Chapel Hill Technology Advisory Committee

[Terri Buckner <tbuckner AT ibiblio.org>]

http://www.washingtonpost.com/wp-dyn/content/article/2005/11/29/AR2005112901096.html?referrer=email


 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 
they approved.

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 
your desktop.

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 
big computer.

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>./