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Note: This paper was prepared in part as a class project to fulfill the course requirements of Information Systems Management for my esteemed professor Dr. Rick Gibson. If you have any reactions after reading this report I would love to hear from you via e-mail.

The Productivity Paradox

Introduction

Coming to a full understanding of the "productivity paradox" issues is not something that can be comprehended easily or treated superficially. The paradox is a complex matrix of issues with multiple implications. The first part of this paper will use Erik Brynjolfsson's framework to explore three critical areas; strategy, structure, and IS tactics of organizations and industries.

1. What is the state of the evidence? Do you believe the claims?

The data and case made in support of the "productivity paradox" in the special feature article in the September 28 edition of The Economist is compelling. on the whole, I accept the integrity of the data and some of the assumptions. However, several authors have since offered explanations, alternative interpretations, and identified other relevant factors that contribute to this phenomenon. In short, there is more to evaluating productivity than just throughput.

Paul Krugman's contention that recent technological advances are not in the same league as those achieved earlier this century has merit although the implications are not the same in all sectors of the economy. However, his example that today it still takes the same time to travel across country typifies the myopic conclusions that characterize several of the productivity arguments. The time it takes to fly across the US has nothing to do with investments in technology. The only thing that could speed up that journey is a "transporter room" or a "virtual trip" via a video conference. Instead, we now have a great many improvements in airline travel that are directly attributable to advances in technology such as; just-in-time ticketing, advanced seat selection, safer flying conditions, optimization of route choice, more efficient fuel usage, and forecasting models that allow airlines to achieve maximum seat utilization. Moreover, many support industries that have begun as a result of new technological developments.

Strategy

How a company, industry, or nation decides to implement its organizational philosophy or approach has a great impact on the success and productivity of technology initiatives. The first question to be asked is, What is the philosophy or approach? The Business Process Reengineering or Redesign (BPR) championed by Hammer and Champy proposes the alignment of the business process through workflow principles to achieve maximum efficiency. Even though BPR concepts are among the most highly regarded business practices, approximately 70% of these efforts fail, often because they do not take into account the breadth and depth of changes that must occur in organizations. Further, the full effect of these changes is only realized when partners along the supply chain are tied into the streamlining processes. Technology that is put into companies who do not have a highly integrated and appropriate business strategies usually demonstrate an under achieving productivity profile.

Brynjolfsson and Lorin Hitt posed several other probing questions related to the business strategy. Is the business primarily looking for cost cutting or maximization of resources and investments? The minimization of loss vs. maximizing of profits strategy has great implications for decisions about they types of technology business investments as well as how they are used.

A third question deals with the company orientation. Is the primary focus on meeting and satisfying customer needs or optimizing the performance of the worker? Executives making these decisions must consider the short and long-term consequences of their plans. How the productivity of the technology is viewed is directly related to their business approach.

Decisions about corporate vision and strategic goals and improved management control often dictate profitability. More creativity is called for in thinking about new ways that computers can create value.

The bottom line is; for technology to achieve its maximum impact it must be aligned with the core competencies of the company, its customers, management, and partners to deliver true value. Much of the low productivity of companies is due to the wrong mix of these factors.

Organizational structure

How a company organizes itself often determines the degree of success that a company can achieve. Several studies have looked at the effect of different types of business structures with various approaches to use of technology. Brynjolfsson's findings indicated that more hierarchical approaches to management are more common among less-computerized companies.

IS tactics

How a business goes about implementing its' business and technology plan is another key to successful initiatives. Type and style leadership are important. Rate of change (i.e. evolution vs. revolution, all out, phased in vs. interative, etc.) has a great impact on the penetration of technology. Approaches to change and corporate culture have widespread implications. Ideally, businesses are looking to create the environment within the organization that allows for a full exploitation and the potential of the technology.

Productivity: state of the evidence

A variety of authors have offered the following points as evidence in the paradox question.

