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April 17, 2000

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Bottom-Line Thinking: A Study Of Output And IT

By Clinton Wilder

W hen it comes to explaining the relationship between IT and worker productivity--bandwagon jumpers like Federal Reserve chairman Alan Greenspan notwithstanding--the generally acknowledged expert in the field is Erik Brynjolfsson, a professor at the Center for eBusiness at the Massachusetts Institute of Technology's Sloan School of Management.

Brynjolfsson has been studying the impact of computers on productivity for more than seven years. In his latest research project, with co-author Lorin Hitt of the University of Pennsylvania's Wharton School, Brynjolfsson supports what many IT and business managers already believe: that productivity gains from IT are dramatically enhanced by accompanying changes in business processes and organizational structures.

"We think those aspects are under-appreciated in the information economy," Brynjolfsson says of his latest research study, entitled "Computing Productivity: Evidence from a Firm-Level Survey," a densely worded academic tome that makes reference to many other studies in the field. "The hardware and software investments are fairly easy to measure, but even bigger investments are being made by companies and IT departments in reengineering business processes, retraining employees, and finding new and better ways to do work. Those investments are made possible by IT--say, bringing in a new SAP system--and they're very productive."

What makes Brynjolfsson's work so exciting is that economists have been slow to attribute increases in worker productivity--and the subsequent sustained economic expansion now being enjoyed in the United States--to IT. Brynjolfsson and Hitt applied standard productivity and growth accounting techniques to data culled from 600 large U.S. companies between 1987 and 1994. Brynjolfsson contends that aggregating the experiences of individual companies, rather than studying overall industry data, better reveals the so-called intangible benefits of business-process improvements.

Brynjolfsson compares his study with historian Paul David's research on the early automation of U.S. factories a century ago. Manufacturers introduced electric motors to automate their plants in the late 1800s, but didn't realize significant productivity gains until the advent of organizational innovations such as Henry Ford's assembly line in the early 20th century.

"With computers, the part that people often miss is that every middle manager, when he or she gets a computer or a new piece of software, invents new ways to do their work," says Brynjolfsson. "It's beyond business-process reengineering--we call it invention. It may be a big invention, like a revamped ERP system, or a little invention, like a better spreadsheet, but they all create big pay-backs over three to five years."

Return to main story, "It's Official: IT Adds Up."

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