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9/3/2004
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Productivity Growth Slows, But I.T. Will Lead To Gains

Over the past decade, packaging and label maker CCL Industries Inc. has seen its productivity improve through the adoption of companywide applications, the Internet, desktop applications, and collaboration tools. Going forward, however, "it's hard to say which business application of tomorrow can unleash similar productivity improvements," says CIO Akhil Bhandari.

As productivity among nonfarm businesses soared in recent years, reaching an annual growth rate of 9% last fall, economists and business executives credited the deployment and use of business technology for the surge. But productivity growth has slowed: The Labor Department last week reported second-quarter nonfarm productivity grew a relatively paltry 2.5% annual rate in the second quarter.

IT still is expected to help companies continue to be more productive--there's no question about that. But it's less clear just how IT will help. Some await the next killer app, while others see incremental exploitation of technologies or new tools as contributing to productivity growth. University of California economics professor Hal Varian sees a growing number of small and medium-sized firms that couldn't afford IT in the past adopting technology and driving up productivity rates. Regardless, a consensus exists among economists and business executives that in the coming years productivity growth rates, spurred by IT investments, will be higher than the average gain through the last half of the 20th century; from 1951 through 2000, annual productivity rates exceeded 3% in only 12 years.

chartThe lackluster productivity gains of the past few quarters reflect the lack of significant IT purchases made in 2001. Generally, a three- to five-year lag exists between the time companies make investments and when the benefits take hold. Three years ago, businesses scaled back on all types of investments. The big productivity gains of the early 2000s can be credited to massive IT investments made in the late 1990s, as companies deployed apps such as enterprise resource planning and customer-relationship management and moved onto the Internet.

Those IT investments enhanced individual worker productivity, which led to a jobless recovery when the recession ended: Technology let employers get more out of each worker, lifting productivity rates, and delaying the need to hire new employees. "But there's a limit to that; you can stretch employees only so far," says Creighton University economics professor Ernest Goss. "The low-hanging fruit is gone."

With an uptick in hiring this past year, productivity growth rates began to fall. In fact, Varian sees higher employment levels, not structural changes brought on by IT, as the main reason for slippage in business-productivity growth in recent quarters.

MIT management professor Erik Brynjolfsson, for one, sees an eventual return to big productivity gains once executives begin to worry less about using technology to cut costs and explore how IT can create new opportunities. "Most companies haven't been in the mode of thinking of radical ways to change their business, to push the frontier, and invest in new ways of doing business," he says.

CCL CIO Bhandari is looking for the right technology to boost productivity by exploring systems that will make it easier for the $1.2 billion manufacturer and customers such as Procter & Gamble and the Gillette Co. to design new products and business processes. "Any applications that address collaboration between companies will help improve productivity," he says.

At Hologic Inc., a medical-imaging and -testing products maker, the IT staff is evaluating ways to link its field-support staff wirelessly either through handheld devices or laptops. "This can be revolutionary for the business, with productivity gains far exceeding what we've seen already," CIO David Rudzinsky says.

There are an unlimited number of little things companies can do to exploit technology, which should result in significant productivity gains, Brynjolfsson says. For example, his wife, a physician, wrote a program on a Palm Pilot to send notes to the next doctor who would be caring for her patient. "There are a million and one examples," he says, "of those little applications to change the way we work that will have an accumulative impact on productivity."

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