The Future

of IT Value
Creation
in a Global
Economy
by Rob Austin, Fellow,
Cutter Consortium
The future belongs to those
who know how to create new
things.
This is the theme that I present in
my final classes with MBAs and
executives at the Harvard Business
School. If they remember only one
thing, I hope it’s this. It’s worth
repeating, with emphasis added:
“The future belongs to those who
know how to create new things.”
I said this to a friend of mine, a
world-class product development
manager, one of very few people in
the world who really understand
how to turn research into salable
products, and he had this to say
(he’s from Texas): “Damn straight!
We’ve got to get manufacturing
back in this country!” But that’s not
what I mean by “new.”
There is, of course, a sense in
which a manufactured product —
say, a new car rolling off an assem-
bly line — is new. That particular
car has not existed in the world
before. But there is also a sense in
which that car is not at all new.
Before anyone performs the first
operation involved in making a car
on an assembly line, the car and
the process for making it are com-
pletely prespecified in exacting
detail. No one builds anything until
they are sure they can build every-
thing. If there is anything surprising
about the car that results — if it is
different from the product
prespecification in any way — we
have a phrase for that: we call it a
“quality problem.” In this world,
surprises are generally bad, and we
devote much effort to avoiding bad
surprises.
What I mean by “new,” though, is
something different. By “new” I
mean novel — that which obtains
value because of its difference from
what has come before it or what
has been previously imagined, not
because it conforms to a prede-
fined idea of what it should be. I
mean things that are valuable in
large part because they are surpris-
ing, in delightful ways. New, never-
before-seen or experienced
products or services. New, never-
before-exploited markets or strate-
gies. The future belongs to those
who know how to create things
that are new in this sense, not in
the manufactured new sense.
Knowing how to create things that
are novel and valuable is quite a
different matter from knowing how
to create a high-quality manufac-
tured good. It requires different
ways of thinking, different manage-
ment principles.
Creating things that are novel and
valuable — this is the capability that
is most essential to generating
value in developed economies of
the future. Why am I so convinced
of this? I can best explain by repeat-
ing something that a major US com-
pany’s CIO said to me about a year
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ago. He was explaining to me the
gist of what he’d been doing for the
past two or three years since taking
his position. As he said it, I could
tell that he himself was at least a lit-
tle bit surprised that so much of
what he’d been doing could be
summarized so succinctly. What he
said was this: “Chunk it, routinize it,
digitize it, automate it, and send it
offshore.”
His company had discovered some-
thing that the company Despair, Inc.
(http://despair.com; check out their
wickedly funny posters) expresses
this way: “A company that will go to
the ends of the earth for its people
will discover that it can hire them
for about 10% of the cost of
Americans.”
This CIO reckoned that there were
only about two operations in serv-
ices his company provided that
could not be sent offshore. One had
to be kept local because of a legal
requirement, and another, it was
determined, was best done locally
because it benefited from close
customer contact. The rest could
go the China, Ghana, India, the
Philippines — wherever. And an
awful lot of it had.
Although I know others on this
Council disagree with me, I assert
that this trend toward offshoring is
pretty much unstoppable. If you can
prespecify work in detail, and qual-
ity can be reasonably well ensured
via conformance to process specifi-
cations, why — as a business mat-
ter anyway (that is, setting aside for
the moment public policy con-
cerns) — would you hire expensive
labor to do the work? The first wave
of this movement of work has been
startling in developed economies,
but the next wave will be breath-
taking. Even if it’s only a percentage
of work done in developed
economies, it’s a percentage of an
increasing absolute number. And
we should be wary of “reassuring”
words like “Some things can’t be
offshored.”
