October 10, 1994
Issue 496, page 34
Section: InformationWeek 500
Column: Trends
Technology's True Payoff -- An MIT survey finds that business tends
to overlook intangibles when evaluating information technology
By Erik Brynjolfsson
A few years ago, the business press was filled with stories about the
so-called ''productivity paradox'' of computers: The billions of dollars
poured into computers didn't seem to boost worker output. While these
stories were based on research indicating that computers hadn't pulled their
weight in the 1970s and early 1980s, the press reaction was out of
proportion to the more carefully worded academic papers on the subject.
The pendulum has now swung with full force in the opposite direction. Last
year, after Lorin Hitt and I published a study that found a correlation
between computer investment and significantly higher output in a sample
of
300 large companies, the same business publication that had screamed
''Productivity Paradox'' on its cover only a few years before ran another
cover story on the ''Technology Payoff.'' Dozens of similar stories
followed.
While it appears that there has been some turnaround in productivity, both
headlines overstate reality and give short shrift to the limitations of
the
underlying academic studies on which they were based. As more research is
done, we are gradually developing a clearer picture of the relationship
between information technology (IT) and productivity. However, as someone
whose research focuses on this area, I feel compelled to issue a warning:
Productivity measurement isn't physics. Our tools are still blunt, and our
conclusions not as definitive as we would like. Although it is
understandable that managers want clear-cut answers, far more work will
have
to be done before the last word is written on IT productivity.
In any event, an excessive focus on aggregate productivity statistics can
distract us from the realities of using IT to create customer value.
Perhaps the most important reality is that despite what the statistics say
about the ''average'' return on IT investment, each manager must decide
which projects are worthwhile. There is no bank where companies can deposit
IT investments and withdraw an ''average'' return. On the contrary, at the
height of the disillusionment with computer productivity, the financial
institutions I visited were quietly reaping returns in the hundred of
millions of dollars on their IT investments. More recently, I watched a
large insurance carrier write off a $100 million failed investment in a
billing system. Productivity does not automatically follow IT dollars--it
takes a lot of hard work.
Another key reality is that even when high productivity is achieved, it
does
not automatically translate into competitive advantage. In fact, a
single-minded focus on productivity can be counterproductive. Competitive
advantage comes from delivering what customers value and from doing so in
a
way that cannot be easily copied.
Because productivity is typically construed to involve a narrow focus on
reducing costs and increasing throughput, it diverts attention from areas
like customer service, quality, and timeliness. These areas are not as easy
to quantify, but they are often places where IT can have the biggest impact.
Customer values have shifted from mass consumption toward subtler,
quality-of-life issues. Although conventional measures of productivity are
better at accounting for physical input and output, that's no reason to
rely
solely on these factors.
Achilles' Heel
The typical approach of basing an investment decision on whether a new
technology increases productivity may sound sensible, but it misses an
important point: Technology is only a tool, and it's one that rivals can
acquire. If a company tries to hone its competitive edge on technology
alone, it will soon find itself imitated. Technology must be aligned with
the core competencies of the company to deliver true value.
For some corporations, cost leadership remains a distinct advantage. For
them, productivity is the essential metric. But for others, customer
intimacy or product excellence sets them apart, and their emphasis should
be
on different metrics. This is not to say that productivity can be ignored
by
any company. Costs must at least be competitive before other factors can
be
exploited. Evaluating the productivity effects of information technology
(IT) is an important first step toward achieving advantage, but it is only
a
first step.
While my past work at MIT focused on the conventional approach to
productivity measurement, my colleagues and I have begun to take a broader
view of the potential benefits of IT. Working with InformationWeek, we
studied input from 285 companies on the IW 500 listing. Some of the
preliminary results confirm the importance of looking beyond cost savings
to
identify the contributions of computers. In fact, the No. 1 benefit that
managers of IW 500 companies say they expect from their IT investments is
improved customer service. Lowering costs is the next most important
benefit, say the managers. But they also stress timeliness of interactions
with customers, higher product and service quality, support for
reengineering efforts, and better flexibility.
Cutting Costs Is Not Key
The emphasis on customer service is apparent in virtually every industry
surveyed. Cutting costs is stressed by companies in the energy, mining,
and
commodities businesses, where cost competition is rampant. Cutting costs
is
also a priority for insurance and health-care companies. Quality is stressed
by pharmaceuticals companies and, to some extent, the banking industry--in
these fields, small mistakes can cost millions of dollars.
