A puzzle [in the American economy] is why productivity accelerated over the past three years at the same time as IT investment fell. After all, a host of studies have concluded that most of the revival in productivity growth is linked to the production or the use of computers and software.
One explanation is that the productivity gains from IT investment do not materialise on the day that a computer is bought. Work by Paul David, an economist at Oxford University, has shown that productivity growth did not accelerate until years after the introduction of electric power in the late 19th century. It took time for firms to figure out how to reorganise their factories around the use of electricity and to reap the full efficiency gains.
Something similar seems to be happening with IT. Investing in computers does not automatically boost productivity growth; firms need to reorganise their business practices as well. Just as the steam age gradually moved production from households to factories, and electricity eventually made possible the assembly line, so computers and the internet are triggering a sweeping reorganisation of business, from the online buying of inputs to the outsourcing of operations. Yet again, though, the benefits are arriving years after the money has been spent.
IT’s impact is likely to continue for the foreseeable future:
Pundits who reckon that 3-4% productivity growth is sustainable for another 5-10 years are, in effect, making the bold claim that IT will have a far bigger economic impact than any previous technological revolution. During the prime years of the world’s first industrial revolutionthe steam age in the 19th centurylabour productivity growth in Britain averaged barely 1% a year. At the peak of the electricity revolution, during the 1920s, America’s productivity growth averaged 2.3%.
Yet there are still good reasons to believe that IT will have at least as big an economic impact as electricity, with average annual productivity growth of perhaps 2.5% over the coming years. One is that the cost of computers and communications has plummeted far more steeply than that of any previous technology, allowing it to be used more widely throughout the economy. Over the past three decades, the real price of computer-processing power has fallen by 35% a year; during 1890-1920, electricity prices fell by only 6% a year in real terms.
IT is also more pervasive than previous technologies: it can boost efficiency in almost everything that a firm doesfrom design to accountingand in every sector of the economy. The gains from electricity were mainly concentrated in the manufacture and distribution of goods. This is the first technology that could significantly boost productivity in services.
So, IT does matter, but only if companies are willing to change the way they do business. “The most dramatic gains happen when companies use technology to understand better what they do in order to change how they do it, says Navi Radjou, an analyst at Forrester, a technology-research firm. The main issue slowing productivity gains down, he adds, is ‘grandma syndrome’a reluctance to ditch tried and tested processes.”
This is what SMEs need to do – adopt technology and revamp the way they think and do their business. This is the next frontier for tech companies.