April 17, 2000
http://www.informationweek.com/782/productivity.htm
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?
t Prudential Insurance Co. of America, the rollout of 8,500 notebook computers to insurance agents over the last three years has dramatically reduced the time agents spend sifting through what had been 500,000 pages of forms and data a year.
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.
InformationWeek Research's survey reveals that 80% of companies that track worker productivity say their productivity is at an all-time high. Still, only two-thirds of companies track worker productivity (see sidebar story, "Devil In The Details: The IT-Productivity Equation"). And of those that don't, almost half say it's because worker productivity is too hard to measure.
Alan Chwick, chief financial officer of TCM Integrated Systems, an IT services firm, says his company's enterprise clients mostly do a poor job measuring worker productivity. "It's one thing to measure how many widgets factory workers can produce in a day," says Chwick. "It's much harder to measure the productivity of paper pushers."
InformationWeek Research's study concludes that productivity is a key part of management's view of its return on technology investments. And 94% of the respondents say enhancing productivity is an important factor in purchasing IT products and services. But pinning down the specifics isn't easy. "It's not all gravy," says Ed Yardeni, chief economist and global investment strategist at Deutsche Bank Securities in New York. "IT is a difficult toolset because it changes so quickly and there's a learning curve," he says.
For Alliance Benefits & Compensation, initial training in the company's scheduling software took about a day, says CEO Rob Cohen. "Payback in terms of productivity was only a matter of weeks," he says. The company has no formal productivity measurement of its workers, Cohen says, and its conclusions are based primarily on "observations" of employee performance, etc.
How much time must pass before managers are ready to evaluate whether productivity is rising because of a new technology investment? According to the InformationWeek Research survey, almost all companies attempt to appraise the return on investment within six months of implementing new technology. Still, because of the learning curve and other negatives involved with some technologies, the return as well as the impact on productivity may take longer, experts say. "Some new technologies can be counterproductive if they can't communicate or work with existing technologies," says Yardeni. This frequently is the case for companies that adopt "bleeding-edge" technologies, he says.
At General Motors Corp., deployments of some new technologies that require intensive employee training or reengineered business processes can take "six months minimum, sometimes a year to a year-and-a-half" to affect productivity, says Kirk Gutmann, GM information officer, develop product, who oversees the IT for GM's vehicle design and development organization. However, investments related to making GM's infrastructure faster have an almost immediate impact, he says. That includes faster computers and networks that led to throughput rates improving 40% to 50%--better than the 30% to 40% GM had anticipated, Gutmann says.
Those improvements reduce what GM calls "red-light time," or the time employees must wait while their computers calculate or retrieve the information they request. Cutting the red-light time for engineers helps them become more productive because they get the answers to complex computations faster, allowing them to proceed through their work more efficiently, Gutmann says.
"IT can improve the productivity of any industry," says Deutsche Bank's Yardeni. "But at the end of the day, it's more a matter of how an industry uses IT to improve productivity."
The "how" has to do with adjusting business practices to support new technology, according to InformationWeek Research. A majority of survey respondents say management policy and technology implementation are responsible for improved worker output. Interestingly, a slightly higher percentage of business executives--rather than IT executives--acknowledged this key practice. Only 30% of surveyed executives report technology alone has given their companies a productivity boost. And management policy isn't so effective when implemented alone--only 16% of respondents report company decisions having the biggest impact on productivity.
At GM, "people, process, and technology are a three-legged stool," says Gutmann. It's a combination of all those things that affects productivity, he says. "There has to be a readiness by workers to use a new technology." Technology can allow workers to do their jobs in a different and improved way, and that requires a change in processes as well as support from management and the company overall.
One management policy that's helping IT's effectiveness is buy-in from the top. "Organizations with management who recognize the value that IT can have for the business are the ones that will do the best in increasing productivity through IT," says Tom Lesica, CIO at retailer J. Crew in New York. "IT can play as strategic a role in launching a new marketing plan as it can in building a new plant. But it has to have support from management because processes and workflow change along with the implementation of IT."
Weirton Steel has seen a dramatic productivity gain over the past 10 years, and attributes much of it to investments in IT. The $1.3 billion company produces more steel now with 4,300 employees than it did five years ago with 8,800 workers. Using an annual steel industry measure of the number of worker hours it takes to produce a ton of steel, Weirton has improved from 6.5 worker hours in 1990 to about 1.3 today.
Weirton CEO Richard Riederer says the productivity gains are directly related to the increased technology investments over the past decade. Since Riederer joined the company as CFO in 1989, Weirton has spent $900 million on new capital equipment. About 20% of that has gone to factory-floor and back-office IT, including $25 million in the past two years.
"I've always believed that IT is what drives reengineering and business-process changes," Riederer says. "Rather than bringing in a change agent or guru, IT is a lot more effective at pushing changes in job functions and business processes. For us, the payback has been very good." For example, new Oracle applications for functions such as general ledger, order entry, and pricing have helped Weirton redefine many white-collar job functions and streamline processes, Riederer says.
