Chapter 4: MAKING THE CASE FOR IT
Focus of chapter—frameworks, approaches, and examples that execs can use to create a
compelling business case for exploiting the power of IT to create value inside the firm
and for customers, suppliers, and partners.
Nicholas Carr’s controversial article, in 2003, was built upon several premises:
 Premise #1: While in the past, IT applications were developed in-house, and given
the time/investment made, were considered a “scarce” resource, today’s IT
applications are readily available from vendors/service providers. Therefore, they
no longer give proprietary advantage and should be considered a commodity—part
of the infrastructure upon which a firm does business.
 Premise #2: More and more hardware and software are part of the shared
infrastructure for doing business. Execs sometimes mistakenly think the advantages
of proprietary IT infrastructure will continue indefinitely.
 Premise #3: Internet technology standards make it possible for new IT applications
to be quickly commoditized throughout an industry. Therefore, the window of
opportunity for creating value from IT often closes before proprietary advantages
can be fully exploited.
Carr concludes that execs should:
1) spend as little as possible on IT
2) concentrate IT investments on driving cost savings
3) follow rather than lead when adopting new IT, allowing others to bear the
risk/cost of testing new technologies
4) concentrate on managing risk, rather than searching for IT opportunities.
Some readers of Carr’s article agreed, responding as follows:
1) Too much is spent on IT, with the rationale that technology itself conveys
proprietary advantage.
2) New infrastructure is often built that duplicates what could have been bought
more cheaply.
3) The increased pace of innovation and speed with which commoditization occurs
has shrunk the windows of opportunity within which a new technology innovation
must be exploited.
4) The scarce resource never was technology itself—it was always the set of
managerial capabilities needed to create value with that technology.
Other readers disagreed with Carr’s premises:
1) Easy availability of IT is what makes IT increasingly valuable.
2) Carr’s logic is defective because it applies only to capital intensive goods, not to
information goods.
3) Carr’s arguments are based on the traditional mainframe-base and client-server
approach to building IT infrastructure, in which IT infrastructures were costly to
build and maintain and provided limited opportunity for rapid leverage to drive
insight and innovation.
4) The new breed of flexible, open-standard, ubiquitous IT infrastructure has
increased the range of business building opportunities and decreased the cost and
time required to launch new IT-enabled strategic initiatives.
Business on Demand Concept:
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IBM execs call this new IT design and the business opportunities it offers
Business on Demand—
a. immediate cost savings and asset productivity from sharing a common
infrastructure AND
b. dramatic increase in the strategic options for pursuing opportunities that
drive profitable growth and proprietary advantage.
c. A virtuous cycle of innovation, productivity and increasing returns.
Commoditization of technology is the very thing that enables innovation in an
“On Demand” world.
With customer needs and global market forces more dynamic than ever,
component-based technologies and flexible business processes enable
organizations to sense and respond to new opportunities and threats.
Technological innovations do become commoditized and ubiquitous, but strategic
innovation using the technology—how hardware and software are used to solve
problems and create competitive advantage—is alive and well.
I. Building the Business Case for IT
There is still confusion about how to exploit IT to create business value.
Why?
 Most execs still view technology as a budgeted expense to be managed on a
project-by-project basis within traditional budgeting cycles.
 This is a throwback to the mainframe era when IT infrastructure was
composed of large, stand-alone computers, housed within a single data center,
and tightly managed by a centralized group of IT professionals.
 In that era, each IT application performed a specific task and delivered
specific benefits.
 The ability to reuse (or share) applications was limited.
 An exception to this was American Airlines computer reservation system,
SABRE, an application built on the company’s internal reservation system
that enabled the airline’s travel agent partners to book reservations directly.
SABRE thus created strategic, proprietary advantage by locking in travel
agents.
Problem:
 By the 1990s, execs had begun to search for new investment models that would
intertwine IT with business operations and strategy.
 However, the proliferation of incompatible computers, operating systems, and
applications within and across organization boundaries impeded the adoption of
investment models that recognized the dual role of IT to create operating
efficiencies and also drive business insight, innovation, and proprietary
advantage.
