Organizational Linkages Understanding the Productivity Paradox (1994) / Chapter Skim
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2 INFORMATION TECHNOLOGY AND THE PRODUCTIVITY PARADOX
2 INFORMATION TECHNOLOGY AND THE PRODUCTIVITY PARADOX
Pages 13-53
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From page 13... ...
for a firm or for an entire economic sector. This ratio is sometimes called throughput productivity, and it is measured in physical or monetary terms.
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Taken together they begin to chart the causes of the productivity paradox. But before undertaking those parts of the chapter, I frame the discussion by explaining why the productivity paradox is so profoundly puzzling to scholars and why it should also be taken very seriously by the public at large and, especially, the computing community.
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It begins to look as if the gamble is failing. Thus, those who believe in the productivity paradox do not argue that computers are a bad thing.
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Only when the nation gains an understanding of the dynamics of IT and productivity inside economic organizations and answers these questions can it expect to reverse the productivity paradox and realize the productivity potential of IT. PRIOR RESEARCH Research Designs The studies that suggest a paucity or lack of productivity payoff from IT are of three types, each of which involves a different level of aggregation, a different unit of analysis.
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Conditions in the early 1980s did not seem auspicious for a dramatic leap in productivity in this sector. The rate of growth of the nation's capital stock had slowed from the 1960s to the 1980s, which did not augur well for investment-driven productivity growth (Roach, 19831.
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For example, advances in computer design and manufacturing techniques spill over from computer manufacturers into benefits for the immediate user of less expensive computers (the financial services sector) and the customers of that sector.
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analyses of computerization in the financial services sector (insurance and banking) based on government time series data on industry inputs and outputs from 1958 to 1983.
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Thus, Franke interprets the productivity paradox as an essentially transitional phenomenon, albeit one that has resulted in three decades of declining capital productivity in financial services. He expects productivity improvements in future decades.
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He then plotted computer intensity against financial performance for some 100 manufacturing and service-sector firms, using survey data published by the magazine ComputerworId. In neither the service nor manufacturing firms was financial performance correlated with computer use.
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. Loveman used a range of econometric models, but he found that "the data speak unequivocally: In this sample, there is no evidence of strong productivity gains from IT investments" (p.
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looked at the financial impact of information processing on a sample of 40 firms in the insurance industry. In a crosssectional analysis, he found that IT was related to performance, defined as a firm's ratio of expenses to premium income.
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No study documents substantial IT effects on productivity. It is this lack of a clearly observable and substantial IT payoff, given the very large investments in IT, that raises the question of a productivity paradox.
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But this does not invaTidate the basic idea of a productivity paradox; if anything, it strengthens it. For if government data series have overstated productivity gains, the payoff of computers may have been even Tower than indicated by those statistics.
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For the present, it is fruitful to give tentative credence to the productivity paradox, based on the above studies, and to ask what mechanisms might explain the lack of payoff from IT. Individual-Leve/ Mechanisms The Shift to Slower Channels of Communication Speaking, gesturing, writing, drawing, and demonstrating by doing are all ways of communicating information; they use different sensory channels and distinct kinds of cognitive information processing.
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Different channels have quite different speeds of transmission- speech is potentially five times faster than writing or typing (Gould and Boles, 1983:2741. Thus, a new technology may simultaneously improve productivity in terms of speeding communication within a channel, and degrade productivity if it shifts communication from faster to slower channels.
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This is one potential explanation, at the individual level, of why IT has not improved productivity. Systematic quantitative data are lacking on how much IT has shifted communication between channels, but there is no dearth of ethnographic examples.
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The Quality Versus Quantity Tracle-off A trade-off between the quantity and the quality of output also affects the productivity gains realized from IT. For many white-collar jobs, the introduction of IT seems to alter preexisting balances between the quality and quantity of task performance by tempting individuals to improve quality.
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Pentland found striking discrepancies between the self-report findings and analyses of objective measures of the same agents' work. None of the computerized features was associated with increased productivity measured objectively, and several were associated with lower productivity.
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Even within one brand of software, operators have to deal with software updates, the inconvenience of going from documents typed using one version of the software to those typed in another, and so on. Skill obsolescence is not a problem solely of word processing: Software applications from accounts receivable to inventory control to financial and statistical modeling have been undergoing periodic replacement.
