Auburn Career Center MIT Sloan Management Review Article Summary Read the paper -Carr 2005 SMRv46n3p67-73.pdf – carefully and summarize it with your own wo

Auburn Career Center MIT Sloan Management Review Article Summary Read the paper -Carr 2005 SMRv46n3p67-73.pdf – carefully and summarize it with your own words using the Paper Summary Template. i updated the Paper summary example, please use the paper summary example to write this assignment. SPRING 2005
VOL.46 NO.3
Nicholas G. Carr
The End of Corporate
Computing
Please note that gray areas reflect artwork that has
been intentionally removed. The substantive content
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REPRINT NUMBER 46313
The End of
Corporate Computing
S
omething happened in the first years of the 20th century that would have
seemed unthinkable just a few decades earlier: Manufacturers began to
shut down and dismantle their water wheels, steam engines and electric generators. Since the beginning of the Industrial Age, power generation had been
a seemingly intrinsic part of doing business, and mills and factories had had
no choice but to maintain private power plants to run their machinery. As the
new century dawned, however, an alternative started to emerge. Dozens of
fledgling electricity producers began to erect central generating stations and
use a network of wires to distribute their power to distant customers. Manufacturers no longer had to run their own dynamos; they could simply buy the
electricity they needed, as needed, from the new suppliers. Power generation
was being transformed from a corporate function to a utility.
Almost exactly a century later, history is repeating itself. The most important commercial development of the last 50 years — information technology
— is undergoing a similar transformation. It, too, is beginning an inexorable
shift from being an asset that companies own in the form of computers, software and myriad related components to being a service that they purchase
from utility providers. Few in the business world have contemplated the full
magnitude of this change or its far-reaching consequences. To date, popular
discussions of utility computing have rarely progressed beyond a recitation of
IT vendors’ marketing slogans, laden with opaque terms like “autonomic systems,” “server virtualization” and “service-oriented architecture.”1 Rather
than illuminate the future, such gobbledygook has only obscured it.
The prevailing rhetoric is, moreover, too conservative. It assumes that
the existing model of IT supply and use will endure, as will the corporate
data center that lies at its core. But that view is perilously shortsighted. The
traditional model’s economic foundation already is crumbling and is
unlikely to survive in the long run. As the earlier transformation of electricity supply suggests, IT’s shift from a fragmented capital asset to a centralized utility service will be momentous. It will overturn strategic and
operating assumptions, alter industrial economics, upset markets and pose
daunting challenges to every user and vendor. The history of the commercial application of information technology has been characterized by
astounding leaps, but nothing that has come before — not even the intro-
After pouring millions
of dollars into in-house
data centers, companies
may soon find that it’s
time to start shutting
them down. IT is shifting from being an asset
companies own to a
service they purchase.
Nicholas G. Carr
Nicholas G. Carr is the author of Does IT Matter? Information Technology and the
Corrosion of Competitive Advantage (Harvard Business School Press, 2004) and former executive editor of the Harvard Business Review. He can be reached at ncarr@
nicholasgcarr.com.
SPRING 2005
MIT SLOAN MANAGEMENT REVIEW
67
duction of the personal computer or the opening of the Internet — will match the upheaval that lies just over the horizon.
From Asset to Expense
Information technology, like steam power and electricity before
it, is what economists call a general-purpose technology.2 It is
used by all sorts of companies to do all kinds of things, and it
brings widespread and fundamental changes to commerce and
society. Because of its broad application, a general-purpose technology offers the potential for considerable economies of scale if
its supply can be consolidated. But those economies can take a
long time to be fully appreciated and even longer to be comprehensively exploited. During the early stages in the development of
a general-purpose technology, when there are few technical standards and no broad distribution network, the technology is
impossible to furnish centrally. By necessity, its supply is fragmented. Individual companies must purchase the various components required to use the technology, house those parts on
site, meld them into a working system and hire a staff of specialists to maintain them.
