For more than two years, the economic think tank
McKinsey Global Institute has been studying productivity and its
connection with corporate IT spending in 20 industries in the US,
Germany and France.
The institute's director, Diana Farrell, talks about the role
technology has been playing in driving productivity and how
companies can make more effective use of IT.
What caused the productivity surges of the
1990s?
Real productivity surges came in six sectors only: retailing,
securities brokerages, wholesaling, semiconductors, computer
assembly and telecommunications. You can begin to see a pattern: an
environment that allows intense competition to take place.
In retail, for example, Wal-Mart's innovation raised the
competitive intensity, forcing competitors to adopt innovations,
and that retail pressure put pressure on wholesalers.
Where does IT come into play as a productivity
tool?
It's the way IT enables the productivity process that makes it
such a powerful tool. It helps in the introduction of new products
and services. It makes innovations so much more replicable and
scalable. And its benefits multiply as it scales, so it allows you
to deal with much more complexity. It's a very powerful tool.
Which industries benefit most from IT, and
why?
I can answer much better at a subsector level. Where we really
see payoff is in certain subsectors that are well suited to
technical innovation.
For example, in retail general merchandising, you have very high
throughput, and that's better suited to technological innovation
than in apparel, where you don't have the same volumes.
What differentiates the companies that gained the most
from IT?
First, they target the technology investment to their very
specific subsegment and to operational levers that matter for their
industry. You don't make a large investment in a lever that, even
if it moves, doesn't really affect the business model or one that
couldn't move enough to make a difference because other barriers in
the marketplace make that impossible.
Hotels spent an enormous amount in IT investment. But if you
look at the operations of a hotel, the biggest chunk of cost comes
down to the labour pool - the cleaning and maintenance people. IT
was focusing on reservations and not on what drove the economics of
the system. So they had a huge investment that didn't pay off.
The second thing is they recognise that IT investment and
business process changes are a co-revolution. You can't solve
business problems by throwing IT at them. You need to optimise the
business process and enable it through IT.
Retailers, for example, have to start by cleaning their internal
data before they warehouse it and extend the technology to their
suppliers. Working in tandem with business process changes is so
obvious, but it's lost on many people.
How do I find my company's productivity
levers?
We've identified eight operational levers that are generic
through all companies. For example, you can reduce labour costs or
non-labour costs. The real key is to take this generic list and
say, If I'm in the hotel industry, there is very little
substitution of capital for labour that will yield much impact. You
have to ask, given my operational model, if we move this lever
100%, what would be the impact on the bottom line? Those questions
are not asked as systematically as you would think.
Talk about the importance of sequencing in IT investments.
Retail is a good example. You can look at the range of IT
investments a retailer would make over time. You start with basic
help in moving products from suppliers to customers - data
integration, distribution logistics. Then you try differentiating
technologies like fine-tuning merchandise planning. Finally, you
move on to next-frontier investment - customer experience
solutions: things that make them feel it's all tailored to
them.
In the IT world, there's a lot of excitement about all this
sophisticated stuff, but if you don't get your data cleaned up
first, you don't have the ability to take advantage of those later
investments. You'd be amazed at how many businesses made very large
investments in CRM before they had clean data. The technology had
no impact. It was yielding garbage.
How can a company hold on to the competitive edge from
its IT innovations?
Couple the innovation with other advantages that are less
replicable. For example, CRM. Anyone can buy CRM. It's important to
build in organisational changes and processes to make CRM effective
and not really possible for others to replicate.
When should a company take the lead in IT, and when
should it follow?
You don't enter into leading-edge investment unless you feel
it's really targeted to levers that matter for you and unless you
can couple the investment with other advantages like scale, tacit
knowledge or some other capability that gives you reason to believe
that what you do won't just be replicated by others or that even if
others follow, they won't get the same bang for the buck.
Otherwise, wait for the leading edge to be worked out by your
competitors and then adopt it.
Productivity levers
Productivity is defined as the output of production per unit of
input. For example, it could be the number of widgets produced per
hour of labor. Farrell offers eight productivity levers to help you
target IT investments to the areas that really matter to your
business.
To increase outputs
Increase the number of units produced by:
- Increasing labour efficiency
- Increasing asset use
Increase the value of the portfolio by:
- Selling new value-added goods and services
- Shifting to higher-value goods in the existing portfolio
- Realising more value from goods in the existing portfolio
- Decreasing inputs
Reduce labour costs by:
- Substituting capital for labour
- Deploying labour more effectively
Reduce non-labour costs by:
- Reducing inventory holding costs, real estate costs and other
costs
Kathleen Melymuka writes for Computerworld