Productivity gains in the United States have become a favorite statistic for business leaders to cite when describing the health of the American economy. But what’s meant by productivity is often glossed over. Productivity is simply this: Output divided by input. When the dividend rises, productivity is increasing.
For close to a decade, business executives, academics and analysts have engaged in a vigorous debate over whether or not technology has driven the significant productivity gains recorded since the late 1990s. (In fact, since 2000, productivity in the United States has risen 4 percent annually.)
The question of what’s behind this is not merely a matter of academic interest; CIO budgets and technology dollars often depend on how organizations view IT’s contribution to productivity.
Most CIOs who have followed the IT-productivity debate naturally believe that investments in technology have been behind these gains, but a lack of data and research—hard numbers—has sabotaged their argument and often left them speechless, not to mention on the short end of the budgeting process.
MIT economist Erik Brynjolfsson, however, believes the terms of the debate must change. Technology has driven the productivity surge, and CIOs can prove it by measuring IT value across the whole organization, not just within the IT department. But there’s a new debate CIOs need to pay attention to: What distinguishes the most-successful companies from the least-successful. Brynjolfsson, the Schussel Professor of Management and the Director of eBusiness at MIT, has been at the center of the productivity debate for years. Speaking at IT conferences and publishing numerous papers on the subject, he has worked with some of the most high-powered firms in the world (including GE, Dell and Cisco, among others) to prove that technology drives productivity. In ongoing research that he shared with CIO, Brynjolfsson has devised metrics that will allow CIOs to demonstrate clearly how improvements in IT have fueled the productivity gains at their companies. (For Brynjolfsson’s metrics, go to www.cio.com/041506).
Numbers, however, will only get you so far. Brynjolfsson insists the companies that have been most successful in developing and demonstrating IT value share certain characteristics and practices that lend transparency to IT’s efforts. Some of these practices may seem elementary; some may seem impossible given the hurdles of age-encrusted company policies and culture. But they are necessary, Brynjolfsson believes, if you want to illustrate just how important IT is to the future of your organization.
Q: Why is the argument about IT productivity still a big deal today?
A: There’s been a debate the past couple years about whether IT matters. Nick Carr and others have raised a lot of interesting questions about that. But the research I’ve been doing has really focused on IT’s effect on productivity and some of the organizational factors that differentiate the more successful firms from the less successful firms. And we found a great deal of evidence that IT makes a big difference.
When I first started doing this research, productivity was bumping along at around 1 percent or 1.5 percent per year all through the ’70s, ’80s and early ’90s. Most economists thought it was going to be stuck there forever. But the past few years, productivity’s been doing much better. In fact, in the last quarter of 2005, productivity growth was about 4.7 percent. And that wasn’t an anomaly. Growth has been close to 4 percent per year on average since the year 2000.
To some extent, all companies are becoming more productive, but we’re also seeing a population shift where the less productive companies are going out of business. And the combination of those two effects is leading to this productivity renaissance.
Q: Then the debate is over? It’s established? IT drives productivity?
A: I think that the debate has changed, or it should change. It’s not so much about whether on average IT is productive; that, at least in the academic literature, is not much of a debate anymore. I think the important question now is, What differentiates the more successful firms from the less successful firms? And that’s going to be a debate for many years because, to some extent, the factors that lead to success will continue to evolve over time.
Q: So what differentiates successful from unsuccessful companies in terms of their use of IT?
A: We looked at the organizational practices that the highly successful firms had in common. And we identified a set of practices that we now call the Digital Organization, a set of seven practices that characterize these firms.
They include a shift from analog to digital business practices, like going from paper-based systems to online systems and intranets. That’s not so surprising, but the other six characteristics really were not something that typical IT managers have a lot of influence over, but they seem to be very important to the success of these firms.
The second was a shift in decision-making responsibility, pushing it out and down.
The third was a policy of much more open information, more open access to information flows. More horizontal information sharing, as well as more vertical information sharing.
A fourth practice that was important was increased use of performance pay and incentive pay. [Successful companies are] more likely to use bonuses and less likely to promote just based on seniority.
A fifth difference was that these successful firms tended to focus on a relatively smaller number of product lines and services, trying to be the best in those areas as opposed to spreading their energies across lots of different product lines.
The sixth practice was working harder on identifying top [job] candidates and hiring them, spending more time and effort in terms of the number of people they interviewed for each slot, and how involved senior and middle management was in the hiring process.
Then the seventh one was a bigger investment in training and education once they’re hired—more onsite education and training, more executive education and offsite training.
