As I See It: What’s Old is New
October 13, 2008 Victor Rozek
The economy may be in shambles, but the surge appears to be working. No, not that surge, the IT Surge. At least that’s what Andrew McAfee and Erik Brynjolfsson call it. The silly war metaphor (silly, because the similarity between business and war ends when the first shot is fired) is used to describe the period between 1995 and 2005 when investment in all things IT jumped from about $3,500 per worker to around $8,000.
That’s a hefty increase, as surges go, but what did it actually accomplish? Cause and effect are often elusive, still it’s worth noting that during that same period the annual productivity growth of U.S. companies approximately doubled. It would therefore be tempting to conclude that a greater investment in IT is a guaranteed precursor of increased productivity; but, as with that other surge, it’s not that simple.
The 1990s witnessed the explosion of Internet technology and the widespread use of enterprise software applications. Appropriate and timely use of these technologies provided companies at least a temporary competitive advantage, as rivals scrambled to find the best use for a new generation of IT resources. It was a period of turmoil with long-shot winners, improbable losers, and a leveling of the playing field that provided competitive footing to small, nimble startups. McAfee and Brynjolfsson liken it to the “creative destruction” mode of capitalism “that was first predicted over 60 years ago by economist Joseph Schumpeter.” Creative destruction was a term used by Schumpeter and others to describe the transformation that accompanies periods of radical innovation.
Assuming not all competitors operating in the same market sector made the same dollar investments in information technology, McAfee and Brynjolfsson wondered what specific uses produced the biggest benefits. For two years, they studied the relationship between increased IT spending and bottom-line results using three quantifiable indicators: concentration, turbulence, and performance spread. They published their findings in a July-August Harvard Business Review article titled Investing in the IT That Makes a Competitive Difference.
Concentration refers to winner-take-all industries where “just a few companies account for the bulk of the market share.” Google and Yahoo are prime examples. A sector is turbulent, the authors say, “if the sales leaders in it are frequently leapfrogging one another.” Performance spread refers to sectors where “leaders and laggards differ greatly on standard performance measures such as return on assets, profit margins, and market capitalization per dollar of revenue.”
The authors found–and this is great news for the IT community–that success in all sectors was more pronounced in industries that were IT intensive; that is, industries “where IT made up a larger share of all fixed assets.” The implication, in these times, is that a generous application of IT resources can help corporations weather otherwise crushing economic downturns. But how, exactly?
Just as the military surge has a key component–bribery, since combatants are paid not to fight us–the IT surge has a key element–process standardization. How are the two related? Bribery is an attempt to control behavior; and so is standardization.
Albeit less dramatic and less costly than bribery, research showed that the ability to standardize and disseminate process-oriented activities gave IT-centric companies a sharp competitive advantage. The digital revolution, the authors note, allows a company’s unique business processes to be “propagated with much higher fidelity across the organization by embedding it in enterprise information technology.” As a company discovers a better way of doing things, the innovation can be replicated faithfully and rapidly to remote offices and outlets. If done properly, everyone is forced to do things the same way regardless of location. Recreating process improvements across diverse platforms and territories results in–among other things–fewer errors and improved customer service.
The role of IT in process evolution and control is twofold, according to the authors: it serves “as a catalyst for innovative ideas, and as an engine for delivering them.” Delivery is best accomplished through enterprise software, purchases of which are estimated to approach $190 billion this year. Think of it as IT’s sensible contribution to the economic bailout.
The authors identify six beneficial characteristics of IT-enabled processes:
Process standardization and control is not new. Over 30 years ago, I worked for a woman who used software to standardize 13 distributed midrange systems. Everything from job scheduling and software development to backups came under strict process control and chaos was transformed into order.
The link between process control, profitability, and industry leadership is important. But from the perspective of the IT community, the more interesting finding is that investment in IT has a direct and measurable correlation to the success and survival of the modern corporation. Such investment also apparently proves to be beneficial to IT personnel. Beyond the quick deployment of process improvement, companies that invest in IT also invest in their employees by providing them with more training and education. “Furthermore,” say the authors, “they gave their employees more discretion in how to do their jobs. . . . “
The IT surge may be temporarily interrupted by the economic ebb, but the trend is hopeful and likely to be lasting. And while bribery has built-in limitations, we have barely begun to discover the full range of uses for information technology.