  • aggressive use of computers is associated with empowerment.
  • using technology to get closer to customers can overwhelm decision-makers with information.
  • the customer-oriented companies had the best productivity performance.
  • there is no evidence that the companies using IT to save labor costs were as successful as their competitors at boosting productivity. If anything, they seemed to did slightly worse in both productivity and profitability.
  • companies that pursue customer-focused strategies reap significant rewards.
  • Wal-mart while they use cutting-edge technology to stay close to the customer, their organizational structure has also enabled them to outpace the industry.
  • InformationWeek's survey of human resource managers found that the top companies delegate more decision-making to line workers and said computerization was associated with skill-upgrading of their work force.
  • winning companies were more likely to be in the midst of reengineering or business process redesign (BPR) and devoting more of their IT budget to BPR than were their competitors.
  • companies that outsourced more of their IS work tend to have lower productivity and profitability. The only performance measure heavy outsourcers did well on was stock market returns. (the short term companies that spent more putting PCs in the hands of their employees and that moved aggressively toward client-server architecture outperform their rivals in productivity, profits, and stock returns. closely associated with decentralized decision-making.)
  • delegating responsibilities reduces bottlenecks at the top and gets scarce information and resources to the point of work.
  • customer intimacy depends on hard and on-the-spot local information and intuition is not captured in traditional computation and even communication.
  • companies turn to reengineering in response to a crisis in sales or earnings.
  • costs must at least be competitive before other factors can be exploited.
  • Quality is stressed by pharmaceuticals companies and the banking industry.
  • saving time is the priority of the computer hardware, service industries and general manufacturing.
  • outsourcing is more likely to lead to conflict.

Brynjolfsson summarized much of the arguments to refute the productivity paradox. The arguments fall into four categories.

1. There is none - Clearly there is something to the productivity paradox. What it all means is the real question. The "no paradox" argument is hard to sustain in light of the volumes of data that have been collected. Multiple counter arguments have been presented about how productivity must be considered in a variety of contexts. For example the National Research Council in 1994 concluded: Organizations are too complex, their performance too multidimensional, an their inertial is great for a single innovation at the individual level to have a substantial impact on organizational performance.

2. Time lag - The argument that we haven't had enough time to learn now to leverage the technology has merit. On the other hand, would argue that its not the time, but the process that managers are using that is the key. Sink and Smith state that productivity is but one of several interrelated and interdependent criteria of organizational performance. They conclude that if the right business process is used, there would not be a delay of several decades before technological breakthroughs deliver economy-wide productivity gains. In economic theory terms Brynjolfsson explains, "the life- cycle costs of maintenance, training, and support, when properly measured, typically dwarf the up-front costs of new computer systems."

3. Scope - This argument can be made on three fronts: 1. we have not made enough of an investment to really realize the gains; 2. the paradox of unrealized productivity improvements results form incomplete systems thinking and from failure to understand the nature of linkages among the individual, group, and organizational level; and 3. although computing is growing rapidly, we're not yet ubiquitous.

4. Can't measure them - Most of the work in this area has been related to evaluation questions. They generally use two approaches; we don't have the tools and we aren't looking at the right things. Brynjolfsson stated, "Productivity measurement isn't physics. Our tools are still blunt. Productivity does not automatically follow IT dollars--it takes a lot of hard work. "

Brynjolfsson said the shortfall of IT productivity is as much due to deficiencies in our measurement and methodological tool kits as mismanagement by developers and users of IT.

The National Research Council (NRC) says that within this model, productivity provides just one part of the total performance picture.

They suggest seven criteria are productivity, effectiveness, efficiency, profitability, quality, quality of work life, and innovation. The NRC would expand the to include other elements such as: productivity = labor output + quality + efficiency.

Many authors suggested that we are not always measuring the right thing. A common trap of assuming that if something can't be measured well, it should be ignored. For example, what about quality, customer satisfaction, convenience, time savings, customer loyalty? The difficulty of measuring improved customer service makes it difficult to justify IT spending and to intelligently set budgets.

In the era of information the emphasis is on competition on the basis of customer service, quality, and speed of delivery. New measures will have to be developed to augment our Industrial Age concept of productivity.

In Infoworld, Bob Lewis concluded that all sectors of the economy have not performed the same. The biggest productivity slowdown has been in the service sector which has been notoriously slow. Production per worker in this sector has remained flat for 15 years.

Another approach has been to look at the productivity analysis was based on "hard" numbers such as revenue, labor costs, and capital costs. Brynjolfsson observed, "you might expect that a hard-nosed, bottom-line orientation toward cost-cutting would do better than investing in "soft" benefits such as customer service, customer loyalty doesn't show up on this year's balance sheet, quality, customer service, flexibility, and speed. He and many others think that we should look at customer satisfaction instead of trying to squeeze out the maximum ROI. Many companies the lack of accurate methods for evaluating IT investments - is it headcount?