I have a favorite example I trot out
when people start talking about
things that can’t be offshored: a
company that makes plastic brack-
ets that substitute for the wired
braces orthodontists put on peo-
ple’s teeth to straighten them. The
process for making these practically
invisible plastic brackets is very
sophisticated. Your dentist makes a
mold of your mouth, which then
gets digitized and transmitted over
the Internet to offshore (though
often US-trained) orthodontists who
work for two or three dollars an
hour. Working with software engi-
neers who are paid even less, these
orthodontists create a digital movie
that describes the trajectory of your
straightening teeth from starting
point to end point. The movie is
transmitted to a factory in another
low-labor-cost country, where more
fancy technology is used to create
the plastic brackets from the digital
specification embodied in the
movie. A few days after your dentist
sticks that gooey mold into your
mouth and asks you to bite down, a
suitcase shows up in his office with
plastic brackets for you to wear
over the next couple of years, a
slightly different shaped bracket for
each week.
I mention this example not to prove
anything, but to be provocative — if
you were going to make a list of
people whose jobs probably could-
n’t be offshored, wouldn’t “ortho-
dontist” make the list? You’d think
an orthodontist would need to be
close to the patient, inside his or
her mouth in fact. But no, not after
some clever entrepreneurs and
some interesting IT get involved. As
a marketing matter, I suspect this
company would never profess an
intention to offshore orthodontists’
jobs. But I’ll let you decide what
this amounts to and whether the
offshore label is justified. Hopefully
my point is clear: many things you
think can’t be offshored probably
can be.
To continue to develop the implica-
tions of the shift in the location of
many forms of value creation,
let’s pause to make a couple
observations:
1. In the formula “chunk it, rou-
tinize it, digitize it, automate it,
and send it offshore,” only the
very last part is at all new. The
“chunk it, routinize it, digitize it,
automate it” is the bread and
butter of what we have done
with IT in the last three decades
or so. We sometimes beat our-
selves up for project failure rates
and suboptimal investments in
IT, but the fact is that business in
developed economies has been
dramatically transformed by IT
managers busy at chunking, rou-
tinizing, digitizing, and automat-
ing. As a profession, we have
created immense value in this
way. It is what we really — really
— know how to do.
2. In the future, however, that work
is likely to happen increasingly
in low-labor-cost environments.
Businesses in developed
economies will capture much
of the value of having work
done in lower-labor-cost places,
but if you are an IT manager
who doesn’t plan to move to
Bangalore or Beijing, you’ll even-
tually have to figure out other
ways of using IT to create value.
Specifically, you’ll have to learn
how to create value by supporting
the creation of novel and valuable
things, and this will not be about
chunking, routinizing, digitizing,
and automating. Creating value by
creating new things is not about
routinization or automation in any
traditional sense. If you automate a
process, you ensure your ability to
re-execute it. But if you execute the
same thing twice, you’ll get the
same result. Creating new things
is not about value extracted from
consistent re-execution of the
same processes. It is about new
processes, with surprising charac-
teristics and unexpectedly valuable
outputs. Our automation reflexes
will not serve us well in efforts to
create anew.
COUNCIL OPINION 3
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EARLY DAYS FOR
INNOVATION MANAGERS
Figure 1 shows the historical evolu-
tion of the labor force from 1850
through 2010 (an estimate). This
picture is for the US labor force, but
other developed economies show
similar patterns. There are several
things to notice about this picture.
First, the ways in which people are
employed shifts rather dramatically
over time. If you were working in
1850, you were likely, with 50%
probability, to be working on a
farm. By 100 years later, in 1950,
that 50% had shrunk to 14%, and a
category that had not even existed
in the 1850 statistics — “manufac-
turing worker” — was the largest at
29%. By 2010, agrarian employment
will have shrunk to a miniscule 2%,
and manufacturing workers will be
down to 11%. The new largest cate-
gory then will be something we
don’t even have a good name for
now, people who create value pri-
marily by innovating, often through
manipulation and transformation of
intangible materials, such as ideas,
symbols, and brands. Call them
“knowledge workers” if you like, or
maybe “innovation workers.”
Second, realize that when we
observe shrinkage in a job category
like “agrarian worker,” we are
watching a management learning
process in action. The 2% of people
who will work in the agrarian sec-
tor in 2010 will make far more food
than the 50% in that sector in 1850
ever did. The absolute numbers
underlying the percentages are
increasing as well, but that’s not the
main reason for the increase in the
amount of food. The main reason is
that we grew a lot more capable in
managing the production of food.
