Thursday, September 01, 2005

An Informed Technology Consumer Be

What is the link between Information Technology and productivity?

Information Technology's beneficial effects on business are myriad. It has not only enabled mightily successful businesses such as ebay, Amazon and Yahoo!, but has allowed us to discover and take advantage of amazing phenomena such as the "Long Tail", first posited by Chris Andersen of Wired magazine.

However, let's focus on a pointed question: how much, if at all, has information technology (IT) contributed to the productivity of businesses? Productivity is the efficiency with which output is produced by a given set of inputs - so, for example, if the productivity of a bus factory is increasing, it means the factory is able to crank out more buses per worker (or per hour or per dollar). IT's effect on productivity has been a matter of considerable debate, both academic and popular.

Before answering this question, let us ask, What is technology?* The most general definition is, "the sum total of knowledge, skills, techniques and tools available to humankind". Defined in this way, it is hardly surprising that technology should boost productivity - that is merely another way of saying that better knowledge, skill and so forth improves our ability to squeeze more output from whatever we put in. In fact, this has been true since the stone age (if not earlier)!

Of course, here we are restricting ourselves to Information Technology, which we may define (specializing the above) as, "the application of knowledge, skills, techniques and tools to create, store and use information". By common understanding, IT includes computing, networking and communication technologies. Let's examine some evidence.

A paper by the Research and Market Analysis group of the New York Federal Reserve finds that productivity did increase across US industries during 1995-99** in comparison to the previous 5 years, and while the entire gain in productivity could not be attributed to techology, there was a "robust link" between the two (these US Fed folks have a wonderful penchant for using the right word - I am a great admirer of the language they use!).

Business Week's Michael Mandel sees the unmistakable hand of technology in the strong growth of US multifactor productivity in the last two years. A study by the McKinsey Global Institute is more circumspect, concluding that IT boosts productivity, but only when tailored to an organization's business processes. It also discovers that innovation is a strong driver of productivity growth, and IT boosts productivity to the extent that it enables this innovation. MIT Sloan School's Professor Erik Brynjolfsson finds that the amount of IT used in a company correlates well with it's overall productivity, and notes an emerging agreement among economists that "IT has been the biggest single factor driving the productivity resurgence, although debate continues about the exact magnitude of its contribution". He cautions that IT helps only when combined with judicious, complementary investments. Christopher Koch of CIO magazine echoes this cautious sentiment.

Taking another tack, outsourcing, which has enabled companies to achieve the same output with fewer inputs (of labor, primarily), is itself strongly facilitated by IT - both because automated business processes are more amenable to being done remotely, and because the outsourcing itself is carried out using networking and communication technologies. Here too, the experience is replete with admonitions to the effect that outsourcing realises its avowed benefits only when done judiciously, with a strategic perspective.

So, the answer to our question is: IT has certainly been a strong (if not the strongest) driver of productivity growth in business. However (and such conclusions usually include a 'however'!), IT really delivers benefits only when integrated well into the organization's business context and processes. As with anything else, it helps to be an informed buyer.

* In keeping with the "horse sense" tradition, we revisit the basics.

** Given the amount of data such studies need to ferret out and crunch, detailed analyses of productivity gains tend to come only with a lag of a few years.