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The IT Productivity Paradox

Ethan Dreyfuss, Andrew Gadson, Tyler Riding, Arthur Wang


What is Information Technology

Perhaps we should start by first defining what IT really is. According to the Information Technology Association of America, information technology is “the study, design, development, implementation, support or management of computer-based information systems, particularly software applications and computer hardware.” Essentially anything that has to do with computers and computing is some form of information technology. Therefore, whenever organizations choose to buy computers, databases, networks, software, or many other computer related materials, they are making an investment in IT. Although on the surface this seems like a great thing, the reality is that it’s not immediately evident that investing in IT is actually profitable. In fact, much of the evidence from the 1960s to the 1980s indicated otherwise.

What about the Productivity Paradox

The productivity paradox (also the Solow computer paradox) is the peculiar observation made in business process analysis that, as more investment is made in information technology, worker productivity may go down instead of up. This observation has been firmly supported with empirical evidence from the 1970s to the early 1990s. This is highly counter intuitive. Before investment in IT became widespread, the expected return on investment in terms of productivity was 3-4%. This average rate developed from the mechanization/automation of the farm and factory sectors. With IT though, the normal return on investment was only 1% from the 1970s to the early 1990s.

There were a number of theories proposed that explained the productivity paradox. There ranged from ideas about inadequate measurement of productivity to the necessary lag period before actual gains in productivity could be seen. Until recently these explanations were little more than theories, but now many of them have hard evidence to support then due to studies that show a large increases in productivity in companies that invested heavily in IT.

The Development of the Paradox

The way the productivity paradox unfolded is best describes by Stuart MacDonald and his colleagues in his paper, Measurement or Management?: Revisiting the Productivity Paradox of Information Technology. According to MacDonald, the paradox began to take place in the early 1970s and progressed through 5 stages.

Stage 1

These were the early days, when not much was known about the implications of IT investment and expectations were huge. The idea of IT investment was so novel that there was a broad notion that IT was going displace labor entirely. Ever since this early period of investment in IT, it was assumed that labor productivity was the correct way to measure the impact IT had.

Stage 2

This stage started in the late 1970s and marked the first indications that the result of IT investment was less than expected. Even though this was the case, companies continued to funnel huge amounts of capitol into computing. Most companies didn't even bother to try and evaluate their IT investment. Those that did usually only used return on investment calculations.

Stage 3

This stage, which spanned the early 1980s, was marked by the realization that IT was only to be used in terms of productivity. Instead, companies began to use IT strategy. Several comapanies (American Airlines, American Hospital Supplies, and Citibank) strategically used IT to create a competitive advantage over their competitors.

Stage 4

By the late 1980s IT investments migrated to management information systems. In this new area IT was no longer expected to be directly productive. It was also during this time that numerous explanations for the productivity paradox emerged. Although none of them individually provided a concrete explanation, collectively they hinted at a larger problem.

Stage 5

After the late 1980s, most of the investment in IT has been in telecommunications. With this new area of investment, expectations of productivity increases were further lowered.