IT's Star Turn

To thrive in the 21st century service economy, startups and old-line companies alike must shift their IT geeks to the front lines of innovation

by Jeneanne Rae

The fundamental shift of the U.S. economy from one based on industry to one based on services has been covered in this column and elsewhere. While some companies—and indeed industries—still resist the trend, the innovators have recognized that the production of value lies in the creation of services, and have adapted accordingly.

Even product-based companies have shifted their focus from the production of physical goods to the delivery of device-enabled services products. But here's the related innovation trend that no one is talking about: Increasingly, those services are being driven by scalable technologies. The information technology departments once seen as back-room cost centers are becoming key players in the execution of innovation, and hence, the creation of value in the new marketplace. Just look at the numbers.

U.S. Leads in IT infrastructure

Our shift toward a service-based economy paralleled our increased investment in IT. According to the 2005 European Innovation Scoreboard, which looked at IT investment in developed countries as a percentage of gross domestic product, the U.S. led the world in 2004 with 9.25%. In aggregate terms this amounts to about $1.1 trillion dollars. In that same year, our investment in new factories fell to $16.2 billion as reported by The Wall Street Journal ("U.S. Birthrate for Factories Is Steadily Falling," March 15, 2006), meaning that for every $1 dollar invested in factories we invested about $68 in computer systems.

Server farms, mainframes, and networked PCs have displaced factories as today's primary industrial complex. And increasingly, and across sectors, those technologies are being deployed in the name of services.

Data are the "raw material" of today. "Any product that is not closely associated with a service today, will be in 10 years," said Kevin Fong, managing director of Silicon Valley's renowned Mayfield venture capital fund, at a recent Institute of Design strategy conference. "Today we only fund devices that are connected to services."

Hardware, in other words, is only a means to an end. Let another country build it—there's little action or profit associated with the majority of commodity products. What is bankable for investors is the recurring revenue streams associated with service contracts, the value created for consumers in using those services, and the data and meta-data the associated network can assimilate and analyze. Consider Medtronic's (MDT) CareLink Network, which uses an implanted cardiac device (IAD) that enables physicians to remotely monitor patients. On average, the device has eliminated the need for 50% of post-op clinical visits for heart surgery patients, allowing physicians to see twice as many patients, doubling the doctors' productivity.

Such device-enabled services are the shape of things to come. The "factory" that creates the new value for all concerned stakeholders is essentially the computer system that collects, analyzes, and disseminates the data.

Terms of engagement

For Medtronic, or any company that embraces device-enabled services, this innovative shift has a ripple effect. To be successful, Medtronic must create a compelling new business model; it must sell an intangible new service with a plethora of user-interaction touch points, and it must become an expert at systems integration in one of the most highly fragmented and complex environments known. All of these things are hard, but if the company can't get the systems' pieces worked out, the potential for this high impact innovation to survive is nonexistent. Further, if Medtronic's IT team can't implement this shift quickly, the opportunity will pass to someone else given that the technology itself is relatively mature.