The 'IT is dead' fallacy

Newsweek is the latest publication to climb on the bandwagon of the “IT is dead” movement. This flap started back in May, when the Harvard Business Review published an article titled “IT Doesn’t Matter.” The thrust of the argument is that the big advances of information technology are behind us as Chad Dickerson said in his June 2 column "Fuhgeddabout IT". High-end gear such as servers, storage, and routers have become commodities. There is little further to be gained from IT innovation.

To their credit, the Newsweek editors did not swallow the story whole; they cited many counterarguments.

But here is another, drawn from statistics kept by the U.S. Bureau of Economic Analysis. Each quarter, the BEA tracks U.S. IT spending from two perspectives. First it calculates the actual dollars spent on hardware, software, and services. Then it estimates the value of those purchases based on improvements in IT gear.

To see the difference, imagine a country that buys 10 computers at a cost of $10 each. Its total IT spending is $100. Next year, it buys another 10 computers, but this time they cost $9 each and are 20 percent more powerful.

If you count only dollars spent, IT spending seems to drop from $100 to $90. But if you consider the 20 percent performance improvement, purchases from Year No. 2 are actually worth $120 in Year No. 1 dollars. By following the two numbers over time, says BEA director J. Steven Landefeld, you get a rough idea of the discrepancy between spending and resulting value.

In fact, nominal spending on IT has grown by only 40 percent since 1996, while the value of the gear rose 96 percent. And it’s in the spread between those curves that the “IT is dead” fallacy lies. During the recession, businesses pocketed any savings from higher- value IT gear. Now they will begin to spend more on innovation — which could fuel a new and very non-bubble-like IT expansion.