A single-minded focus on productivity can be counterproductive. Competitive advantage (vs. productivity) comes from delivering what customers value and from doing so in a way that cannot be easily copied.

Productivity, a narrow focus on reducing costs and increasing throughput further diverts attention from some of the essential areas like customer service, quality, and timeliness. These areas are not as easy to quantify, but they are often places where IT can have the biggest impact. Finally, several authors adopted the view that customer values have shifted from mass consumption toward subtler, quality-of-life issues.

2. What are the causes of the unrealized gains?

Most of the reasons that contribute to the unrealized gains have been discussed in question one under the three headings; strategy, structure, and IS tactics. In Datamation The Lee in 1995 talked about structure issues by concluding that workflow products have better design and processes to aid production.

Brynjolfsson & Hitt also stated that a cutting-edge computer shop that isn't aligned properly with the company's strategy and organizational structure, "is like a high-strung greyhound chasing a mechanical hare: No matter how fast the dog runs, it never reaches its goal." Vicki Burbach in a 1995 article in PC Novice touched on the lack of training and that workers need to know and use certain computer skills to increase their productivity. Further, learning takes place simultaneously in a variety of social and organizational domains that are not necessarily in communication with one another.

New ways of looking at economic principles such as micro-economic theory are being considered. "Rational, self-interested individuals and organizations will not invest heavily in unproductive activity over time. It took time for managers to understand that computers not only allowed them to do the same things differently, but also to do complete different things."

At times it is we, society, that have the wrong assumptions. In many cases it is really a computer evolution not revolution that is happening. We are expecting the gains from a revolution when organizations often do not change at that rate.

3. Is it a problem?

This question must be answered in at least two ways. First, yes it is a problem or at least a disappointment that with all of the investments in technology a greater return on investment has not been realized. On the other hand, other valid measures such as performance, customer service, and quality of life have been changed substantially.

On a more personal level, this paradox might be very difficult for an uninformed information systems manager to explain to a CEO or board. If he does not have a full grasp of the basic concepts of the argument and some ammunition for his points, he could be in deep trouble, particularly in times of austerity and downsizing. As Brynjolfsson observed, "a shortfall of evidence is not necessarily evidence of a shortfall." With any development, plateaus are normal. The data show that there is still growth, its just not exponential. Further the new different distribution of workforce, (i.e. white collar vs. blue collar) means that they are doing quite different things.

It is important to look at these questions in innovative ways. For example, Brynjolfsson & Hitt: "Instead of simply focusing on whether the companies in our survey use the latest technology, as past rankings did, this year we looked at their performance as well. The top organizations in our rankings have combined computers with new strategies and structures to generate more wealth than their competitors. To get some insight into this question this past spring, we worked with our students at the MIT Sloan School and examined six matched pairs of successful and unsuccessful users of IT. Our research suggested that certain business strategies, organizational structures, and information systems tactics can each play a role." The danger of focusing narrowly on maximizing traditional productivity measures is it can inhibit creative thinking about how technology affects other business processes. If we can find uses of technology to leverage special competencies of our business it is much more difficult for competitors to duplicate the approach.

As Brynjolfsson so correctly observed, "Only by understanding the causes of the productivity paradox can we learn how to identify and remove the obstacles to higher productivity growth. On one hand, experts warn that merely spending money on technology does not guarantee a more productive office; it should be seen as a tool, not a substitute for a good business strategy. The final true test is - just take away the computer or the new systems and see the reaction you get.

Bibliography

From the Economist September 28, 1996

MIT's INFORMATIONWEEK 500 STUDY The Productive Keep Producing: Successful companies support good business plans with the right information technologies By Erik Brynjolfsson and Lorin Hitt Issue date: Sept. 18, 1995

InformationWeek October 10, 1994 Issue 496, page 34

Technology's True Payoff -- An MIT survey finds that business tends to overlook intangibles when evaluating information technology By Erik Brynjolfsson

Center for the Study of Living Standards Ottawa - webpages

Harris, Donald, (1994). Organizational Linkages: Understanding the Productivity Paradox, National Research Council, National Academy Press, Washington, DC.

Last updated on November 10, 1997

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Last Updated: December 10, 2001