Thursday, November 09, 2006

IT does matter - at least sometimes

Ever since Nicholas Carr wrote IT doesn't matter there has been a well publicised debate on the real value of IT in modern businesses.  Sometimes Carr is right, commodity hardware and commodity software is good enough, there is no competitive advantage to be gained by going beyond cheap commodity products.

But sometimes IT does matter.  Sometimes IT can be the source of competitive advantage, sometimes it can help you do things you couldn't do otherwise.  I'm always on the look out for these instances and the front page of today's Financial Times gives a great example.

The London Stock Exchange (LSE) has just announced half year profits up from £26m to £76 - yes a three fold increase.  This is on trading volume up 42% to 744bn shares.  And the reason?  An improved IT system.

Over the last 10 years stock exchanges - and related institutions - have switched to electronic trading systems.  These have multiple advantages over the old "open outcry" systems: accuracy, speed, process automation, etc. etc.  Perhaps one of the biggest benefits is that electronic trading systems allow fully automated trading, a computer programmed with the right algorithms can conduct the trading.  This is more than just automating the process it is a radical change in the basis of share trading system and has helped hedge funds reach their current position.

Earlier this year the LSE introduced a new version of its trading system, SETS.  In reality this probably meant a software upgrade, perhaps a hardware upgrade, maybe even bandwidth upgrades.  The hardware is commodity boxes (Sun boxes I think) and the bandwidth is purchased from regular communication providers, the software is the interesting bit, this is specific to the LSE.  A change to the system usually means a software upgrade, and sometimes this can go wrong - like it did earlier this week at the London Metals Exchange (LME).

In the case of the LSE and its customers IT does matter, it allows them to do something different and it can make a big difference to the bottom line.  But it comes with risk, it matters because your business now depends on this stuff, like at the LME.

This IT is expensive and difficult to get right - I know, I worked on the Reuters end of the LIFFE Connect trading system when it went live in 1999.  As the LSE shows, when you get it right it makes a big difference.

However, IT also has its limits.  Its all to easy to dream up some big new idea, some strategy and say "Technology will implement it."  Technology has its limits and this can effect strategy is a very real way.  A good example of this is the problem Skype faces, describe by Robert X. Cringely in July.

Although most people think Skype is a pure peer-to-peer networking system it isn't.  Because of Network Address Translation (NAT) Skype needs to impose a server into most calls.  These don't have to be Skype’s own servers, they've worked out how to borrow server bandwidth from others but as the user base grows this will become a bigger problem.

For Skype there is no short or medium term way around this problem - their techno-business strategy means at some stage they had to get access to lots of server.  Consequently it was almost inevitable that they had to sell out to a big player like eBay or Google sooner or later to get access to more public servers.

Meanwhile, Skype, and similar VOIP technology, is changing the business strategy of other companies, obviously traditional telcos like AT&T and BT are vulnerable, so to are mobile operators like Vodafone but also  companies who simply use telephones - which is most of us – face change.  Even if in the long term VOIP becomes yet another commodity technology it is causing change now, and that is strategy and that is important.

So, there you have it, another reason why I still believe IT is important.  Ignoring IT in creating your strategy is wrong, letting it run the entire show is wrong, you need to find a middle way, which is were you need people who understand both.

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