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Thursday, September 16, 2004The quest for productivity is perhaps one of the most fundamental aims of any business and, in fact, most governments. Higher productivity leads to rising company profits, rapid growth rates, low-inflation and increasing prosperity.Much has been made about the difference between the productivity of American companies and Europe. Some of these differences can be explained away by different accounting practices but significant gap remains, a gap that many European governments are keen to diagnose and remedy.A study for the government by McKinsey comparing US and Europe's use of IT laid the blame on restrictive product regulations and planning laws: "The most pervasive explanation lies in the effect of regulations governing product markets and land use on competitive behaviour investment and pricing," it concluded.The McKinsey Quarterly recently reported on a study undertaken in partnership with the London School of Economics across companies in France, Germany, the United Kingdom and the United States. The McKinsey study rated a hundred companies on a scale from zero to five, measuring how they used three important tools: lean manufacturing that cuts waste in production; performance management that sets clear goals and rewards employees who reach them; and talent management that attracts and develops high calibre people. The report entitled , "When IT lifts productivity",identified a clear relationship between better management practices and improved corporate productivity.The results showed that a one-point improvement on the five point scale in management practice produced a 25 per cent increase in the company's total factor productivity (a measure that includes both labour and capital productivity). Their results showed that additional computing power delivered higher productivity but with a much more modest impact. The difference in productivity generated by increased IT investments was a mere quarter of that from improved management practices. Good management is essential to squeeze productivity benefits from new investments in computers and software. Companies should therefore focus on improving their management practices before they embark on IT spending sprees. And policy makers should champion the early adoption of measures that encourage better management rather than hand out tax credits to reward IT investment.
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