The Tipping Point: The commercialization and rapid adoption of the Internet
 Internet standards for packaging, storing, accessing and sharing information—
voice, data, video, and graphs—catalyzed convergence of multiple technology
platforms and a commitment to develop and adopt common standards.

By 2005, it was possible to provide a shared infrastructure that would enable a
dramatic decrease in the total cost of ownership and the speed with which new
value-creating IT applications could be developed and deployed across an
organization, an industry, and the world.
 Complex applications could now be built from reusable modules linked together
through shared “middleware” services and common interfaces.
 This increased the speed and flexibility with which new value-creating IT-enabled
business initiatives could be launched and globally deployed.
The bottom line for success:
 Businesses that still have incompatible, inflexible proprietary (legacy)
infrastructures are at a significant strategic disadvantage as they attempt to keep
pace with increasingly shorter cycles of innovation, productivity, and returns.
 Web services approach—large portions of an IT investment involve shared
infrastructure that serves as a platform upon which multiple business building,
value-creating applications can be deployed.
 Now, IT can no longer be considered an expense that is managed on a project-byproject basis.
 Business-building IT opportunities must be thought as a string of investments that
must deliver value today and in the future.
The IT Value Framework: recognizes 3 categories of benefits that can be used to define
the business case for IT (see Figure 4.2, p. 120):
 Leveraging infrastructure and creating options: Investments in reusable,
value-enabling infrastructure lower costs, improve asset efficiency, and create
strategic options for future growth.
 Driving profitable growth: Investments in value-creating IT applications drive
profitable growth through further cost reductions and revenue generation.
 Achieving proprietary advantage: Value-sustaining IT applications and
infrastructure provide strategic differentiation and proprietary advantage that can
be measured in terms of increased market, share, improved brand value, and
increased market capitalization.
See Table 1 for examples of IT projects/metrics within each category that drive
business value.
A. Leveraging Infrastructure and Creating Options
The 2 key components of IT infrastructure that form the foundation for delivering
business value—
 IT operations (data centers, network, call centers)
 Supporting enterprise processes (procurement, enterprise resource
planning, finance, and human resources)
Given that IT infrastructure in most companies is far from “best in class,” in terms
of being lean, yet flexible, significant value can be created through investments to
modernize infrastructure.
Problems with IT infrastructure in many companies:
 IT infrastructures have been assembled in piecemeal fashion.
 New technologies were adopted as they became available with little
consideration for how the different technologies might need to work
together in the future.

By the mid 1990s, this “legacy” IT infrastructure had become a
hodgepodge of incompatible and inefficient technologies that were costly
and difficult to manage and maintain.
 Large investments were required to keep critical systems up and running.
 Cost of maintaining/managing IT infrastructure represented 80% or more
of yearly IT budgets.
Solutions being sought by firms today:
 Some firms are turning their infrastructure over to specialized shared
services providers (i.e., IBM Global Services, EDS, CSC) that deliver
best-in-class, asset efficient, yet flexible global IT shared services.
 Large, global firms often build their own best-in-class shared services IT
infrastructure, often offshoring IT shared services in company locations in
Indiana, China, Brazil, to take advantage of lower cost, yet highly skilled
labor markets.
 But, they still cannot sacrifice flexibility in their quest for efficiency.
 Firms are considering the options value of investments in IT
infrastructure—the value of business opportunities that could be pursued if
infrastructure were in place, the ability infrastructure would provide to
pursue riskier opportunities because of a higher potential return, and the
ability infrastructure would give to the company to capture value.
B. Driving Profitable Growth
2 key categories of IT-enabled revenue-generating opportunities can be pursued:
1. Revenue-generating capabilities can be enhanced.
 Systems that provide timely, actionable information to knowledge workers
and execs whose performance is measured based on ability to drive revenue
growth.
 Customer relationship management systems that increase productivity of
salespeople.
 Reengineering of product and/or business development processes that enable
execs to identify business-building opportunities, speed time to market, and
evolve product/market channel positioning.
