McKinsey survey dispels the myth that greater investment in IT
leads to higher profits.
New research has called into question the assumption that spending
more on better IT will improve productivity and lead to higher
profits.
For years politicians and technology companies have pointed to the
boom experienced in the US in the late 1990s as evidence that more
IT means more productivity.
From 1995 onwards, spending on IT by US companies has doubled. By
the end of 1999 US companies were shelling out an average of $3,000
(£2,085) on IT for each employee.
At the same time, the US enjoyed some of the most spectacular
economic growth it has seen so far. Growth in labour market
productivity rose from 1.4% to an unprecedented 2.5% a year.
But research has cast doubt on the central role played by IT in
this economic transformation. A study from McKinsey Global
Institute, research arm of the management consultancy firm,
suggests that the bulk of the improvements were due to changes in
the way companies delivered their products and services.
IT, though important, was not the main driving force.
Although McKinsey based its conclusions on an analysis of US
government data, its findings are just as relevant to IT directors
in the UK.
The group found that nearly all the post-1995 growth in the US
economy came down to just six sectors of the economy - retail,
wholesale, securities, telecoms, semiconductors and computer
manufacturing. The remaining sectors of the economy showed
virtually no productivity improvements, or even a decline. And yet
they accounted for 62% of the growth in IT spending.
On closer inspection, McKinsey found a host of reasons for the boom
in the six key areas of the economy, many of them only remotely
linked to IT.
In the semiconductor industry, productivity jumped from 43% to 66%
largely because of improvements in chip manufacturing processes.
Intel, driven by competition from rival AMD, shortened the time
between new chip versions and began improving the performance of
each new chip more rapidly.
In telecoms, the Government's decision to license a new spectrum
for mobile phones increased competition. This led to lower prices,
more customers, and allowed the industry to spread its costs over a
wider customer base.
Even in retail, IT played only a secondary role. Here, the driving
force was the US budget supermarket Wal-Mart. The retailer saw its
market share grow from 9% in 1987 to 27% by the mid-1990s, driven
by productivity figures that were 40% higher than the industry
average.
Competitors took up many of Wal-Mart's innovations. They included
the use of electronic data interchange and wireless barcode
scanning, but some of the most significant changes were not IT
related, such as economies of scale in the stores and warehouse
logistics.
In other areas, investments in IT have yet to show any payback.
Hotels have spent money on reservation systems, but they have led
to only marginal improvements. Investments by retail banks in
Internet banking have yet to reap dividends. And long-distance
telecoms companies have invested in networks that are likely to
remain underused for years to come.
The existence of these sectors, according to McKinsey, shows that
IT alone is not a magic solution that can drive productivity
growth.
It is only when IT enables significant management innovations that
it plays a major role in driving productivity.
"IT directors will need to realise that IT is not a silver bullet
and that by spending on IT alone they will not get improvements. It
is only when you have IT investment and managerial innovation that
changes the way a business is run that you will increase
productivity," said James Manyika, a partner at McKinsey.
In fact, many IT investments in the late 1990s were made to
maintain existing capabilities, rather than to generate rapid
returns. Companies spent millions upgrading systems for Y2K. They
invested in Internet and network technologies with long-term
returns in mind, and upgraded PCs to keep up with changing
standards, rather than to improve efficiency.
McKinsey's findings were backed up by research by Butler Group
earlier this year. Butler analysed the IT investment of more than
1,500 UK companies and concluded there is only a random link
between how much a company invests in IT per employee and how much
money it makes back through returns on shareholder equity.
Like McKinsey, Butler's research highlighted the need for companies
to be well managed if they are to get a return on investment.
McKinsey's findings, however, do provide some valuable lessons for
IT directors, said Manyika.
For instance, IT directors should make sure new systems are
tailored to the way their company works. Those firms that benefited
most from IT invested in technology that fitted with their existing
business practices. Those that did not often had to change their
business practices to match the IT.
"In a lot of sectors investments were made because there was a bit
of an arms race going on. We need to buy this technology because
the competition has bought it, but we are not sure how we are going
to use it."
Whether IT spending patterns will return to anything like pre-2001
levels is difficult to predict, said McKinsey. It will depend how
quickly economic confidence is restored and how long it takes
before compelling new applications emerge on the market.
For copies of the report go towww.mckinsey.com