Such fragmentation of supply is inherently wasteful: It forces
large capital investments and heavy fixed costs on firms and leads
to redundant expenditures and high levels of overcapacity, both
in the technology itself and in the labor force operating it. The
situation is ideal for the suppliers
of the components of the technology, since they reap the benefits of overinvestment, but it is
ultimately unsustainable. As the
technology matures and central
distribution becomes possible,
large-scale utility suppliers arise
to displace the private providers.
Although companies may take
years to abandon their proprietary supply operations and all
the sunk costs they represent, the
savings offered by utilities eventually become too compelling to
resist, even for the largest enterprises. Abandoning the old model
becomes a competitive necessity.
The evolution of electricity
supply provides a clear model of
this process. When the commercial production of electricity
became possible around 1880,
many small utility suppliers
quickly popped up in urban areas.
These were largely mom-and-pop
Although companies may take
years to abandon
their proprietary
supply operations,
the savings
offered by utilities
eventually become
too compelling
to resist.
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MIT SLOAN MANAGEMENT REVIEW
SPRING 2005
operations that used tiny coal-fired dynamos to generate modest
amounts of power. The electricity they produced was in the form
of direct current, which could not be transmitted very far, so their
service distance was limited to about a mile. And their high-cost
operations forced them to charge steep prices, so their customers
were generally restricted to prosperous stores and offices, wealthy
homeowners and municipal agencies, all of which used the electricity mainly for lighting.
Relying on these small central stations was not an option for
large industrial concerns. To produce the great quantities of reliable electricity needed to run their plants, these companies had no
choice but to build their own dynamos. They contracted with
electrical supply houses like General Electric and Westinghouse to
provide the components of on-site generators as well as the
expertise and personnel needed to construct them, and they hired
electrical engineers and other specialists to operate the complex
equipment and meld it with their production processes. During
the early years of electrification, privately owned dynamos quickly
came to dominate. By 1902, 50,000 private generating plants had
been built in the United States, far outstripping the 3,600 central
stations run by utilities.3 By 1907, factories were producing about
60% of all the electricity used in the country.4
But even as big manufacturers rushed to set up in-house generators, some small industrial concerns, such as urban printing
shops, were taking a different route. They couldn’t afford to build
generators and hire workers to maintain them, so they had to rely
on nearby central stations, even if that meant paying high perkilowatt rates and enduring frequent disruptions in supply. At the
time, these small manufacturers must have felt like laggards in
the race to electrification, forced to adopt a seemingly inferior
supply model in order to tap into the productivity gains of electric power. As it turned out, they were the vanguard. Soon, even
their largest counterparts would be following their lead, drawn by
the increasingly obvious advantages of purchasing electricity
from outside suppliers.
A series of technical advances set the stage for this shift. First,
massive thermal turbines were developed, offering the potential
for much greater economies of scale. Second, the introduction of
alternating current allowed power to be transmitted over great
distances, expanding the sets of customers that central plants
could serve. Third, converters were created that enabled utilities
to switch between different forms of current, allowing old equipment to be incorporated into the new system. Finally, electric
motors capable of operating on alternating current were
invented, enabling factories to tap into the emerging electric grid
to run their machines. As early as 1900, all the technological
pieces were in place to centralize the supply of power to manufacturers and render obsolete their isolated power plants.5
Technical progress was not enough, however. To overturn the
status quo, a business visionary was needed, someone able to see
So Long, PC
If there’s a perfect symbol of corporate
IT today, it’s the personal computer.
Not only is the PC ubiquitous in modern
companies, dominating the desks of
most office workers, it is also a microcosm of the overall state of computing
resources at the typical corporation:
fragmented, redundant and increasingly
underutilized.
The invention of the PC was a great
advance, one of the most important in
recent business history. It dispersed the
power of computing to individuals,
spurred ingenuity, increased personal
productivity and undoubtedly sped the
development of networks, including the
Internet and World Wide Web. But the
rise of robust, high-capacity networks
has also made the desktop PC less
essential; computing resources can
increasingly be provisioned to users
from afar. And while the capacity of PCs
has exploded, the needs of users have
failed to keep pace. Few workers employ
more than a tiny fraction of the computing horsepower at their disposal, and
the multigigabyte hard drives of modern PCs tend to be either empty or filled
with nonessential files.
