Rethinking the Value of It, Again

Has the widespread application of information technology (IT) significantly improved business performance? Are the thousands of hardware engineers or software programmers making a worthwhile contribution? To put it bluntly: is the huge investment in IT paying off? It seems that we remain unsure.

One of the most fundamental measures of business performance is productivity. We would certainly expect all the computers and telecommunications equipment to make workers more productive. However, a "productivity paradox" was acknowledged a decade ago [1]. IT could be found everywhere except in the productivity statistics.

With the U.S. and other developed economies enjoying unprecedented prosperity in the late 1990s, concerns about poor returns on IT investment seemed to disappear. Business leaders and government policymakers, including Federal Reserve Chair Alan Greenspan, agreed that productivity gains from IT were a major force driving economic expansion.

However, with the U.S. and other developed economies experiencing little or no growth, the relationship between IT and productivity is being revisited. The recent Internet and dot-com euphoria has been replaced by renewed skepticism about the value of IT.

McKinsey and Company, the management consulting firm, has recently completed what it claims to be the most comprehensive study to date on the impact of IT [5]. The McKinsey report is likely to be widely read and cited. It can be expected to influence corporate policy, guide IS planning, and shape IT budgets.

The report challenges the view that IT is responsible for widespread productivity gains. Remarkably, the McKinsey research team arrived at its conclusions by drawing on much of the same data Greenspan and other economists used to support their claims that IT was the engine for economic growth.

The McKinsey report relates significant productivity gains to IT investment in only six economic sectors—retail, wholesale, securities, telecommunications, semiconductors, and computer manufacturing. It concludes that in 53 other economic sectors, computers and telecommunications have not increased productivity to any significant degree.

The report’s conclusions imply that whether or not a company uses IT productively depends primarily on the industry. The managers of companies outside of the lucky six industries can now explain why the millions they invested in IT amounted to almost nothing: they are simply in the wrong industry. These companies are likely to slow down or even stop investing in IT. This can only hurt the IT industry when it is already ailing.

We believe the report sends an erroneous message to business decision makers. Our combined experience includes consulting and researching hundreds of organizations all over the world and managing IT at the corporate level in four different industries. We are concerned the McKinsey report will spawn inappropriate business behavior.

Why do we believe the economists and the McKinsey report are unhelpful to businesses trying to manage IT? The fundamental problem is the level of analysis. Economists like to look at the big picture. They focus on sector productivity statistics, such as those produced by the U.S. Bureaus of Labor Statistics and Economic Analysis. It seems that at least one large consulting firm has chosen to rely upon those same statistics to produce a report certain to influence many business decisions.

Unfortunately, this report is misleading. The impact of IT does not depend much on the economy as a whole. It also does not depend much on what a company does. It depends much more on what a company does with IT.

When it comes to IT, management matters. IT value is firm-level specific rather than being dependent on the economic sector.

It is easy to point out great successes and spectacular failures with IT in a single industry. For example, Wal-Mart has revolutionized retailing by using computers to control its own inventory and to manage its supply chain. Other retailers have done little more than speed up old-fashioned operations. Similarly, some universities have made great strides in using IT to deliver a richer learning experience to their students. Others have merely entrenched traditional teaching practices.

We have repeatedly seen the benefits of IT limited by a focus on automating existing practices. Remarkably, the emergence of business process reengineering (BPR) was intended to address this deficiency. Michael Hammer introduced the concept [2] and reengineering became popular in the early 1990s. However, BPR soon lost its luster and became widely criticized for neglecting the soft side of management. After the reality of the Internet and e-business failed to deliver on their hype, many business leaders are now skeptical about IT and reluctant to make additional IT investments.

In contrast to this skepticism, we see the bursting of the dot-com bubble as providing a timely opportunity to finally realize the potential value of IT. While the criticisms of its excesses were legitimate, the basic principles of BPR have enduring value [3]. We see a renewed need to understand what IT can do, and to use it as a catalyst for change.

We see the productivity paradox as resulting largely from traditional input-output accounting models that can only capture increases in efficiency—doing things right. In contrast, IT is increasingly able to provide benefits in terms of greater effectiveness—doing the right things—and innovation—doing new things.

Moreover, we see corporate-level financial reports or balanced scorecards at the strategic level of analysis as an appropriate way to judge the benefits of IT. Significantly, many successful multinational companies have developed balanced scorecards to help them manage IT [4]. General Electric, Home Depot, and Wal-Mart are among those whose scorecards encourage and monitor improvements in key aspects of IT performance. For them, IT is a change agent rather than an efficiency tool. IT is used not only to improve existing processes, but also to enable new value-adding activities.

Simply stated, the McKinsey report does not offer enough insights about patterns of success or failure to make it useful for business decisions. The analysis is also misleading because it concentrates on a narrow and perhaps outdated view of IT benefits. We strongly believe business decision makers today must consider not only how IT can improve performance, but also how IT can change the way that work is done.

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