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Anatomy of Agile Enterprise

Janne J. Korhonen

Escaping the IT Productivity Paradox

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"You can see the computer age everywhere except in the productivity statistics." With this apt remark, Nobel laureate economist Robert Solow summarized the so-called "IT productivity paradox" as far back as in the late 1980's. Even today, 20 years later, the effect that the computerization has on productivity is difficult to assess: productivity increases cannot be readily attributed to IT investments and IT investments do not always measurably increase productivity.

In his landmark paper "The Productivity Paradox of Information Technology: Review and Assessment" (1993), Erik Brynjolfsson identifies four hypothetical explanations for why IT has not measurably improved productivity:


  1. Measurement error: Outputs (and inputs) of information-using industries are not being properly measured by conventional approaches.

  2. Lags: Time lags in the pay-offs to IT make analysis of current costs versus current benefits misleading.

  3. Redistribution: Information technology is especially likely to be used in redistributive activities among firms, making it privately beneficial without adding to total output.

  4. Mismanagement: The lack of explicit measures of the value of information makes it particularly vulnerable to misallocation and overconsumption by managers.

More recent research has been able to show that information technology brings about productivity gains at both macroeconomic and individual firm's level. However, anecdotal experience indicates that IT investments do not always increase productivity, but may even have an adverse effect in individual cases.

In the following, I will use Brynjolfsson's explanations as a vehicle for finding reasons why IT does not always pay off at the micro level. I will address each of the hypotheses from a viewpoint of an individual company and argue that effective IT investments enable productivity-increasing business innovations.

Measurement error

The benefits of IT go beyond conventional notions of productivity. Not only does IT help to produce more of the same things, but it also allows doing entirely new things in new ways. The overall bottom line impact of IT includes all the cost reductions, quality improvements and intangible value creation that IT enables.

IT investments are more readily reasoned in terms of efficiency gains rather than increase in effectiveness. The former is easier to quantify: The new system replaces five clerical employees. The solution allows decommissioning an old legacy system. The latter is less tangible: The new IT architecture increases responsiveness to the market. The new SCM system provides better visibility to the supply chain.

However, increase in productivity is essentially linked to innovation: how new value is created to new customers in new ways. Operational improvements, new capabilities, new products and new markets should be the starting point. IT investment should follow the investment in these innovations to enable them.

Rigorous new means to measure IT productivity and output are needed to account for IT's role in innovation and new value creation, commensurable with IT-enabled efficiency.

Lags

Productivity does not increase just by investing in the infrastructure. Employees need to figure out how the new technology can be applied effectively. External consultants are also often needed to get things started. It takes time and money to achieve proficiency.

Many investments appear inefficient, if only short-term costs and benefits are measured. The cost-benefit analysis of investments should cater to both short and long term.

Redistribution

The third explanation for IT productivity paradox observes that whereas IT may be beneficial to individual companies, the gain comes at the expense of other players in the economy rather than contributes to new wealth. According to this hypothesis, companies with inadequate IT budgets would lose market share and profits to high IT spenders.

IT cost cutting is not a winning strategy to increase market share. Companies poised for taking profits from their competitors need to have big-enough pockets to support innovation and to fund strategic IT initiatives as required by business. However, lavish spending should not be encouraged either, but funding should be "requisite" and driven top-down by business needs. Up-front investment in rapidly expiring IT infrastructure and then figuring out what to do therewith is rarely money well spent.

Mismanagement

This explanation is probably the most pessimistic of all. It maintains that IT is not really productive at the company level, but individual decision-makers are rewarded based on outdated criteria not congruent with the benefit of the whole. Inefficient systems are being built as far as output targets, organizational structure and incentives are not appropriately adjusted. Only when they are modified can the new technology be fully leveraged.

Due to the difficulties in measuring the benefits of IT, gut feeling and heuristics rather than proper cost-benefit analyses guide IT decisions and investments. However, the radical changes enabled by IT render many management principles and heuristics of the past obsolete. Again, new physical processes must be innovated before respective new technology is introduced. By merely overlaying it on old processes, we end up paving the cow paths, so to speak.

How to do IT right...

To exemplify how IT would be done right, let's consider an energy utility that is undergoing a major business transformation: as mandated by a new legislation, electricity billing will be based on actual, rather than estimated, consumption of energy consumers. The change will introduce hourly measurement and remote reading of electricity consumption to most grid customers. To this end, hundreds of thousands of smart meters need to be rolled out in a few years to enable remote meter reading and other services. The information systems need to support this roll-out process and the new operational model as well as cope with drastically increasing volumes of meter values.

Information technology is not the major component of the required investment, but IT is an intrinsic part of the business backbone and plays an important role here. A requisite budget needs to be allotted to the IT project to ensure that strategic investments can be done based on high-level business requirements.

The major change in modus operandi creates opportunities for innovations in terms of business processes, services and capabilities. The transformation effort should start with an analysis of the current business architecture and design of the future one. Subsequently, a solution architecture is outlined to describe the logical as-is and to-be states of the IT architecture. An enterprise metadata repository is populated accordingly to assist in assessing the overall IT impact, including value creation.

The multi-year program is split to a number of releases so that the long-term strategic investment and its follow-up frames shorter-term planning and investments at lower levels. The time perspective of the strategic investments and decisions should be several years ahead after the project end date.

In order to align the organization with the new technology, a governance model for the enterprise architecture needs to be established to ensure participation and cooperation of different organizational entities. The governance model outlines roles and responsibilities, decision-making rights, privileges and liabilities so that each party knows what is expected from them, can make independent decisions in its area of influence and understands their part in a wider context.

... or wrong

IT can be done right, but IT can also be done wrong so that IT investments may in fact impede productivity:

Business processes are not innovatively reengineered, but the existing processes are merely adjusted and appended to accommodate the new operational model. Likewise, existing information systems are adapted to the compliance requirements without consideration and budget for new strategic platforms that would enable true business innovations.

The IT project procures the required functionality from system vendors without logical level architecture function that would specify the solution blueprint first. IT cost cutting in short term is the primary consideration, which results in complex, brittle and inflexible systems in the long run.

There is no enterprise architecture to enable proper impact and cost-benefit analyses with long-term perspective. And no governance model is in place to ensure that the decision-makers are working for the benefit of the whole.

Take Away

Not all IT projects are productive. They may even be detrimental to the business, but misaligned incentive schemes and other structures sustain non-optimal IT decision-making with predominantly short-term planning horizon and focus on operational and cost efficiency. IT investments should be judged by their overall bottom line impact, including not only cost reductions and efficiency gains but also the indirect impact that IT has on increasing business effectiveness. Albeit more difficult to quantify, requisite investments in strategic IT in support of business innovations bear potential of bringing about measurable increase in productivity. Information technology and enterprise architecture should be given the attention that they deserve: not only in terms of budget, but also by institutionalizing pertinent governance structures throughout the organization.

Janne J. Korhonen provides insights into how information technology can be applied strategically to catalyze organizational change and responsiveness. Drawing from both theory and practice, he discusses agile enterprise and its governance.

Janne J. Korhonen

Janne J. Korhonen is an independent business and IT consultant,specializing in enterprise architecture, business process management,service-oriented architecture and pertinent governance models. He has over ten years of experience as an architect and consultant in a variety of extensive and mission-critical IT projects. With strong theoretical underpinnings, his consulting encompasses systemic co-development of business, organization and information technology.

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