Investing in Enterprise Software

by Vince Kellen, Senior Consultant, Cutter Consortium

Back in the 1980s, and even recently, some have claimed that investments in IT haven't paid off [1, 2]. Fortunately, much research in the past decade has started to explain the complex relationship between IT and advantage and has shown, rather compellingly, that investments in IT do matter [3]. Firms that invest heavily in IT and concurrently apply a set of appropriate management practices do reap rewards.

While the research is showing that investments in IT and the adoption of a certain set of management practices can help, the research is also clear about two not-so-good points. First, firms vary significantly in their ability to take advantage of IT investments. While some firms receive handsome rewards, others do not. Second, in IT-intensive industries, increased investment in IT and diffusion of relevant business processes result in a more turbulent market. IT serves as a competitive accelerant that causes firms to leapfrog each other until many firms die out, leaving a few to garner control of the industry [4]. IT may actually hasten the demise of some, if not most, firms in these industries.

Both of these problems -- variation in the successful use of IT and IT-accelerated competition -- suggest that something other than just IT must lie at the root of advantage for successful firms. Will future deployments of enterprise IT be simply a requirement of doing business? Or will enterprise IT investments -- and most notably, enterprise software (ES) investments -- be a source of reasonably sustainable advantage?

At the center of this debate lies enterprise software. ES lets firms process and manage core data. Nearly all of this is highly structured data residing in relational data tables. To date, both the software and the data have provided firms with sources of advantage. Applications have automated human labor, letting machines do faster what human beings used to do more slowly. ES has produced much structured data, which firms use to help coordinate activities and produce insight that can streamline operations or produce new products and services. But will ES continue to provide these advantages in the future? When all firms can do these things equally well, will ES (and IT) simply go the way of the telephone?

For the purposes of this article, I am including in ES the following types of software:

• Enterprise resource planning (ERP) systems (e.g., finance, procurement, payroll, HR)

• Customer relationship management (CRM) systems (e.g., sales force automation (SFA), marketing, customer service, field support)

• Business intelligence (BI) systems (e.g., data warehousing; data extraction, transformation, and loading [ETL]; data quality; reporting; analytics and visualization)

• Supply chain management (SCM) systems (e.g., distribution and logistics management, inventory management, and sourcing planning)

• Knowledge management (KM) and collaboration systems (e.g., portals, e-mail, instant messaging, chat and discussion boards, document management, search tools)

• Enterprise 2.0 (E 2.0) tools (e.g., blogs, wikis, social networking, crowdsourcing)

ES can be distinguished from general IT, especially infrastructure and hardware IT. IT hardware and infrastructure are commodity technologies that are universally available to nearly all firms. At the present moment, I do not consider most ES commodity IT. Due to ES's complexity and the ability of vendors and client firms to configure or customize ES in a myriad of ways, especially in tailoring it to match idiosyncratic, value-adding business processes, ES can be treated as a valuable and not easily copied or substituted resource. For this reason, I believe the strategic contributions IT makes come almost exclusively from ES.

I also contend that, right now, something is afoot.

The manner in which firms use ES to create advantage is changing. This transition period may stretch for the next decade or two. Some firms have already crossed over from this first stage of advantage to the second stage. Over time, first-stage advantages (including automated business processes, decentralized decision making, and the use of total quality management [TQM] frameworks) will become accessible to most or all firms, thus nullifying these advantages. When all firms can reap similar benefits from ES, it ceases to be differentiating. In contrast to first-stage advantages, I contend that the advantages of the future will not be available to all firms. Instead, a select few firms will garner the benefits of the future, allowing those firms to secure long-term advantage.

I welcome your comments on this issue of the Cutter Edge and encourage you to send your insights on the market in general to me at vkellen@cutter.com.

-- Vince Kellen, Senior Consultant, Business-IT Strategies Practice

References

1. Roach, S.S. "America's Technology Dilemma: A Profile of the Information Economy." Morgan Stanley Special Economic Study, April 1987.

2. Carr, Nicholas G. "IT Doesn't Matter." Harvard Business Review, May 2003.

3. Dedrick, Jason, Vijay Gurbaxani, and Kenneth L. Kraemer. "Information Technology and Economic Peformance: A Critical Review of the Empirical Evidence." ACM Computing Surveys, Vol. 35, No. 1, March 2003.

4. Brynjolfsson, Erik, Andrew McAfee, Feng Zhu, and Michael Sorell. "Scale Without Mass: Business Process Replication and Industry Dynamics." Harvard Business School Technology & Operations Management Unit Research Paper, No. 07-016, 16 April 2007.