IT in the Insurance Industry: Commodity or Competitive Advantage?

In his controversial book, "Does IT Matter?" Nicholas Carr warns against implementing new technologies in a rush to gain competitive advantage. He describes information technology as a commodity. And he compares IT to electricity in the 1800s, which he says gave companies strategic advantage until everyone began using it. Recently, SAS e-newsletter Editor Shelley Sessoms spoke with Carr about how he applies this advice to the insurance industry.

Shelley Sessoms: You've said in the past that there are two different types of technologies used in business – proprietary and infrastructural. Can you describe the difference?

Nicholas Carr: Any technology that you can protect and keep private – often through a patent or an exclusive license – is proprietary. Proprietary technologies can provide a strong source of competitive advantage, because they're hard for competitors to copy. The defining characteristic of an infrastructural technology, on the other hand, is that it provides its greatest value and its greatest productivity gains only when it's broadly shared by many companies and industries.

SS: You've also written that most IT-based competitive advantages simply vanish too quickly to be meaningful. Can you explain how IT has evolved to this point?

NC: When information technology was in its early stages of adoption, it tended to be very expensive. At that time, it was hard to create new software, expertise hadn't yet diffused throughout the industry, and it was difficult for competitors to copy your innovations. Since then, IT has matured as a technology. It's become cheaper, more standardized and homogenized, and best practices are shared widely. These things erode its ability to provide competitive advantage, because they make it easier for competitors to replicate any new innovation. You can still be an innovator with IT, but the advantages that those innovations create tend to vanish quickly as competitors and vendors copy what you've done and incorporate it into their own systems or their own products.

SS: In the past you've described software and hardware both as commodities. Do you still view them that way, and if so, what can be done to change that?

NC: Few people today would argue that business IT hardware has become increasingly commoditized. From PCs to more sophisticated layers of corporate hardware, all of that has become commoditized over the last 15 years. The same trend can be seen in much of today's business software. As companies adopt different systems and as vendors compete to sell them to more and more customers, any valuable system tends to be copied throughout an industry.

SS: How can the insurance industry take advantage of this trend?

NC: Most IT expenditures for insurers can be looked at as costs of doing business rather than as a way to gain a competitive advantage. Look for ways to standardize your systems, consolidate your systems and capitalize on the commoditization trend to push down the cost of computing within your company. Taking a more conservative approach toward IT can really pay off for insurers as we continue to move into this more commoditized IT world.

SS: What makes IT so vulnerable to commoditization?

NC: It's not necessarily a vulnerability. The great value of IT comes when it becomes standardized. When all companies own systems that can be integrated easily within their organization and with their suppliers' and customers' systems, there is great benefit. The need to standardize, in effect, promotes commoditization because it turns the technology into a shared infrastructure, just like the rail system or the electrical grid.

SS: When you hear an organization say, "IT just can't get off the ground. We're getting bombarded left and right. Upper management doesn't see a value in IT," how do you respond?

NC: The immediate reaction is to look for ways to simplify IT. Consolidate assets, standardize assets and prune assets where possible, and then you can start thinking about new applications.

SS: Do you foresee a change in the way IT organizations are viewed within the larger organization?

NC: I think we're moving into an era where there's going to be more focus on centralizing both your IT assets and the control over those assets. Credibility becomes more and more important in this type of environment. Increasingly, we're seeing the need for IT leaders to combine a strong business sense with a strong technological sense, and I think that trend will continue.

SS: Is there still a place for technological innovation and competitive advantage to go hand in hand within IT?

NC: The great danger of expecting too much from information technology is it often leads you toward customized software, which sometime is necessary, but shouldn't be your default position. For many companies today, the biggest IT challenge is an integration challenge. Making all the customized systems that they've invested in over the years work together in a seamless way is a challenge. The worst thing you can do at this point is to perpetuate those integration difficulties with an innovative system designed to bring competitive advantage.

SS: What three things should insurance companies do to make IT more valuable to the business?

NC: First, find ways to capitalize on the commoditization trend in order to drive down the cost of computing while still getting all the capabilities and benefits you require. Second, be wary of trying to be an IT pioneer. If you're out on the cutting edge, you're going to pay a lot more and you're going to take on a lot more risk. Therefore, in most cases, it makes sense to be a fast follower: wait for standards to emerge and costs to come down. Finally, if you are going to seek IT innovation, you should look to see if there are ways to push down the costs of being an innovator on to suppliers or other partners. And you should make sure your competitors will face barriers to replicating your innovation. If there's no way to reduce the cost of being an early mover and there are only weak barriers to competitors copying what you're doing, then being an IT pioneer probably is foolhardy.