Enough Already: IT's Decreasing Returns

March 17, 2004

Twenty or so years ago if you wanted to give a presentation using color charts and other graphics, you had to be prepared to spend lots of time and money. I remember those days very well. I was working as an editor at a management consulting firm, and I recall we had a small department dedicated to what was known as “slide production.” Three “color graphics specialists” (I think that’s what they were called) used high-powered workstations and sophisticated color printers – extremely expensive gear back then – to translate consultants’ hand-written sketches into pretty pictures and then, usually after many laborious rounds of revisions, they’d send the files out to a service bureau to produce the actual slides, which a courier service would deliver back to the office. Lugging bulky slide carousels, the consultants would head out on the road.

Then came the personal computer and presentation graphics applications – PowerPoint and its predecessors – and the rest is history. Soon, the three color graphics specialists were let go, the pricey workstations and printers were carted off, and the service bureau became a distant and not-particularly-good memory. The creation of graphics-intensive color presentations became a routine part of business, done quickly by regular folks using cheap computers and printers.

Since then, innumerable versions of PowerPoint have been pumped out by the coders and marketers of Redmond, each providing an assortment of new bells and whistles. And companies have dutifully forked out many millions of dollars to buy and install the upgrades. But the big productivity gains came very early on – when the purchase of the original application allowed companies to lay off specialized workers, stop buying expensive specialized gear, and stop sending money out to service bureaus and couriers. It’s debatable, in fact, whether most subsequent purchases of PowerPoint upgrades produced any returns whatsoever.

That process is not unique to presentation graphics software. It is, in fact, a hallmark of information systems in general. The big economic returns come relatively early after the introduction of a new system – when a labor-intensive manual process is first automated – and then the returns from successive technology investments steadily decline, eventually turning negative. As the distinguished Northwestern University economist Robert Gordon argued in a 2000 article published in the Journal of Economic Perspectives, “a second distinguishing feature of the development of the computer industry, after the decline in price, is the unprecedented speed with which diminishing returns set in.”

We’ve seen this dynamic play out with other personal productivity software, from word processing to spreadsheets to e-mail, but we’ve also seen it play out with much more sophisticated “enterprise” systems, from ERP to CRM to e-commerce to networking suites. The makers of the systems keep trying to entice (or force) buyers to purchase new upgrades – that’s how they make their money – but no one really believes that, say, Version 8.0 is going to produce any substantial productivity or other gains over Version 7.3.

In time, buyers begin to rebel. Knowing that successive investments are producing decreasing returns, they start to resist the upgrade cycle, despite the pressure from vendors to keep doling out the bucks. That’s happened with PCs and PC apps, and it’s now happening with enterprise apps as well. A new study by AMR Research reveals that companies are “furious” about software upgrade and maintenance costs. Almost 75% want to see the upgrade process curtailed, and more than 20% indicate that they’re going to stop buying upgrades altogether. Noting that upgrades and add-ons represent “huge costs,” AMR tells buyers that “if you can’t use the enhancements, don’t pay for them.”

That’s good advice. But it’s also inevitable. Companies aren’t dumb, and when faced with decreasing returns on investments, they start decreasing the investments. At the same time, they often begin looking for cheaper alternatives that “get the job done” at a reasonable cost without a lot of fuss – generic chips and hardware, for instance, or open-source operating systems and applications. Indeed, as I describe in my upcoming book Does IT Matter? Information Technology and the Corrosion of Competitive Advantage, the reality of decreasing returns on IT investments is one of the primary drivers of the rapid and inexorable commoditization of computer hardware and software.

At some point, and it’s usually sooner than later, enough’s enough.

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Enough Already: IT's Decreasing Returns