2. New IT-enabled product/service or business offerings can be launched.
C. Achieving Proprietary Advantage
To achieve proprietary advantage, execs must change competitive positioning as
measured by:
 Successful entry into a large and growing market or exit from a shrinking one.
 Achieving the number one or number two position in an attractive industry
and providing evidence that the company can sustain that position over time.
 Attracting loyal investors that pay a premium, as measured in price/earnings
ratio and other capital market measures, over other players in a company’s
industry or even across industries.
Reality Check: Few companies have actually achieved sustainable proprietary
advantage over time. IBM, as described below, is one of the very few.
C. IBM’s Decade of Transformation: A Case Study in Turnaround Leadership
and Delivering IT-Enabled Business Value
 In 1990, IBM was the second most profitable company in the world and
was transforming itself for success in the next decade.
 But, there were structural problems.
 Between 1991-1993, IBM lost $16 billion.
 Then, Lou Gerstner turned this around, 1) by leveraging infrastructure and
reengineering processes to reduce costs and improve asset efficiency, and
then using infrastructure to 2) drive profitable growth and 3) achieve
proprietary advantage.
How Gerstner leveraged infrastructure
 Decreased data centers –from 155 to 11
 A singe global Internet network replaced 31 incompatible networks
 Open source common standards for info processing and from
proprietary to industry standard enterprise applications
 Modular design and reuse
 Decreased global applications-16,000 to 5,200.
 Reduced CIOs from 128 to 1
 50% reduction in total cost of ownership for data center/network
operations
 Over $2 billion/year cost savings in internal IT expenses
 ROI on infrastructure investment of $100 million was less than one
year.
How Gerstner created options:
 IBM Global Services offered new services, including business
transformation outsourcing.
 Real-time actionable information was delivered to internal IBM
decision makers and to customers, suppliers, and business partners.
 Continuous improvement and organizational learning.
How Gerstner drove profitable growth:
 Through revenue-generating capabilities, such as:
o Benchmarking new product development process
o Redesigning hardware/software research and new product
development processes to reduce time to market and lower
development costs.
o Reducing abandoned project and warranty expense
 Through Actionable Information and Business Analytics:
o Knowledge management, content, collaboration, and web
portal infrastructure and tools for knowledge workers
o Web-based knowledge sharing portal
o Customer Relationship Management and link to intranet portals
o Consultant intranet
o eLearning for employees
o Internal intranet, content management, and collaboration tools
 Through It-enabled Product/Service Offerings:
o Services delivered internally and data center outsourcing
o Business transformation outsourcing, e-business and web
services.
o Business Transformation Outsourcing services
o IBM Global Services--$46 billion in revenues
o Linux-based server market grew 35%/year
o From 2002-2004, revenues grew from $64 to $96 billion, and
profits from $ 3 billion to $8 billion
How Gerstner achieved proprietary advantage:
 IBM Global Services became the #1 global IT services provider.
 Business Transformation Outsourcing
 Business Innovation Services
II.
Nicholas Carr Revisited
IBM case shows how emerging lean, flexible IT-enabled business infrastructures
can create strategic options and then decrease the cost and time of pursuing those
options and cashing in on their value.
Carr did not recognize that emerging networked IT infrastructures can be a major
driver of business insight, innovation, and proprietary advantage.
Study Questions:
1. What were the premises upon which Nicholas Carr’s judgment of the value
of IT was built?
2. What were some of the arguments against his idea?
3. What is the Business on Demand concept?
4. In the 1990s, why did execs still have trouble in trying to interwine business
operations and strategy with IT?
5. What was the “tipping point,” and why?
6. What 3 categories of benefits does the IT Value Framework identify that can
be used to define the business case for IT?
7. What is wrong with IT infrastructure in many companies?
8. What solutions are many firms now using to address these problems?
9. When firms consider the options value of investments in IT infrastructure,
what advantages can they anticipate?
10. What are the 3 categories of benefits identified in the IT Value Framework
that can be used to define the business case for IT?
11. What are some things that IBM, under Lou Gerstner, did to achieve each of
these 3 categories of benefits?
12. What capabilities of IT infrastructure did Nicholas Carr not recognize?