Technology can drive productivity, says think tank director

For more than two years, the economic think tank McKinsey Global Institute has been studying productivity and its connection with...

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


Read more on IT strategy