[Chtechcomm] The end of IT Depts?
tbuckner at ibiblio.org
Wed Nov 30 11:49:26 EST 2005
Economy of Scale Might Inspire Companies to Ditch IT Departments
By Steven Pearlstein
Wednesday, November 30, 2005; Page D01
Among the technorati, journalist Nicholas Carr is infamous for his 2003
article in the Harvard Business Review declaring that information
technology was no longer a significant source of corporate competitive
advantage. Carr's assertion challenged not only the received wisdom from
a generation of strategy consultants, but also the marketing campaigns
of every hardware and software vendor and thousands of newly minted
"chief information officers."
While Carr may have overstated his point a bit, it was well received by
chief executives who always suspected they were spending too much, or
getting too little, out of all those expensive technology investments
Now Carr is back with an equally controversial notion -- the death of
the corporate IT department -- that he launched in the spring issue of
MIT's Sloan Management Review and is now peddling in speeches to
business groups and industry conferences.
For years, economic historians have drawn the parallel between the
productivity revolution spurred by the development of electric power at
the turn of the 20th century and development of computers and the
Internet at the turn of the 21st. Carr simply builds on that analogy.
In the early years of electricity, he notes, manufacturing companies
generated their own power from dynamos they purchased from General
Electric or Westinghouse. But in the 1890s, Samuel Insull, an adviser to
Thomas Edison, came up with the insight that he could provide
electricity more efficiently, even for the biggest users, from
centralized plants that realized economies of scale. The company he
founded, Chicago's Commonwealth Edison, would become one of the
country's biggest and most successful enterprises, lowering the price of
electricity and serving as the model for the power industry for more
than a century.
Now, Carr predicts, the same transition is coming to the world of
information technology. Instead of each company buying, maintaining and
upgrading its own hardware and software -- most of which are remarkably
similar from one company to the next -- it will buy computing services
from a utility-type company, paying for only what it uses while enjoying
the lower costs that come from scale economies.
Carr argues that the current setup is rife with inefficiency and excess
capacity, citing studies showing that the typical corporate data center
uses, at most, only a third of its available processing power while more
than half of its storage capacity is wasted. And if you are the typical
employee, you use just 5 percent of the computing power of that PC on
It was only 20 years ago when everyone was sure that computing would
become increasingly decentralized -- out with the old mainframe and in
with the personal computer, which would become ever more powerful with
each generation of computer chip. Now, however, the swing to
centralization is driven by the new economics of the Internet and
dirt-cheap communication, and technological advances that make it easier
for different programs and operating systems to work with each other and
allow large numbers of servers and disk drives to effectively act as one
In essence, the trend toward centralization began back when Ross Perot
first persuaded a corporation to "outsource" its IT department to his
new company, EDS. And even before Carr's article appeared, companies
like Sun and IBM were already peddling early versions of a utility-type
service, renting out processing and storage capacity for a fixed
unit-price. Sun is even setting up an online auction of excess computing
capacity. MCI's Digex unit, meanwhile, has been targeting small and
mid-size companies with data centers that use shared hardware and
software in a utility-type arrangement.
Microsoft, meanwhile, is about to introduce a new generation of products
-- Web 2.0 and Microsoft Live -- that essentially embraces the utility
model by allowing users to buy into software over the Web rather than
installing it on their own computers. And what is Google, after all, but
a giant computer utility providing search capabilities and now a growing
set of services to huge numbers of customers?
All this has profound implications for the type and quantity of
equipment that will be sold, and how it will be priced. And, not
surprisingly, the industry has largely pooh-poohed Carr's thesis and
thrown up all sorts of reasons why things won't -- or shouldn't --
develop in that direction.
I suspect, however, that Carr is on to something, and that there will be
an important place in business history -- and the Forbes 500 list -- for
whoever figures out how to become the Insull of computing. An equally
intriguing question is whether he'll be a Sam or a Sanjay.
/Steven Pearlstein will host a Web discussion today at 11 a.m. at
washingtonpost.com. He can be reached atpearlsteins at washpost.com
<mailto:pearlsteins at washpost.com>./
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