Ditto for manufactured goods. The
fact that so many people worked in
factories in 1950 and that relatively
few work in manufacturing in 2010
shows how much better we’ve got-
ten at managing factories through
six decades.
Third, when the workforce transi-
tioned from agrarian to manufactur-
ing orientation, managers were not
able to simply transfer the lessons
of state-of-the-art farming into the
factory setting. Some learned prac-
tices from farming were no doubt
transferred into factory settings, but
surely much could not be. Farms
are not factories, and superb farm
managers were not necessarily
great factory managers. The shift in
the mode of value creation gener-
ated a new need for management
know-how.
Which leads me to some
conclusions:
1. These are still very early days in
the management of those
knowledge or innovation work-
ers who produce new value by
creating new things. Any man-
agement understanding we have
that concerns factory manage-
ment is many decades more
developed and refined than our
understanding of managing, say,
software developers. Hence, we
have much to learn about man-
aging innovation-based value
creation.
2. Just as agrarian managers and
workers probably first tried to
transfer their understanding
of farms to factories, so are we
inclined to try to apply our hard-
won understanding of how to
manage factories to innovative
work. It’s a natural human ten-
dency to want to use the knowl-
edge you already have, to do
what you already know how to
do, rather than admit that you
must learn something new and
different.
3. The chunking, routinizing, digi-
tizing, and automating that we
have done so well in IT is part of
our “factory” mindset; much of
it will not help us as we move
Agr. 14 %
Agr. 2%
Mfg. 11%
?
r er Wo k s
Agrarian
workers
50%
Mfg.
workers
29%
1850
Agrarian Economy
1950
Industrial Economy
2010E
Information Economy

Figure 1 — Agrarian to industrial to information economy. (Source: Compiled from numerous sources, including
[1] and reports from the US Department of Labor, Bureau of Labor Statistics, www.bls.gov.)
BUSINESS TECHNOLOGY TRENDS & IMPACTS ADVISORY SERVICE 4
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forward into innovation-based
value creation. The very success
we have experienced in cost
reduction and efficiency
improvement in IT has been giv-
ing us the wrong feedback and
has helped us form the wrong
reflexes for an innovation-based
future.
The challenge for the IT manager in
a developed economy who wants
to continue to produce business
value with IT, then, is to develop a
broad new strategy for supporting
business value creation via inno-
vation. Unlike the traditional
approaches to creating value with
IT, which were mostly aimed at the
cost side of the income statement,
these new ways of supporting value
creation with IT will often be
focused on the revenue side of the
income statement.
To build on our theme: The future
belongs to those who know how
to use IT to support innovation
processes that are as reliable at
producing value by creating anew
as past uses of IT have been at
generating cost reduction and
efficiency. But if that’s not about
chunking, routinizing, digitizing,
and automating, what is it about?
Fortunately, the answer to this
question is becoming clear.
SUPPORTING CHEAP AND
RAPID ITERATION (WITH A
HUMAN TOUCH)
Some of the most instructive exam-
ples of the future of IT taking shape
have, in recent years, been in the
pharmaceuticals industry. Compa-
nies in this industry have long
understood the importance of rev-
enue-side IT investments. Many
firms have invested billions in what
is sometimes called “industrialized
drug research.”
The idea behind these investments
is simple and compelling: Once
upon a time, it took a lab tech-
nician an afternoon to test a
promising compound; the number
of lab technicians limited the num-
ber of tests performed in a day. But
with computerization and robotics
available, this need not be true.
Industrialized drug research has
involved huge investments in
automating this kind of experimen-
tation, so that many more tests can
be performed, much more quickly,
carried out by robots and analyzed
by computers. By building IT sys-
tems to make tests “cheap and
rapid,” drug makers can over-
whelm the new drug discovery
process by brute force, explore
an “experimentation space” much
more quickly, and thereby discover
more and more blockbuster drugs
at an accelerating rate. Payback is
not measured in terms of cost sav-
ings, but rather in terms of new rev-
enue sources — new products to
take to market.