Some have argued that PCs are now
so cheap that it doesn’t matter that
they’re largely wasted. But that doesn’t
account for the considerable costs of
maintaining and updating huge fleets
of PCs and their associated software.
It also overlooks the fact that PCs often
represent the biggest security hole in
today’s companies, a gateway for hackers and a repository of ready evidence
for the litigious.
how the combination of technological, market and economic
trends could lead to an entirely new model of utility supply. That
person arrived in the form of a bespectacled English bookkeeper
named Samuel Insull. Infatuated by electricity, Insull emigrated
to New York in 1880 and soon became Thomas Edison’s most
trusted advisor, helping the famous inventor expand his business
empire. But Insull’s greatest achievement came after he left Edison’s employ in 1892 and moved to Chicago, where he assumed
the presidency of a small, independent power producer with
three central stations and just 5,000 customers. In less than
25 years, he would turn that little company into one of the country’s largest enterprises, a giant monopolistic utility named Commonwealth Edison.
Insull was the first to realize that, by capitalizing on new technologies to consolidate generating capacity, centralized utilities
could fulfill the power demands of even the largest factories.
Moreover, utilities’ superior economies of scale, combined with
their ability to spread demand across many users and thus
achieve higher capacity-utilization rates, would enable them to
provide much cheaper electricity than manufacturers could
achieve with their private, subscale dynamos. Insull acted aggressively on his insight, buying up small utilities throughout
Chicago and installing mammoth 5,000-kilowatt generators in
his own plants. Equally important, he pioneered electricity
metering and variable pricing, which enabled him to slash the
rates charged to big users and further smooth demand. Finally, he
launched an elaborate marketing campaign to convince manu-
In the late 1990s, Oracle CEO Larry
Ellison was roundly criticized for predicting that the PC, which he called “a
ridiculous device,” would be supplanted
by so-called thin clients — terminals
and other stripped-down devices connected to centralized computers.i If
Ellison’s timing was off, however, his
assessment was not. The case for keeping desktop computers in companies
will steadily weaken as utility computing becomes widespread. Unlike in
the home, where the PC is the engine
of computing, in business it is just a
cog, and an increasingly unnecessary
one at that.
i. K. Girard, “Ellison Resurrects Network Computer,” Nov. 16, 1999, http://news.com.com/
Ellison+resurrects+network+computer/2100-1001_
3-233137.html.
facturers that they would be better off shutting down their generators and buying electricity from his utility.6
As Chicago manufacturers flocked to his company, Insull’s
vision became reality. In 1908, a reporter for Electrical World and
Engineer noted, “although isolated plants are still numerous in
Chicago, they were never so hard pressed by central station service as now. … The Commonwealth Edison Company has among
its customers establishments formerly run by some of the largest
isolated plants in the city.”7 The tipping point had arrived.
Although many manufacturers would continue to produce their
own electricity for years to come, the transition from private to
utility power was under way. Between 1907 and 1920, utilities’
share of total U.S. electricity production jumped from 40% to
70%; by 1930, it had reached 80%.8
By changing their view of electricity from a complex asset to a
routine variable expense, manufacturers reduced their fixed costs
and freed up capital for more productive purposes. At the same
time, they were able to trim their corporate staffs, temper the risk
of technology obsolescence and malfunction and relieve their
managers of a major source of distraction. Once unimaginable,
the broad adoption of utility power had become inevitable. The
private power plant was obsolete.
IT’s Transformation Begins
Of course, all historical analogies have their limits, and information technology differs from electricity in many important ways.
IT, for instance, incorporates software, which is a product of
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human creativity that is protected
by intellectual property rights.
But there are deep similarities as
well — similarities that are easy
for modern-day observers to
overlook. Today, people see electricity as a “simple” utility, a
standardized and unremarkable
current that comes safely and predictably through sockets in walls.
