Commoditized IT

In the Spring 2005 issue of the MIT Sloan Management Review, Nicholas Carr suggested in his article “The End of Corporate Computing” that the commoditization of information technology would signal the end of corporation owned and operated IT in favor of a centralized set of utility-style providers. In other words - outsourcing will be the way forward for greater profitability and efiiciency.

But somewhere between then and now, things started to change slowly in unexpected ways. Yes, IT has indeed become a commodity. Absorbing the following definiton of Commoditization, we can see how well it applies to IT.

"Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities....."

But, companies are far from letting go of their hold on IT, and are giving charge of formerly outsourced activities to their own in-house IT departments.

IT, like many other commodities, is governed by the resource dependency theory: When a resource becomes so ubiquitous that it becomes essential to survival, the risks imposed by its absence outweigh the burdens of maintaining its availability. IT processes are fully integrated in nearly all business practices, from simple e-mails and data storage to more complicated core practices such as forecasting and audit procedures. IT has become so ubiquitous, in fact, that it is taking on another common attribute of commodities — the need for government oversight and regulation.

For example, U.S. government regulations require 911 emergency service across broadband and digital phone providers. Information technology controls that specifically address financial risks may be within the scope of a SOX 404 assessment. IT control objectives relate to the confidentiality, integrity, and reliability of data and the overall management of the IT function of the business enterprise. Thus companies now feel less secure outsourcing these controls, especially because the penalty for failing to meet these standards does not fall on the outsourcing partner but on the reporting company.

A key finding was that outsourcing generates new risks and made compliance regulation complex. Upon canceling the deal with IBM global Services , Austin Adams, JPMorgan CIO, said: “The decision to cancel the outsourcing deal wasn’t driven entirely by cost savings. It was about our belief that we wanted to be more involved in every aspect of our business, and technology is a significant part.” Kurt Potter, research director at Gartner Inc.,says "....Declining asset lifecycles, constant business changes, cost, innovation, and cultural/business fit are affecting the contract length in the life of an outsourcing relationship.”

One way companies are avoiding/mitigating external dependencies is by shifting dependency to another resource. Executives can choose to create internal dependencies over which they do have control to counterbalance external dependencies, and this action can result in a competitive advantage.

And this brings into focus the need for better IT-Business alignment. IT should be separated into discrete tasks based on process instead of technology, and each task must have a specific purpose in the strategic framework.