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Monday, December 18, 2006

IT Productivity : In The Measured But Unattributed Catchall Category?

Paul Strassmann once wrote that his Information Productivity studies suggest that there is not a shred of evidence that massive investments in information technologies have increased US productivity performance. The best one can say is that computers may have prevented further deterioration than would have otherwise taken place.Andrew McAfee comes out with an excellent article commenting on Robert Norman’s perspectives on IT spending and its correlation with productivity.

Andrew writes that as per Gordon based on recent analyses by Jorgenson, Stiroh, and others it is found that essentially all the increased IT capital deepening that took place was over by 2000. In other words, since the turn of the century we've fallen back to the same rates of IT capital deepening as existed prior to 1995, when productivity growth was so sluggish. This isn't too hard to believe, given the sharp slowdown in IT spending that occured after the Y2K 'crisis' passed and the dot-com bubble burst in early 2000. As a result, Gordon argued, it's reasonable to conclude that IT couldn't really have been responsible for the strong productivity growth increases we enjoyed between 2000-2004. After all, we weren't adding IT to the economy during those years any faster than we were from 1973-1995. Gordon's explanation for the 2000-2004 increases in productivity growth centers on ruthless corporate cost-cutting and high-powered incentives (i.e. stock options) for good performance. He asked us why an IT-based explanation still made sense, given reduced IT capital deepening and reduced need for ever-faster computers.

In fact recent reports indicate that IT spending (the central IT budget, controlled by the CIO) is not growing proportionately to revenue in most industries.
- IT spending is more negatively affected by revenue declines and reacts less positively to revenue increases.
- Even in organizations that experienced a 10% growth in revenue, most did not increase IT spending beyond 5%.
- The business continues to place increasing demands on IT. Increased capacity needs negate the financial benefits of Moore's law. While storage cots come down, organizations' needs for more storage capacity mean that many are still spending more on storage today than they did in the past.

Andrew provides a good counterview : Even in such a successful, well-managed, and IT-friendly company there were still significant opportunities to use technology to drive out inefficiency and redundancy and not adding IT to the economy as fast since 2000 as we were from 1995 to 2000. But that doesn't necessarily mean that pace of IT-based business transformation has slowed down; it just means that the pace of hardware and software buying has slowed down. Given what we know about the long time lags between the purchase of enterprise IT and its impact, it's easy to believe that the systems we were buying in the late 1990s delivered their value earlier this decade. Previously purchased IT might well also have been delivering part of the kick. Also to note is the fact that Re-engineering efforts that don't involve IT often fail because people simply ignore the new methods and keep doing business the same old way. IT can be used to remove this option. Andrew concludes that there's also an intriguing possibility that IT's benefits are now showing up elsewhere in the productivity statistics. It seems quite plausible that the measured-but-unattributed catchall category is where IT's productivity benefits are now showing up.
Steve Ballmer while pointing out to a new era of productivity and growth writes that the free flow of information, goods, and services that resulted has given rise to an era of unprecedented productivity and innovation that has had a profound impact on the global economy. As The Economist magazine recently noted, "the first decade of the 21st century could see the fastest growth in average world income in the whole of history."

The point is lot more innovation centered on technology is happening all around and like earlier investments have taken time to reap benefits, we would see that IT shall bring about transformative effects in future. We are seeing right in front of our eyes the significant change that’s happening owing to social network phenomenon and as these take the rightful place inside enterprises, the benefits shall begin to unfold. The other day I pointed to online ticket sales exceeding offline sales numbers and virtually every service industry going online is benefiting out of technology investments. Essentially the upside is wherever business model changes by taking advantage of investments in IT - the benefits are overwhelming.I remain more optimistic about tech powering innovation and productivity in the days to come.

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