The innumerable applications of
electric power, from table lamps
in homes to machine tools on
assembly lines, have become so
commonplace that we no longer
consider them to be elements of
the underlying technology —
they’ve taken on separate, familiar
lives of their own. But it wasn’t
always so.
When electrification began, it
was a complex, unpredictable
and largely untamed force that
changed almost everything it
touched. Its application layer, to
borrow a modern term, was as
much a part of the technology as the dynamos, the power lines
and the current itself. All companies had to figure out how to
apply electricity to their own businesses, often making sweeping
changes to long-standing practices, work flows and organizational structures. As the technology advanced, they had to struggle with old and often incompatible equipment — the “legacy
systems” that can impede progress.
As a business resource, or input, information technology
today certainly looks a lot like electric power did at the start of
the last century. Companies go to vendors to purchase various
components, such as computers, storage drives, network switches
and all sorts of software, and cobble them together into complex
information-processing plants, or data centers, that they house
within their own walls. They hire specialists to maintain the
plants and often bring in outside consultants to solve particularly
thorny problems. Their executives are routinely sidetracked from
their real business — manufacturing automobiles, for instance,
and selling them at a profit — by the need to keep their company’s private IT infrastructure running smoothly.
The creation of tens of thousands of independent data centers,
all using virtually the same hardware and for the most part running similar software, has imposed severe penalties on individual
firms as well as on the broader economy.9 It has led to the overbuilding of IT assets, resulting in extraordinarily low levels of
The creation of
myriad independent data centers,
all using virtually
the same hardware and similar
software, has
imposed severe
penalties on
individual firms.
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SPRING 2005
capacity utilization. One recent study of six corporate data centers
revealed that most of their 1,000 servers were using just 10% to
35% of their available processing power.10 Desktop computers fare
even worse, with IBM Corp. estimating average capacity utilization
rates of just 5%.11 (See “So Long, PC,” p. 69.) Gartner Inc., the
research consultancy based in Stamford, Connecticut, suggests that
between 50% and 60% of a typical company’s data storage capacity is wasted.12 And overcapacity is by no means limited to hardware. Because software applications are highly scalable — in other
words, able to serve additional users at little or no incremental cost
— installations of identical or similar programs at thousands of
different sites create acute diseconomies in both upfront expenditures and ongoing costs and fees. The replication from company to
company of IT departments that share many of the same technical
skills represents an overinvestment in labor as well. According to a
2003 survey, about 60% of the average U.S. company’s IT staffing
budget goes to routine support and maintenance functions.13
When overcapacity is combined with redundant functionality,
the conditions are ripe for a shift to centralized supply. Yet companies continue to invest large sums in maintaining and even
expanding their private, subscale data centers. Why? For the same
reason that manufacturers continued to install private electric
generators during the early decades of the 20th century: because
of the lack of a viable, large-scale utility model. But such a model
is now emerging. Rudimentary forms of utility computing are
proliferating, and many companies are moving quickly to capitalize on them. Some are using the vast data centers maintained
by vendors like IBM, Hewlett-Packard and Electronic Data Systems to supplement or provide an emergency backup to their
own hardware. Others are tapping into applications that run on
the computers of distant software suppliers. Such hosted programs, which include systems for procurement, transportation
management, financial accounting, customer service, sales-force
management and many other functions, demonstrate that even
very complex applications can be supplied as utility services over
the Internet. (See “The Pathbreakers.”)
What these early efforts don’t show is the full extent and
power of a true utility model. Today’s piecemeal utility services
exist as inputs into traditional data centers; individual companies
still must connect them with their old hardware and software.
Indeed, firms often forgo otherwise attractive utility services or
run into problems with outsourcing arrangements because the
required integration with their legacy systems is so difficult. True
utility computing will have arrived only when an outside supplier
takes responsibility for delivering all of a company’s IT requirements, from data processing to storage to applications. The utility model requires that ownership of the assets that have
traditionally resided inside widely dispersed data centers be c…
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