The reengineering of business processes through IT initiatives is reshaping UnitedHealth Group, fueling double-digit productivity increases while cutting $300 million in costs, says CIO Paul LeFort. The $18 billion Minneapolis health-care services provider measures productivity two ways: revenue per employee and sales expenses as a percentage of revenue. Through a combination of factors, including process reengineering supported by technology, the company has been able to reduce overhead by $300 million over the last year. IT implementations helped bring basic process improvements. "There's been a massive reengineering, a rethinking in the way we do things," says LeFort.
Examples of business changes are the elimination of patients' preauthorization process for hospitalization, as well as the dismissal of the referral process that had been needed for patients to use specialist services. Eliminating those two processes has saved the company "tens of millions of dollars annually," LeFort says.
At the same time, IT improvements have helped UnitedHealth customer-service people become more productive while enhancing the quality of customer services. For instance, a new call-tracking system keeps a history of why an individual called UnitedHealth, reducing the time needed for customer representatives to familiarize themselves with the backgrounds of customer inquiries and problems. A voice-response processing system also cuts customer-service calls, LeFort says. While the volume of UnitedHealth's business is growing 15% to 20% annually, the need to add new employees to service these customers has dropped, he says.
InformationWeek Research found that vestiges of business reengineering remain in force. Three in five executives say that some of the their companies' most-effective nontechnology efforts to boost worker productivity have entailed process improvements that eliminate jobs. An equal number of respondents admit to laying off unproductive employees.
Over the last 10 years, KIAH Inc., a financial-services firm in Stockton, Calif., has deployed mortgage-processing software that's let the company cut overhead as well as improve customer services. The software has reduced the mortgage application approval process for KIAH customers from four days to 10 minutes, says Thomas Kennedy, CEO and chairman of KIAH. Before getting the software, KIAH needed six mortgage processing people to do a job that's now done by just one person. "If you can eliminate a half-dozen people and still get more work done, that's an incredible productivity improvement," says Kennedy. "The payback from that IT investment is huge."
The key technologies that help boost worker productivity, according to survey respondents, include collaborative software tools (95%), upgrading PCs with newer models (91%), boosting network bandwidth performance (84%), and several mobile computing options, such as new notebook computers (76%) and wireless devices (65%). At the same time, more than four in five executives surveyed say that breaking down the barriers between various business functions has improved their companies' productivity. It's not surprising, then, that collaborative technologies such as E-mail and intranets are highly supportive of this effort.
General Electric's companywide, global intranet gets 11 million hits a day. That includes employees (and ex-employees) who go online to see their personal benefits summaries, as well as to make a range of transactions, such as moving savings into money market accounts. Intranet Webcasting also serves as a platform for self-paced training, reducing the need for travel. GE's virtual private network also lets employees work remotely as though they were in GE offices, enabling many to bypass morning and evening commutes.
Using Web-based product data-management applications, GE project teams "follow the sun," enabling engineers across different time zones to work collaboratively, ultimately reducing development time. Meanwhile, instant messaging technology lets GE employees check in real-time which colleagues are online (or at their desks), eliminating the guessing game of phone tag.
IT deployments have eliminated manual procedures and paperwork, reduced the time it takes to accomplish tasks, and helped GE employees more efficiently access and share information, says Larry Biagini, GE's chief technology officer of corporate initiatives. "IT is helping us to be faster, more energized, more global, and more customer-centered," Biagini says. "It means less wasted time pushing around papers and more time spent focusing on the customer." In recent months, the company has launched a range of enhanced communication tools "to keep employees informed and to put the latest news at their fingertips," he says. "The end result is a more productive and profitable workplace."
At Prudential, the ability for agents to access coverage, customer, and company information from mobile notebooks has eliminated the need for the insurer to print and distribute millions of pages of documents annually. It has also freed Prudential agents to spend more face-to-face time with customers, ultimately allowing Prudential to service--and sign--more customers, says VP of field technology Christine Ludwig. "Technology has been an aid for our agents to do their jobs better and for them to save a great deal of time," she says. The time savings "creates more sales opportunities, more cross-selling," which improves Prudential's revenue as well as the livelihood of the agents themselves. "Agents aren't paid unless they're out there with clients."
Western Surety, a part of CNA Insurance, has been able to maintain the same employee level in its surety bond business as it had in 1991, even though the company's business has doubled. Western Surety CIO Bob Fullenkamp says the company has been able to achieve this increased productivity through a reengineering effort supported by a workflow and imaging system from JetForm Corp. that cuts the paperwork and time involved in customers' purchasing Western Surety bonds. Down the line, the company will roll out E-commerce applications that will let customers do more transactions over the Web by themselves, as well as let agents get their customers' policies underwritten by Western Surety quicker.
