Information Age: News, analysis & insight for IT & business leaders

Ask almost any IT director, almost any IT supplier, about the state of their budgets or their industry, and they will tell you things are a little better than they were in 2002, but nowhere near what they were in the late 1990s.

Back then, technology was hot, even explosive - and so, by direct or indirect association, were its developers, its suppliers, and even its biggest customers. The link between real competitive advantage and the use of IT was so firmly established in the minds of business leaders that even the wildest of proposals were usually able to attract funding.

On some cases, the link reached the point of absurdity. The valuation of some online trading exchanges, for example, exceeded the value of the supply chains they aimed to make more efficient - a situation described by Hasso Plattner, co-founder of SAP, as "preposterous".

But since then, the climate has turned distinctly chilly. True, corporate IT budgets in the US and the UK are expected to creep up by 1% to 2% in 2003 and 2004, but these will be hard won gains; not only is IT a smaller industry than it was in 2000, but sentiment has swung against it.

Consider, for example, the widely quoted study by Alinean, an otherwise little known research company, that claimed that companies that spend less on IT tend to perform better. Take the even more notorious Harvard Business Review article by Nicholas Carr, 'IT doesn't matter' (see Influencer profile page 55), in which he argued that IT should be rigorously managed and treated as a necessary cost - because it rarely gives any individual company a competitive advantage. And examine the 2002 McKinsey Global Institute study, which concluded that productivity gains in the 1990s were the result of better management rather than the introduction of new technology.

All of these studies are economic and none applied to specific technologies. But there are more concrete examples of the shifting sentiment. Take, for example, the CEO of Phones4U, John Caudwell, who in September received widespread and favourable press coverage when he (partially) banned the use of email - widely hailed as powerful business tool - on the grounds that its use was damaging productivity; or look at the studies by Nucleus Research, that found that many flagship CRM and ERP implementations have mostly not, and maybe never will, give a return on investment.

Such examples are controversial and have been vociferously criticised. But the over-riding sentiment remains: IT is risky, expensive, over-complicated, and, in many if not most cases, unlikely to yield a competitive edge or even a measurable improvement in productivity.

There is, however, buried in all this a contradiction, if not a paradox. Spending on IT may have stumbled, but it nevertheless has continued at a steady rate over the past two decades of some 4% to 5% of corporate revenues, regardless of sentiment. Moreover, while CIOs or IT directors agree that spending on IT is very often wasteful if not wasted, they also believe that applied correctly, IT still can and will deliver great benefits. And, indeed, there are tens of thousands of case studies that prove their case.

The key question for these organisations, then, is not if IT is effective in general, but how certain technologies can be made to work highly effectively.

A growing consensus is emerging on how problems and poor payback can be avoided. First, choose the best technologies and avoid poorly conceived or speculative technologies and projects; second, manage rigorously according to best practice; and third, make sure any spending is directly aligned with corporate strategy.

As Vinod Khosla, the US venture capitalist and co founder of Sun Microsystems put it: "Technology should clearly pay for itself when implemented in line with strategic objectives." As a result, he continues, every 1% of spend should lead to a 1.5% to 2% reduction in selling and administrative costs.