Evaluating the benefits of IT

Investment in IT can have significant effect on business productivity. So why do IT sceptics still hold sway in many boardrooms? It all boils down to what you measure and why, says the LSE’s Leslie Willcocks, as Julia Vowler reports

Being able to evaluate the benefits of IT expenditure for business has been the Holy Grail of IT for decades. And with global IT expenditure topping one trillion pounds a year, discovering that Holy Grail is more important than ever. But is it still just a dream?

“There are 30 years of question marks about what measurable value we get from IT investment,” says Leslie Willcocks, professor of technology, work and globalisation at the London School of Economics.

Willcocks believes that the first step to removing some of that uncertainty is to challenge the long-established IT productivity paradox. “It haunts our development and use of IT and communications,” he says.

“The term was invented by macro- economist Steven Roach in the mid-1980s to characterise his finding that despite massive IT investment in the US services sector, for many years labour productivity barely increased. And because the phrase resonates with managers’ own experiences and puzzle¬ment over IT value, we have lived with the notion of the IT productivity paradox ever since.”

But Willcocks believes that the paradox is spurious and cites three critical limitations of the study, claiming that Roach:

  • Used flawed government data that only represented 40% of US services
  • Failed to explain factors besides IT that could inhibit productivity (IT might have had  positive effects in  otherwise negative contexts)
  • Looked at correlations, not causalities, failing to explain why in the same period US manufacturing was investing in IT and making large productivity gains.

Willcocks says, “Subsequent studies at the organisational level, notably by Bryonjolffson and Hitt,  found strong  evidence of  a positive impact of IT on business performance. My own study of 400-plus business units with Gus van Nievelt in 1998 found evidence for significant, positive multi-faceted IT effect on productivity. However, timing and placement of IT expenditure emerged as all important.”

From Willcocks’s extensive studies of corporate IT in action in real-world companies and organisations, he identifies five key issues:

Wrong valuation of IT

“IT only has business value when related to a work process, has people competent to use the IT, and a business-focused informational purpose. We probably spend an awful lot of time measuring the wrong things. We should be measuring the  business value of IT management, not IT itself,” says Willcocks.

Studies show that IT’s business value is always secondary. The primary value comes from the process re-engineering that precedes any IT implementation. “Re-engineering is a prerequisite for IT, otherwise you only get a more efficient version of what you had before. If that was poor, what you get is disaster faster,” he warns.

Wrong measurements

IT’s contribution to business value must be measured in the right way. “I have devoted five books and numerous articles to showing that there are weaknesses in measurement
approaches, not just in macroeconomic studies but as adopted by
organisations,” says Willcocks.

These weaknesses include:

  • Not fully investigating cost and risk
  • Not accounting for human, organisational and management costs
  • Budgeting methods hiding costs
  • Not including intangible/indirect benefits
  • Not assessing the opportunity cost to business of a lack of IT
  • Not aligning business with information and IT strategies
  • Adopting poor anchor measures for tracking benefits.

“Moving to more balanced scorecard and dashboard-type holistic measurements can be healthy, though they run the risk of developing an internal evaluation bureaucracy and of losing credibility if not kept up-to-date and focused on critical parameters,” he says.

Another danger is that companies tend to be initially rigorous in their measurement of IT and business metrics, but then lapse.

Even with good metrics and practice, accurately evaluating the financial bottom-line is always a bedevilled task. “For example, the Sydney Opera House is one of the three most recognisable constructions in the world but how do you put a dollar sign against that immense value to the Australian tourist industry?” says Willcocks.

Sub-optimal use of IT

IT that is either unused or underused  is a waste of money. It takes people to extract value from IT investment. Willcocks says, “Much of the disappointment with IT is to do with not allowing for and funding the time lags needed for organisational learning and adjustment that can translate into more optimal IT use.”

Firms are too often preoccupied with the operational complexity of implementing IT rather than ensuring staff know how to get the best from it.

Lack of portfolio approach

Not all IT is the same. Different types of IT cost different amounts and return business value by different means. IT infrastructure investment, for example, cannot be seen in the same light as a point solution for a particular, self-contained business process.

“There are problems with not seeing IT as a portfolio of investments with different purposes, needing different measurement regimes,” says Willcocks.

“One of the fundamental mistakes Nicholas ‘IT Doesn’t Matter’ Carr made was to characterise IT as a  commoditised infrastructure. If IT investment is a necessary evil, then be risk-averse, spend less and use IT defensively. Focus on vulnerabilities not opportunities.

“Was it just coincidence that this is just what corporate boards wanted to hear in the 2001-2005 semi-recession? On the other hand, Thomas Friedman in his book The World is Flat massively overdoses on the inherently strategic and competitive advantages to be gained from IT investment.

“Both views are ultimately misleading when it comes to expectations about and measurement of IT’s business value.”

Non-uniform IT performance

Some IT systems deliver business value better than others. “There are considerable organisational variations in IT performance. Getting the right measurement regime embedded as a routine part of management helps to establish where you are. And getting this linked from the business, strategic to the IT operational level, and across a system’s lifetime is an obvious, if rarely enacted, recommendation.”

Willcocks outlines two possible causes of variability.

“We have always found a strong correlation between good measurement and actual improvement in the business use of IT,” he says.

Attitudes are also key. “Much  comes from the orientation of senior executives towards IT. In some organisations we see what I call ‘fear metrics’. These are set up by executives who have no faith in IT, whose existence has to be continually justified and invariably judged on traditional measures used with other assets, thus becoming a self-fulfilling prophecy of disappointment and under-funding.

“However, other executives have a more ‘strategic asset’ view of what IT can do for the organisation. They tend to get more business value out of their IT, not least because they are clearer about giving a business focus to their measurement systems and IT investment in the first place. They are more confident about the value they are getting from IT, and so they tend not to want exhaustive, highly detailed measurement data, but focus on key metrics and results.”

Good management practices are key to getting business value from IT investment. “That is when competitive advantage can kick in. It is a point Carr misses. He greatly underestimates how problematic IT is and the difference management makes. We have spent years studying these phenomena,” says Willcocks.

He says that effective users of IT share certain traits:

  • They listen to the technology and are informed by global dynamics of new trends such as offshoring
  • IT is governed as a strategic, business-focused portfolio by relevant stakeholders
  • IT is led by a credible CIO, influential among senior business executives
  • Business executives manage IT as a strategic resource
  • The organisation retains key IT capabilities and ensures key supplier capabilities are in place within a disciplined strategy, management and delivery regime
  • There is good project management to draw upon for re-engineering and IT implementation.

“In such organisations the notion of an IT productivity paradox is too false to be good,” says Willcocks. 

Leslie Willcocks was speaking at a Computer Weekly 500 Club meeting

IT's productivity paradox

Attention was first drawn to the “IT productivity paradox” in 1987 by Morgan Stanley’s chief economist, Steven Roach, who demonstrated that although the amount of computing power per white-collar worker in the services sector had grown dramatically during the 1970s and 1980s, measured productivity of the sector remained flat.

The Productivity Paradox of IT

Invest in IT for productivity gains

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