That’s the theory, anyway. In prac-
tice, it hasn’t worked out exactly
that way. The blockbusters have
stubbornly refused to appear in
large numbers from this process.
Instead of a brave new world full
of many new and amazing drugs,
we have what the industry calls a
major “research productivity prob-
lem.” There has been much soul-
searching about why this is true.
Some say we simply haven’t given
the approach time enough to bear
fruit, but another explanation often
posed by those within the industry
is also quite interesting. An article
in the Wall Street Journal illumi-
nates this explanation:
In 1991, Schering-Plough scien-
tists were looking for a drug
that would block a certain
cholesterol-producing enzyme
in the body. They noticed in a
test on hamsters that one
molecule, while failing to block
that enzyme, nonetheless low-
ered cholesterol. If a robot had
tested the molecule ... it would
have caught the failure but
missed the serendipitous
side result … scientists stum-
bled onto a new approach for
reducing cholesterol. [2]
The problem, propose many, is
that industrialized drug research
removes too much of the “human
element” from drug discovery. It
makes implicit assumptions that
the “experimentation space” pro-
grammed into the automated
approach is the right one. The his-
tory of blockbuster drugs (and
other great discoveries, for that
matter) suggests that we often
notice the most important results in
a surprising way, along dimensions
orthogonal to those we thought
of in planning the experiment. In a
way, we are back to questions of
what “new” means: If we find
something in the exact experimen-
tation space where we expected to
find it, how new can it really be? To
be truly novel, perhaps a thing must
surprise us. Not all things that sur-
prise us will be valuable, of course,
but if our process rules out the sur-
prising (as does the automated
experimentation described above),
then we will have trouble produc-
ing big value.
What does this mean for IT? If we
analyze the industrialized drug
research process in accord with our
earlier thoughts about chunking,
routinizing, digitizing, and automat-
ing, we could say that they got
things half right. Pharma firms
focused not on cost reduction and
efficiency but on revenue-side
enhancements to justify their IT
investments. But alas, they did not
completely break away from the
cost-side mindset. They applied the
idea of automation — prepro-
grammed and prespecified process
execution — and the outcomes
were reliably consistent but not all
that novel. Their reflexes were to
chunk, routinize, digitize, and auto-
mate, which works very well in
creating “new” products in the
manufacturing sense but not so
well in the novel and valuable
sense. They shook off their indus-
trial reflexes halfway (in thinking
about the justification and domain
of application of IT) but not all the
way (they fell back on old auto-
mate-the-process inclinations). In
COUNCIL OPINION 5
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this example, we see the clash
between Industrial Age reflexes and
the need to create value in a new
way in the age of innovation-based
work.
The way out of this difficulty is to
think in terms of supporting the
human capacity to try new things,
to notice unexpectedly important
outcomes, and to build upon those
outcomes to create new value.
Reducing the cost of trying things,
through computerization, is a sound
inclination; this is what the industri-
alized drug research investments
do right. They make it cheap and
rapid to try new things. But the
human element needs to be built
into the process, and computeriza-
tion needs to be aimed at support-
ing not repeated and consistent
execution of the same processes,
but easily reconfigurable execution
of different processes, from itera-
tion to iteration. When this is done
correctly, the overall “shape” of
value creation changes. Figure 2
contrasts the shape of reliable inno-
vation with the classical shape of
processes aimed at producing out-
comes that are new in the manu-
facturing sense of that word. In the
future, IT managers in developed
economies will need to focus their
attentions on the new, iterative
shape and try to defeat their
reflexes to structure work in the
old, more sequential ways.
RECOMMENDATIONS
1. Make a list of ways your com-
pany might use IT on the rev-
enue side of the income
statement.
2. Review your company’s portfolio
of in-progress IT initiatives and
see how many of them are pri-
marily cost-side versus revenue-
side in terms of hoped for
benefits. Ask yourself whether
there are enough revenue-side
investments in your portfolio.
