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The IT Productivity Paradox

Ethan Dreyfuss, Andrew Gadson, Tyler Riding, Arthur Wang

Productivity Benefits Lag IT Investments

When anything novel or complex is introduced into an industry, especially a general purpose technology, immediate benefits in terms of productivity should not be expected. In fact, it is often times the case that there will be a noticable decrease in productivity immediately after the change. This is largely due to learning costs, developing new infrastruce to support the technology, and other factors. Two factors in particular -- training and education costs and restructuring at an organizational level take a significant amount of time before results are yielded. In fact, a survey conducted in the early 90s found that executives expected to wait as long as 5 years before IT investments paid off. The idea of benefits lagging investments is by no means a new theory. The cannonical example of this trend is the way productivity increases did not occur immediately when organizations and communities begain investing in electricity.

Electricity and Productivity Lag

Perhaps the most common example of productivity lagging behind investments is the case of the electric dynamo. Even though knowledge of electrical advances were well known in the late 1800s, electric power technology did not significantly spread until around 1914-1917 in the United States. In fact, factories did not fully utilize electricity until the 1920s. Before this time electricity also had no discernable impact on productivity growth. It took two to three decades before electricity was being used in a productive manner. The time needed before productivity benefits were realized in the technological sector (especially since software is still a relatively new field) was about 40 years if we are to believe the studies of the 1990s that show significant productivity achievements. Further analysis between the analogy of computers and the electric dynamo can be read in The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox by Paul A. David.

Training and Education

When a new technology is introduced into a company, it takes time for the employees to learn how to properly use this technology. This is particularly true with IT, where the technology is often times completely different from the methods it replaces. In order to properly learn the ins and outs of this new tool, employees must undergo overcome the initial learning curve, and become familiar enough with the new system that they are able to equal or exceed their previous levels of productivity.This can be a time intensive process, and it is quite possible that during the time employees are still unfamiliar with the new technology their productivity will decrease even though they're using superior tools.

This concept of a training and education time-lag was evident among white-collar workers in the mid-1970s to mid-1980s. During this time period IT capitol per white-collar worker expanded significantly, but instead of seeing greater productivity from their white-collar information workers, their productivity decreased by 6.6 percent. The shift to IT took away many of the methods and tools workers had become comfortable with and replaced them with unfamiliar ones that necessitated a acclamation grace period.

Restructuring of Organizational Structures

Although recently there is a definitely positive trend where investing in IT increases productivity, there is an extremely large amount of variance in the size of the return. In addition, it has been estimated that abouthalf of the value of IT is directly linked to unique characteristcis of the individual firms implementing it. When one takes these two facts into account it becomes clear that IT benefits greatly from certain organizational structures.

In their article "Beyond the Productivity Paradox," Brynjolfsson and Hitt suggest that IT is giving rise to a "New Organization." In order to best capitalize on IT in this new paradigm, organizations are making a number of changes. First, they are flattening out their hierarchical structure and filling their ranks with highly-skilled workers who are given greater decision-making responsibilities. This ensures that when productivity advances are seen at the individual level, they can then be propelled upward throughout the company, and is explored more in the organizational linkages section. In addition to restructuring the organization, there is also a shift towards decreasing mas-production and instead focusing on customization, variety, and customer service. These factors let technology rich firms capitalize on their IT infrastructures, but these adjustments do not happen immediately.

Manufacturing Example

In one case study, a firm invested millions of dollars in moving over to an IT-driven manufacturing process. Their management had the foresight of understanding that these changes would necesitate a change in their general work practices. For example, their new IT processes were much more flexible, so it was beneficial to give line workers the ability to make decisions on-the-go and adapt to their current situation. However, after the move to a computerized process was complete, no initial increase in productivity was detected. After some investigation they discovered that their manufacturing workers were still adhereing to their old work practices out of both habit and also a lack of interest in assuming greater responsibilities. Given time, management was able to acclimate workers to the newly instated work practices, and the company exceeded their production goals. This is a clear example of how in the short term IT investments may create the appearance of a Productivity Paradox, but given time to adjust and reorganize the benefits and value often prove significant.

Further Reading

Brynjolfsson, Erik and Lorin Hitt. "Beyond the Productivity Paradox." Communication of the ACM August 1998: 49-55.

David, Paul. "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox."