April 17, 2000
It's Official: IT Adds Up
Economists agree that technology boosts productivity and is a significant factor in the expanding economy. Is more IT always good--and how long will the benefits last?
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The theme? Productivity. The unifying element? Information technology. Examples like these--from multibillion-dollar companies to 10-person offices, global banks to regional retailers, manufacturers to law offices--have led many business managers and most IT managers to conclude that IT has had a direct, positive impact on the productivity of workers in almost every area of business in the United States.
However, economists have been slow to come to that conclusion. For years, many agreed with Nobel laureate Robert Solow, professor emeritus of economics at the Massachusetts Institute of Technology, who more than a decade ago said, "We see the computer age everywhere but in the productivity statistics." As recently as 1998, Federal Reserve chairman Alan Greenspan expressed skepticism about IT's lasting impact on productivity.
Not anymore. A report last month from the Federal Reserve pinpoints a dollar amount that IT has contributed to the economy over a five-year period. A forthcoming report from MIT goes further, suggesting investments made in IT several years ago are realizing their greatest return now. Well-known economists such as Robert Reich, former secretary of labor in the Clinton administration, and Laura Tyson, dean of the Haas School of Business at the University of California, Berkeley, point to IT as a significant factor--perhaps the most significant factor--in the country's prolonged economic expansion. Even Greenspan retracted his earlier skeptical assessment in a recent speech at an economic conference in Boston.
Besides patting themselves on the back, what are business and IT managers to make of this confirmation of the power of IT? A recently released survey by InformationWeek Research suggests several areas of examination. For example, while many business and IT executives attempt to benchmark worker productivity, for most companies, confirming IT's specific impact on productivity is no more scientific than a strong hunch. Also, according to most executives, it's not just IT but the reengineering of business practices in conjunction with IT that produces the biggest boosts in productivity.
The technologies that contribute most are collaborative in nature, such as groupware and E-mail, and one of the most-effective business-process improvements is breaking down the walls between vertical business areas--where collaborative technologies can contribute. Also, both business and technology managers agree that a significant goal in implementing E-business strategies is to increase worker productivity.
Two questions arise: Are productivity improvements over, or can increased investment in IT yield even greater gains in output? And where will the most significant IT productivity improvements come in the future?
At an InformationWeek conference in Amelia Island, Fla., last month, Reich, now a professor of social and economic policy at Brandeis University, chided his colleagues for failing to see "the extraordinary productivity improvement generated primarily by information technology." Reich pointed out that the increase in productivity starting in the early 1980s and continuing through the late 1990s--approximately 1% to 2.5%--corresponds almost directly to increasing investments companies were making in IT. "That has been the driving force behind this economy," he said.
Several reports indicate economists may have finally figured out how to calculate IT's contribution to productivity. Late last month, Federal Reserve economists released a study showing the use of IT and the production of IT products has contributed approximately $50 billion in productivity output annually since the mid-1990s. That $50 billion figure represents about two-thirds of an annual $70 billion productivity gain overall demonstrated by U.S. businesses in the last half of the 1990s.
Those are "underestimates," according to Eric Brynjolfsson, a professor at the Center for eBusiness at MIT's Sloan School of Management. Brynjolfsson is the author, along with Lorin Hitt of the Wharton School at the University of Pennsylvania, of a forthcoming report, "Computing Productivity: Evidence from a Firm-Level Survey." Brynjolfsson says IT's contribution to productivity increases with investment. "Firms that invest more in IT have greater productivity improvements, and productivity continues to improve over time," he says. Productivity gains through IT investments generally continue over a five-year period because, as companies work out the problems and workers become comfortable using the technologies, companies discover other ways to apply those technologies to improve productivity.
Yet IT has fueled productivity improvements that are hard to measure by both macroeconomists and microeconomists, Brynjolfsson says. For example, automated teller machines have improved customer convenience while improving banks' productivity. "But that's not counted in the gross domestic product," Brynjolfsson says. And if economists have a difficult time, business and technology managers have an even tougher task. "It's hard for companies to measure the many benefits to IT spending," he says. Besides increased worker output, related productivity improvements through IT include improved customer service, product variety, response time, product quality, and more customization of products and services--none of those are easy to quantify in terms of return on investment.
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