Forget about personalization, portals and push: Today's mantra in information technology is "services."
Most financial analysts have been skeptical about the proposed merger of Hewlett-Packard and Compaq Computer, announced last week. But those who see some hope have based their assessment on the prospect of the merged company's being able to build a business in providing information technology services to its customers.
The information technology service business ranges from day-to-day system administration, to the more difficult, and more risky, challenge of system integration: making new technology work with older "legacy" systems.
The more information technology a company buys, the more it has to spend to support it and use it effectively. Erik Brynjolfsson, an MIT economist, estimates that for every dollar spent on information technology hardware, about US$10 must be spent on additional expenses like worker training, systems administration, business process re-engineering and other services. It is not surprising that a lot of technology companies are hungry for a piece of the services market.
Hewlett-Packard, looking at IBM's success in this area, has been trying to expand its role in services for some time. It tried to acquire the consulting company PricewaterhouseCoopers last year; even though that acquisition collapsed, Hewlett-Packard has continued to make deals with PricewaterhouseCoopers and another big information technology consultant, Accenture. As for Compaq, last year its services business generated about 23 percent of total revenue -- a bright light in an otherwise dismal earnings report.
But is the service strategy the way to go? If the real estate market were so depressed that no one wanted to erect new buildings, would it make sense to say, "Let's get out of construction and go where the real money is: architecture?"
But perhaps that isn't the best comparison. Maybe a better analogy is this: If the construction business is depressed, remodeling could still be a very good business.
The information technology industry had three back-to-back investment spurs during the latter part of the 1990s: telecommunications deregulation in 1996; fears in 1998 and 1999 of the Year 2000 computer problem, and the Internet boom in 1999 and 2000. Each of these events led corporate customers to stock up on information technology. Now, large companies generally have a modern, efficient information technology infrastructure. The problem is, they haven't figured out how to use it very well.
Paul David, the Stanford economic historian, described a comparable situation in his classic 1990 article "The Computer and the Dynamo." Before electricity, manufacturing plants were built around a shaft running down the center of the factory. All the power tools were run by belts connected to the central shaft.
When electric motors came along, they provided a more reliable power source, but initially had little impact on the actual production process.
It wasn't until Henry Ford and company started experimenting with assembly lines in 1913 that electric motors really became useful. Ford and his executive team were on the factory floor every day, tinkering with the line: speeding it up, slowing it down, raising it, lowering it, moving the tools around and rearranging production flow.
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