What's the upshot of all this improved productivity? For the companies winning at output gains, the payoff is quite impressive. More new ideas, higher gross revenue, and increased customer satisfaction top the list of achievements. For workers, the productivity success is a mixed blessing. They're enjoying higher base salaries, enhanced promotional opportunities, and more bonuses--but at a cost. At more than three-quarters of the companies surveyed, staff jobs have never been so demanding despite widespread productivity gains.
At Duramet, its new inventory-management system has helped the company double sales over the last three years--without needing to hire more salespeople, says controller Joe Butler Jr. "Our salespeople no longer have to spend a lot of time making phone calls to check whether we have specific inventory available to sell to customers," he says--the inventory-management system eliminates extra work and at the same time improves customer service. In the past, Duramet salespeople looked at printed reports to check the status of inventory. Those reports become obsolete quickly; the new computerized system gives salespeople real-time information, he says.
Improved customer service is a benefit of IT cited over and over again by companies. For example, at Chase Manhattan Corp., data mining applications have allowed the company's internal help desks--including the help desks that answer internal banking and procedural questions by Chase branch-office workers--to deal with inquiries faster. Those inquiries include frequently asked questions as well as unusual situations, such as the correct procedure for a teller to follow when a customer wants to close an account for a deceased person and has a death certificate from Brazil, says Walt Korduba, Chase's VP of services assurance center. Help-desk personnel are able to find the answers to the problems using a keyword search. This capability replaces previous hard-copy manuals, and lets Chase's help-desk workers frequently answer questions with one phone call, and within 20 seconds. The data-mining application has also helped Chase integrate and standardize procedures and policies related to Chase's mergers with Chemical Bank and Manufacturers Hanover, says Korduba.
Standardization is a key factor in IT's contribution to GM's productivity gains as well, says Gutmann. "Before, we may have had 10 different products for a process. But having employees use the same software platforms makes it much easier to share information," he says. What will drive this standardization even further is the Internet, Gutmann says. "Even if someone has a different E-mail system, you can still receive those messages over the Internet," he says.
Yardeni and others say standardization is a key contributor to IT's potential in boosting productivity. That's because technologies that "don't talk to other existing technologies" reduce the likelihood for collaboration. "Plug-and-play technologies are also generally quicker to initiate," he says. "There's no need to reinvent the wheel, which eats into productivity."
Though the Federal Reserve's research doesn't extrapolate whether IT will continue to boost productivity, economists say the potential is favorable, considering the increasing impact of the Internet and E-commerce. The Federal Reserve's study was undertaken from 1995 to 1999, mostly before the Internet boom hit high gear. Conceivably, the impact of the Internet on productivity could be even greater.
"One of the few constraints on business has been time and space," says Deutsche Bank's Yardeni. "The Internet reduces this; it's virtual and real-time," he says. The Internet represents what Yardeni calls "creative destruction"--it tears down boundaries while creating new jobs and new opportunities, he says. "The Internet is a highly democratic structure."
For instance, on the drawing board for Chase is a Web system that will let tellers at bank branches look up procedural information themselves, using a keyword search similar to the one used internally. The Internet is an integral element to providing that widespread access, says Korduba.
Indeed, productivity is a major aspiration managers have for their companies' E-business efforts, according to the InformationWeek Research study. Three of five executives say their companies are counting on E-business to improve worker productivity. This percentage is consistent across companies of all sizes and among business and IT executives in both above-and below-average productivity sites.
At the same time, two-thirds of those surveyed by InformationWeek Research say their companies' management hasn't taken every possible step to improve productivity. So, it's plausible that the next boon in worker productivity will be fueled by Internet initiatives--through their potential for further streamlining processes, breaking down informational barriers, and facilitating even better and easier collaboration.
"Industry by industry, companies are figuring out new ways to use the Internet to better manage long-distance relationships, eliminate travel, and understand customers," says Howard Rubin, chairman of the computer science program at Hunter College and a Meta Group research fellow. For example, "onboard diagnostic systems in cars allow technicians to solve problems from afar. That means the same number of technicians can fix a lot more cars each day," he says. It's those sorts of technology applications--unheard of a decade ago--that will likely stretch productivity gains even further in the future.
"The Internet is creating a standard around which everyone is converging," says Yardeni. The Internet and related information technologies will undoubtedly be the tools of choice to help workers accomplish even more in less time in the new millennium.
--with additional reporting by Clinton Wilder and Jennifer Mateyaschuk
This Week's Issue
Technology Whitepapers
- Mobile BI: Actionable Intelligence for the Agile Enterprise
- Creating the Enterprise-Class Tablet Environment - by Yankee Group
- How To Regain IT Control In An Increasingly Mobile World - by BlackBerry
- Red Alert: Why Tablet Security Matters - by BlackBerry
- New Visual and Wizard-Driven Paradigms for Exploring Data and Developing Analytic Workflows
