Weekly Update

Too many forklifts for IT innovation?

6134612964_21bcdbff81The Information Technology & Innovation Foundation (ITIF) is out this week with a new report, Restoring America’s Lagging Investment in Capital Goods, that outlines declining US business investment over the past decade. Overall growth in business investment averaged 2.7% in the 1980s and 5.2% in the 1990s, but only 0.5% from 2000 to 2011. Since 1980, business investment as a share of GDP has fallen by more than 3%.

The focus of the report, however, is on the share of investment that the US government classifies as Information Processing Equipment and Software (IPES). The Foundation’s data shows a similar pattern of rise, then rapid rise, but more recent stagnation in IPES investment.

Economist Paul Romer’s theory of “new growth” economics holds that, in contrast to spending, or just any capital investment, it is the investment in innovationthat is the primary driver of growth in modern, knowledge-based, growth economies. (Robert Solow had already teased out technological progress as a dominant factor, as high as 80%, for economic growth.) What is significant for the economy, and individual businesses, is that in the current environment, innovation is primarily captured and disseminated through the implementation of such hardware and software.

Collateral benefit or drag?

As the ITIF points out, the full innovation benefits of technology investment are not captured solely by the investing firm. External benefits include

  • Departing employees taking their knowledge to subsequent employers
  • Invested money spurring further R&D by the supplier
  • Lower future costs for other investors in the technology
  • The network effects of more users of a technology.

Still, the greatest benefits accrue to the investing firm (and their technology suppliers), and the benefits are generally significant.

Romer uses the example of forklifts to demonstrate how not just any capital investment, but particularly innovative capital investment, is key to economic growth. Once a sufficient number of forklifts are deployed within an economy (or an individual firm), there are diminishing returns to adding to that supply., Indeed, as the number of forklift investments increase, they eventually become a net cost or drag on the economy (or firm).

Tech buyers gate keepers to innovation

 The purpose of the ITIF report is to advocate for technology tax credits. But IT buyers should realize that by their selection and acquisition of new technology, they are the primary gatekeepers bringing innovation into their enterprise. Their choices are primary determinants of the enterprise’s ability to innovate within its markets, as well as the direction of that innovation.

Of course, one of the innovations wrought by technology is not only cost savings generally, but also potential cost savings over previous technology implementations. Yet,  the cost of maintaining previous implementations can be a significant barrier to new investment not only in cost savings, but also in other innovation. Multiple analyst studies have shown that maintenance costs consume 50% to 90% of typical IT budgets.

With maintenance costs that high, firms are essentially investing in more forklifts, year after year. Breaking that loop of what comes down to reinvesting in the same technology repeatedly is a necessary precursor to innovation.

How can IT buyers break that trap and avoid falling into it again?

  • Invest in cost savings, so there is ultimately room in the budget for additional innovation,
  • Avoid technology and vendor lock in,
  • See that the right systems are implemented and well managed, and
  • Select technologies with the agility to be made new, over and over into the future.

Otherwise, further IT spending is not an investment in innovation, but merely a down payment on the delivery of more forklifts onto an overcrowded IT loading dock.