So these are a set of practices that clearly correlated with greater productivity and greater market value.
Q: Were successful firms defined simply by their adherence to these seven practices or did they have extraordinary IT, too?
A: It’s really the combination of the practices and the technology; the practices alone or the technology alone weren’t nearly as effective as the two in combination.
Q: Tell us about some companies that have been able to measure their IT productivity effectively.
A: I can describe some firms that I’ve worked with, but the firms I’m going to describe may or may not be in the sample.
At Cisco, for instance, they installed a new and improved employee directory, where people could quickly find other employees with similar skills. Cisco calculated how much time was being saved based on the average number of lookups people were doing per day, and the average amount of time they spent doing those lookups compared to the time previously. That gave them some simple cost-saving metrics which were more than enough to pay for the system. But they also attempted to measure some of the intangible benefits, like the fact that people were finding colleagues with the right skills more frequently, and that was leading to more collaboration, and the ability to solve customers’ problems more rapidly. So for each project, you need to come up with project-specific metrics. Then what you want to try to do is roll those up and see how they affect the overall bottom-line performance of the firm.
Cisco CEO John Chambers has set a stretch goal of $1 million dollars of revenue per employee, and the company is working very hard to understand what ways they can use technology most effectively to achieve that.
I also do an executive program for GE. One thing that struck me was how the policies GE has put in place are very consistent with many of the characteristics that we found in our Digital Organization survey of successful firms. Because GE is almost compulsive about measuring everything, they’re very careful about measuring how each change in business processes leads to changes in performance.
Why have other companies missed the mark in measuring IT productivity? Did they employ the seven practices but fail?
A: The worst performers in our sample were the ones that have kind of gone halfway, [implementing] a mixture of some of the new practices and some of the old practices. There’s an old saying that you can’t cross a chasm in two weeks. And I think that some of these firms may have fallen into that chasm, where they took some partial measures. For instance, if you empower your workers to make a lot of decisions, but you don’t give them the information, incentives or the technology infrastructure to help them make right decisions, you may actually be making your firm worse off than just sticking to the old command-and-control system. And that goes for a lot of the other practices as well. Changing one or two of them in isolation without really having a coherent plan can be counterproductive.
“Intangibles” is often a word used by CIOs, economists and the media when trying to explain productivity gains as a result of IT. Are they really that intangible? Do they exist at all?
A: I do believe that intangibles are a very big part of what’s driving productivity. But contrary to most people, I would not equate intangibles with wishy-washy, unmeasurable components. In fact, that’s part of our research: to take these intangibles and make them just as measurable as the tangible assets. And I think that’s a key research agenda for the 21st century, and it’s a key goal of management.
Has the emphasis on cost-cutting distracted CIOs from focusing on those critical intangibles?
A: I certainly think it’s always better to do things in a more cost-effective, less expensive way than in a wasteful way. And in the late 1990s, I think too often a lot of the investments were wasteful and there wasn’t enough attention to cost-cutting. But recently I think the pendulum has swung a bit too far in the other direction, with people obsessing on the cost-cutting side to the detriment of some real value-creating endeavors. As you go farther and farther away from cost-cutting inside the IT function toward helping a whole organization or helping the top line, each of those steps often becomes harder and harder to measure and justify. And so sometimes IT managers do shrink back to things that are really hard numbers, that are like “what’s the cost of my server?” And while that’s a lot easier to quantify, in some ways it’s destructive if all the emphasis is just on those highly measurable aspects of the CIO’s job, as opposed to being creative and brave enough to talk about how IT can affect the rest of the organization.
Does showing the value of IT require the CIO to be more involved on the business side, becoming move involved with the CEO and CFO?
A: Yes, because most of the real payoffs in business are not pure IT projects. They are a combination of IT with new business processes or new product lines. And that means working in a partnership with the business unit heads or the functional heads. In fact, most of the time, it’s good to have the business unit heads take the lead on some of these new initiatives, with IT serving as a coach, as an educator, as somebody who helps identify opportunities but doesn’t drive the whole show.
That requires a combination of understanding business skills as well as technical expertise, and that’s new for a lot of CIOs. If anything, I think that in the past year or two it’s been the business unit managers I’ve talked to, and even the CFOs, who have been quicker to point out the opportunities for IT in their areas. I think a lot of CIOs are still a little shell-shocked from the recession, and still a little bit in their shell, focusing on cost-cutting as opposed to how to leverage the revenue in the rest of the organization.