have IT projects gone? Most were disasters! –Most are way over budget –16% considered to be success! –75% took too long to complete Can you imagine if airlines worked like this? –84% of flights do not make it to the right airport or crash? –How about pizza deliveries?

Reliable Infrastructure Changing now into a true infrastructure –Still not as reliable as electric grid

So what is a mother to do?

Carr’s Four Points to IT success 1. Spend Less 2. Follow, Don’t Lead 3. Innovate when risks are low 4. Focus on vulnerabilities over opportunities

Spend Less Spending too much appears to be the biggest risk in IT –True for any commodity input –Identify the essential from the discretionary –Justify the spending!

Remember -- Cost Justification Displaced, tangible function Displaced, intangible function Avoidable, intangible function Avoidable, tangible function High CERTAINTY Low High Low MEASURABLE

Justify! Focus on the measurable –Most projects “sold” on the immeasurable items! Calculate a true ROI on the project Assume all does not go well –Prepare for project “surprises”! –What will you tell the CEO when it doesn’t work?

Spending less on: Do all employees really “need” to be on the Internet? –NO – they waste time! –Cutting access may yield vast savings Can we outsource non-strategic projects? –Yes – given that IT is increasingly a commodity, expect MORE outsourcing –GM no longer even employs programmers (of course, they just reported a $1 billion quarterly loss)

Spend even less— Should you build when you can buy? –Probably not- unless a competitive advantage results Focus on generic items –Use Linux –Generic servers systems Buyer power increases when item is a commodity – USE IT!

How much to save? E-Trade spent $14 million in 1998 for SUN servers + $1.5 million a year in service In 2002, they replaced the SUN servers with generic servers for $320,000 total! –They saved $13+ million AND 1.5 million on annual maintenance –Think of the Cost of Ownership justification on that!

Follow, Don’t Lead Spend slowly! Avoid the “bleeding edge” –Leading edge stuff often become obsolete –Compare to HDTV – waiting is good When should you be a first mover? –When you reap a competitive advantage –If IT is a commodity, there is little advantage available.

UPS vs. FEDEX Fedex spent plenty to build their site: – e=us e=ushttp:// e=us UPS waited a bit and followed: – UPS saved a ton of $$$

UPS vs FedEx UPS FEDEX

Innovate when Risks are low Innovate when you can have others bear the costs –Wal-Mart’s RFID has suppliers bearing much of the cost –If successful, RFID will become a commodity and pressure other retails to follow Wal-Mart’s lead

Focus on Vulnerability Just as when power fails, IT failure can be catastrophic for a firm –IT may not offer a competitive advantage – but it sure offers risks Must have someone whose job it is to plan for contingencies –Plan for the worst!

Prioritize your risks What happens if: –Power fails? –Our data center burns –We get hit by lightning? –A bomb goes off? –Someone screws up? –Software fails? –We get hit by a virus? Etc.

Commodities reward stability Think of the power company, airlines, trucking, package delivery, etc. IT will be similar –More focus on security –Less on development Which will likely be outsourced? –Development

The bottom line The key will likely be to not seek first advantage Instead, focus on –Cost control –Managing risks carefully –Be careful to really justify investments –Treat IT as a commodity input and not a strategic advantage –end