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It seems plausible, then, that much of the potential productivity gains from IT have been absorbed by the process of change itself and its impact on skill and perform~nce.3 Users find themselves with obsolete skills and new programs or procedures to learn. Technical support personnel face ever-higher degrees of software and hardware complex 3For a model of the diffusion of IT in which knowledge or skill acquisition plays a central and sometimes limiting role, see Attewell (1992a)
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All one sees in computerized workplaces is more and more change. The cost of that change must be balanced against the promise of productivity gains.
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The reason why the overall employment changes were small is that in the very applications in which productivity improvements were most marked, there was an equally striking increase in work load after the application was implemented. Thus, in a sample of 489 applications for which there were complete employment and productivity data, managers reported that mean output per worker rose by 78 percent compared with the immediately prior technology a substantial productivity effect.
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Although the economist's language of cost is appealing, and the falling unit cost of processing certainly explains much of the IT expansion, focusing on cost can obscure another important aspect of the phenomenon. Within an office, what most employees experience is not cost (to the organization)
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Government data series document that the administrative component of private sector firms has been growing for several decades. Figure 2-1 shows that administrative overhead, far from being curtailed by the introduction of office automation and subsequent information technologies, has increased steadily across a broad range of industries.
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managerial employment, 1972-1988. SOURCES: Klein (19841; Bureau of Labor Statistics (1989~.
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have offered a rather different argument regarding increased employment and the productivity paradox. They hypothesize that the efficiency gains of IT may have been spent on increased employment in marketing, sales, and service stab necessitated by the intensification of domestic and international competition.
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Services exclude private household services and wholesale and retail trade. SOURCE: Bureau of Labor Statistics (1989~.
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1 ~ i- ~ ~ 1982 1984 1986 1988 1990 Year Information and the Manageria/ Taste for Control To understand why the infusion of IT appears to have resulted in the expansion of managerial ranks requires consideration of the role of managerial information systems and the dynamics of control and power in the modern enterprise. Although many employees believe their bosses are immensely powerful, the experience of top management is often the reverse: Executives often find it very difficult to change the organization's course, And their policy initiatives can become bogged down, ignored, or even reversed Tower down the organizational pyramid.
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Management information systems, decision support systems, and executive support systems reflect a massive investment in elaborate reporting and control systems for management. The direct cost of such systemshardware, software, and systems staff is very large.
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The management-by-numbers culture places new work burdens on managers: In several films I studied almost any request for new machinery or investment had to be accompanied by a rationale entailing spreadsheet models of cost and payo~based on MIS data, often illustrated by pie charts and other graphics. Today's managers spend many hours (often at home)
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It is widely used as a case study in business school curriculums (e.g., Harvard Business School, 19861. By installing order-entry terminals in the purchasing departments of its hospital customers, and later providing inventory management software to them, AHS made it easier for its customers to order medical supplies and speeded its response to orders.
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In the long run, this could leave those industries in which strategic IT investment dominates highly vulnerable to competition from firms that maintain a cost-Iowering strategy. IT and the Service Approach Although American Hospital Supply illustrates the ejects of strategic investment in IT, it is also an example of the use of IT to gain customers through improved service.
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oo 3 o o v = A Cal o Ct C)
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Such demands can often only be met by further investments in IT. For example, in the early 1970s, insurance companies that processed medical insurance claims began to install costly mainframe-based interactive claims payment systems.
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Research suggests that the strong productivity gains that were expected from IT have not manifested themselves in the economy as a whole, in particular industries, or for representative samples of firms. The empirical evidence on the question is mixed, and this review has considered issues of data and methodology that might "explain away" the paradox.
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If IT is to achieve its promise, then, it must enhance productivity as well as quality and service. Going beyond the evidence suggesting a productivity paradox, this chapter sought to identify several mechanisms that undercut or attenuate the potential productivity payoffs from IT in organizations.
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Dexter 1982 Individual differences in the use of decision support aids. Journal of AccountingResearch 20(1)
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Department of Labor. Business Week 1988 The productivity paradox.
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Harvard Business School 1986 American Hospital Supply Corporation.
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1989 Assessment of the Current Developments and Trends in Office Automation
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Barr, and J.C. McDonnell 1988 Decision support system effectiveness: A review and empirical test.
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