3. Budget iteratively. Think of rev-
enue-side IT investments as
experiments or bets you are
placing. Don’t make them dis-
astrously large where uncer-
tainty is high, but don’t back
away from uncertainty either. Try
to structure investments so that
you “buy information” that helps
you reduce uncertainty as you
explore potential new revenue
sources.
4. Look for opportunities to make
trying things more cheap and
rapid, but make sure you keep
the human element present in
those processes. Keep in mind
that no automated solution,
however sophisticated, is as flex-
ible as the human organism.
Design applications to magnify
the benefits of that flexibility, not
drive it out of the process.
5. If you work in one of those com-
panies in which everything has
to be justified in terms of cost
savings or headcount reduc-
tions, you must immediately
start a campaign to educate sen-
ior managers about the impor-
tance of expanding the criteria
for project justification.
6. Take a marketing or product
development class at a local
business school. Try to take on a
more revenue-oriented outlook.
7. Be more open to suggestions
from those employees who drive
you nuts by never wanting to do
the same things twice or by hat-
ing to do repetitive activities.
These people have the motiva-
tion you need to tap to create
novel and valuable outcomes.
8. Keep in mind another deep truth
from a Despair, Inc., poster: “If a
pretty picture and a cute saying
are all it takes to motivate you,
you probably have a very easy
job — the kind robots will be
doing soon.”
REFERENCES
1. Kutscher, Ronald E. “Historical
Trends, 1950-92, and Current
Uncertainties.” Monthly Labor
Review, Vol. 116, No. 11, November
1993, pp. 3-10.
2. Landers, Peter. “Drug Industry’s
Big Push Into Technology Falls
Short.” Wall Street Journal,
24 February 2004.
Expose Customer
to Product
Kim Clark and Takahiro Fujimoto’s
Description of the Automaking Process
Iterative Not Sequential

Software Development
Using an “Agile” Approach
Product
Repeat
Conversation with
Customer about
Product
Generate Product Concept Generation
Product Planning
Product Engineering
Process Engineering
Production Process
Figure 2 — The “shape” of reliable innovation.
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ABOUT THE AUTHOR
Robert D. Austin is a Fellow of the
Cutter Business Technology Council
and Cutter Consortium’s Business-
IT Strategies and Enterprise Risk
Management & Governance prac-
tices. He is former Editor of Cutter
Benchmark Review and is a regular
speaker at Cutter Summits and
symposia. Dr. Austin has been a
professor at the Harvard Business
School since 1997, where he has
taught subjects such as economics,
financial reporting, IT, and opera-
tions management to MBAs and
executives. He chairs the school’s
executive program targeted at CIOs
and teaches the IT module in the
program for owner managers.
Currently, he serves on the advisory
boards or boards of directors of
several IT industry firms, and he
advises major corporations world-
wide. Dr. Austin’s research deals
with IT management and, more
generally, on management of
knowledge-intensive activities,
with a particular focus on inno-
vation. He is the author of four
books: Measuring and Managing
Performance in Organizations;
Creating Business Advantage
in the Information Age (coauthored
with Lynda Applegate and Warren
McFarlan); Corporate Information
Strategy and Management (also
coauthored with Applegate and
McFarlan); and Artful Making:
What Managers Need to Know
About How Artists Work (coau-
thored with Lee Devin). His newest
book about the telecom industry,
The Broadband Explosion, is
co-edited with Professor Stephen
Bradley. Before joining the Harvard
faculty, Dr. Austin was a technology
manager at Ford Motor Company’s
European and Emerging Market
operations. During his 10 years with
Ford, he was involved in develop-
ment, implementation, and support
of IT applications in a variety
of businesses, including after-sales
service, parts operations, consumer
credit, vehicle assembly, and tech-
nical services. He also has partici-
pated on Software Process
Measurement and National
Software Capacity Study teams
at the Software Engineering
Institute (SEI). He can be reached
at raustin@cutter.com.
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This article originally appeared as part of Council Opinion Vol. 7, No. 12 of the Business Technology Trends & Impacts advisory service.
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