Academic journal article The McKinsey Quarterly

Technology after the Bubble: IT Will Rise Again-But Only If the Providers Learn How to Help Their Customers Make Money

Academic journal article The McKinsey Quarterly

Technology after the Bubble: IT Will Rise Again-But Only If the Providers Learn How to Help Their Customers Make Money

Article excerpt

The great corporate information technology glut is over, and not a moment too soon--at least from an IT buyer's perspective. Having spent more than $1.2 trillion on information technology in the United States alone from 1995 to 2000, companies now want to wring the elusive productivity and bottom-line gains from this massive outlay.

If buyers are glad to end their spendthrift ways, IT providers of course have a different perspective: after years of heady sales growth, they are now engaged in bare-knuckle competition as the industry confronts sated customers and overcapacity. With too much of almost everything--sales reps, manufacturing capacity, engineers, managers--these companies must now accept more reasonable near-term projections of demand than they had anticipated during the years of overbuilding and overhiring. To make matters worse, they can expect stronger price pressure from customers, which have shifted their focus from new investments--currently regarded with considerable skepticism--to the maintenance and management of their in-place IT systems. The mounting pressure from customers whose budgets are falling and the more intense competition will continue to bear down upon the IT vendors' margins.

Merely getting leaner won't suffice. When corporate demand for technology revives, within the next 18 to 24 months, the requirements for success in IT will be very different from those of the boom years. In the profligate 1990s, vendors got by on somewhat theoretical return-on-capital analyses. Now customers are more likely to demand that any case for investment not only take into account the business realities they face and their existing IT investments but also demonstrate the top- and bottom-line impact of the products and services on offer. The vendors must also learn from companies that have made their IT investments pay and show less successful companies how to emulate them.

Obtaining this know-how won't be easy. It will force vendors to acquire deep business-process or vertical-industry expertise and a better understanding of their customers' deployed systems and configurations, to say nothing of the associated economics. To lead in the postbubble era, IT providers that entered the boom as leaders will have to shed, we estimate, an average of half or more of their current business portfolios over the next eight to ten years. And they must start preparing for the future immediately.

Succeeding now

The requirements for success will change for two reasons, both related to the failure of most companies to derive value from their IT investments in the late 199 Os. First, less successful companies will push IT vendors to help them realize near-term results from the money they have already spent on technology. Then, having seen the benefits enjoyed by the prescient few companies that did obtain a competitive advantage from IT, the less successful ones will put longer-term pressure on the vendors to help them reach or push beyond the best-practice frontiers opened up by the leaders. Both developments have challenging implications for the IT providers, which will have to focus their products and services on assisting customers in the quest to create value.

Learning from companies that got IT wrong ...

During the boom years, from 1995 to 2000, companies installed massive enterprise-resource-planning packages; upgraded their equipment as costs for PCs, servers, and storage hardware fell; and tried to tie their hardware and software together by investing heavily in connectivity, including technology to support the leap to the Internet. They also shelled out large sums of money, often on expensive new applications to replace old ones, anticipating Y2K problems. (1) Technology vendors reaped the bonanza.

Yet few companies benefited from this orgy of investment--as the gap between spending and productivity, at both the sector and the corporate level, demonstrates clearly. …

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