Focus on processes, not the technology

How is it that two companies can spend the same amount on IT and one will get a solid business bounce out of the investment and the other will see nowhere near the gain?

Erik Brynjolfsson, a professor of management at the MIT Sloan School of Management and the director of MIT’s Center for eBusiness, shared his thoughts and research on the matter last week at the 2004 MIT Sloan CIO Symposium.

He started by dispensing with the age-old productivity paradox. “Economists agree today that IT has been the single most important factor in productivity growth since the mid ’90s,” he said.

Productivity growth was 1.4% from 1973 until the early ’90s, and many economists thought it had settled there for good. But in 1995 it jumped to 2.5% and by 2000 had reached 4.5%. Some economists thought it would settle back down after the bubble burst, but surprise, surprise, it has stayed at 4.5% even as a recession settled in.

That growth can be attributed to IT, Brynjolfsson said. But not the technology itself; the business process changes enabled by the technology, such as new ways of dealing with suppliers and customers.

Brynjolfsson shared research showing average component costs associated with a $20.5 million software IT project: hardware cost, $800,000; software, $3.2 million; implementation (piloting, process reengineering, consulting) $9.3 million; and deployment (labor, travel, training) $7.5 million.

IT tangibles – the software and hardware – usually get treated as the real investment, and intangibles get less attention, yet they account for the bulk of the costs. “Today’s companies are becoming less and less dependent on physical assets and more and more dependent on information and software assets,” Brynjolfsson said. IT is a catalyst for productivity surge, but organization capital accounts for the bulk of the real benefit.

Based on extensive survey data, Brynjolfsson concludes that the companies that are IT-intensive AND marry organizational practices to computing usage get the best return on their dollar. He calls companies that get it right “digital organizations.”

A member of the audience asked Brynjolfsson how he reconciles his views with those put forth in the Harvard Business Review story “IT doesn’t matter.”

“IT by itself isn’t the story,” he said. “What gives advantage is having optimized business practices in place. Business processes are difficult to discover and difficult to imitate.”