Saving time is the priority of the computer hardware and service industries,
where product cycles are measured in months. Improving timeliness also ranks
highest in general manufacturing. In fact, despite all the evidence of these
companies' successes in cutting costs over the past decade, manufacturing
puts less emphasis on cutting costs than any other industry. The survey
suggests that for many manufacturers, low prices are a necessity, but
competitive advantage comes from faster delivery, higher quality, and
improved customer service.
The architecture of information systems must be adapted to support these
new
goals. This makes the original selling point for client-server systems--that
they are cheaper than mainframes--increasingly irrelevant. While there is
evidence that client-server can cut costs, we found that the IW 500
companies moving most aggressively to client-server architectures were less
interested in cost savings than the other corporations in our sample.
Instead, client-server-oriented corporations expect the greater benefits
from their investments to come from improved timeliness and better support
of organizational reengineering efforts (see charts, p. 35).
Of course, these benefits are difficult to quantify, so many companies'
official justification for moving to client-server is cost savings. One
manager in a diversified financial company thought the main benefits of
the
new system would be to allow top management to more quickly identify
customer-service problems and develop scenarios for product introductions.
But because his management demanded that ''hard'' benefits be identified,
he
confessed that he justified the system mainly on the basis of eliminating
several dozen clerks and systems personnel. He told me a post-audit was
unlikely once the system was in place, and he suspected he would never be
forced to make the staffing cuts.
According to the IW 500 survey, there is one IS strategy that closely
focuses on cost-cutting: outsourcing. While this could be construed as
evidence that outsourcing saves money, more complex factors are at work.
Because lower costs are relatively easy to measure, this is one of the few
IS goals that can be delegated to an outsider. When the IS group is called
on to support more ambiguous goals, outsourcing is more likely to lead to
conflict.
The difficulty of measuring benefits such as improved customer service also
makes it difficult to justify IT spending and to intelligently set budgets.
Therefore, it is encouraging that only a minority of companies in our survey
(25%) have resorted to using the old rule of thumb of setting IS budgets
based on a fixed proportion of total revenues.
Using traditional capital budgeting approaches is more difficult when the
costs and benefits of IS are intangible. But that does not mean companies
should abandon them altogether. On the contrary, extra caution should be
applied to avoid the common trap of assuming that if something can't be
measured well, it should be ignored. This strategy is tantamount to valuing
corporate intangibles at zero, which is no less arbitrary than making an
educated guess.
As businesses move to an information era that emphasizes competition on
the
basis of customer service, quality, and speed of delivery, new measures
will
have to be developed to augment our Industrial Age concept of productivity.
Fortunately, some of the hidden benefits and costs of new IT systems can
be
quantified without too much difficulty. For instance, managers at many
manufacturing plants find they can attach dollar values to the inventory
savings, reduced space requirements, and decrease in rework enabled by MRP
(manufacturing resource planning) II systems. These benefits often amount
to
more than the direct labor and energy savings gained from the system.
Similarly, the life- cycle costs of maintenance, training, and support,
when
properly measured, typically dwarf the up-front costs of new computer
systems.
Another danger of focusing narrowly on maximizing traditional productivity
measures: It can inhibit creative thinking about how technology affects
other business processes. While computer systems must be aligned with
business goals, this does not necessarily mean implementing a one-sided
adaptation of the technology. In some cases, the best strategy is to modify
business processes and goals to better exploit the technology. Not only
can
this lead to new ways of providing customer value, but when ntechnology
is
used to leverage special competencies of a business, it also becomes much
more difficult for competitors to duplicate the approach.
It's easy to draw the wrong conclusions from the reports that IT spending
has been linked to improved productivity. Not only is IT spending alone
unlikely to achieve the reported productivity gains, but given the way most
corporations measure it, productivity by itself may also be too constricting
a goal. Designing and implementing accurate measures and linking IT to real
business needs is not easy. What's more, these moves may not always succeed.
But a strategy of blindly investing in IT and expecting productivity to
automatically rise is sure to fail.
Copyright 1994 by CMP Publications. All rights reserved.