IT and Business Performance – is there a continuing positive effect?

(What matters ?)

John Hassall

October 2008

Abstract
Starting with Nicholas Carr’s controversial 2003 article in the Harvard Business Review, I argue that I.T. initiatives must be
accompanied by significant business process change in order to yield positive benefits. I draw upon economic principles and
literature, published material in I.S. and I.M. plus my own working experience to conclude that I.T. Does Matter!; just not a
much as we think it does.

INTRODUCTION

In a widely read and controversial article in the Harvard Business Review in May 2003
Nicholas Carr rocked parts of the computing establishment by questioning the
assumption that investment in I.T. was capable of leading to sustainable competitive
advantage. Instead he suggested that the days when I.T. investment could lead to large
returns and lengthy periods of competitive success were long gone. He argued that I.T.
was no longer a scarce resource and that I.T. investments by one company could
quickly be emulated by a competitor.

Carr’s argument is, at its heart, an economic one. All competitive advantage comes of necessity from having
something that your competitors do not have. Where everyone has easy access to a technology or group of
technologies, the advantage can only exist in something apart from the technology. This has been true of every
technology ever invented, once it becomes widely available it looses scarcity value. Of course, what you do with a
technology can provide an advantage – but it seems to me that the advantage cannot therefore be associated
mainly with the technology.
The I.T. industry was quick to respond to the notion that all their products might not confer the sorts of benefits
they like to sell. Steve Ballmer, CEO of Microsoft called the article “Hogwash”’ Carly Fiorina, CEO of Hewlett-
Packard suggested that Carr was “...dead wrong..”, whilst Fortune Magazine described him as “..dangerously
wrong..!”.
My first thought about the responses to Carr’s article was that the I.T. companies were guilty of a self seeking
and illogical argument. They would like all the companies in their respective markets to use their products – no
scarcity value at all there! How then can they ignore the argument for loss of scarcity value. It seems that the I.T.
CEOs had chosen to ignore the difference between the technology and what is done with it; and of course it is
helpful to claim credit for some other company’s skill in using your product. However it is can be instructive to read
what Carr is actually saying in his article and subsequent book; and it is hard to escape the conclusion that the I.T.
industry fully understands the commoditisation of many of their technological products and consequent fall in per
unit value.
The question I want to ask arising from this debate is, what is the value of I.T. to modern organizations? In this I
mean value to the using organization, not the producers of the technology. (Naturally it is valuable to them; it’s
where their profits lie!)
 BENEFIT AND PRODUCTIVITY
I have an idea that part of the debate over I.T. benefits is related to problems of definition. Amongst the issues
that arise are notions of efficiency, effectiveness, tangible and intangible benefits and a discussion of long and
short term effects. Mingled with this is the un-doubted fact that I.T. is continuing to evolve in new and exciting
ways. Think of computerisation in cars and many other products, think of mobile phones, think of medical
imaging , for example CAT (Computerized Axial Tomography, impossible without fast and economically effective
digital computers), think of the new generation of digitalized speed cameras – emerging applications of I.T. are
ubiquitous. We can debate the benefit of a myriad of technological innovations, but when we wish to measure
benefit of a specific technology to a particular using organisation we need a measure that makes sense. Carr in
his article equates benefit to the achievement of sustainable competitive advantage; in other words the ability to
support the creation of sustainable scarcity value in terms of goods or services. This leads to superior turnover
and profit on a sustainable basis.
At the level of the individual organization we usually evaluate any new development or change including I.T.
implementations in terms of tangible and intangible benefit. Tangible benefits are measurable in financial and
resource terms and typically involve increase in revenue or decrease in costs. It is possible to argue that the
adoption of particular technology or a particular project confers no tangible benefit if you cannot measure it. A
protagonist for the project can in turn argue that the benefits are intangible or longer term and a judgment must be
made about whether the resource cost should be incurred on the strength of the stated intangible benefits. Senior
managers, boards, councils and government make these sorts of decisions every day of the week. And who is to
argue that the decision to invest, say £12 billion?, on I.T. for the U.K. NHS is not a good deal? You would have to
be sceptical about either the benefits OR the capability of the organization to absorb such a lot of technology and
accommodate so much change; wouldn’t you?
I want to make clear here that I do not intend to argue that innovative uses of information technology do not
bring benefits; and I have mentioned some examples already. What I am keen to examine is whether I.T.
investments in terms of commonly available technologies and applications at the margin can generally be shown to
convey much in the way of improved performance for the average company or organization. My intention is to be
fairly, although not entirely, un-partisan with respect to the question. This relates to my conclusion, formed from
long experience, that non-profit making and public organizations waste more money and resources on I.T. than
others; but then such organizations are often thought by commentators to waste a lot of money on many things, so
perhaps we may not be too surprised............
My real question is closer to something like;
“Do the management in all types of organizations fully understand the benefits in terms of performance they
expect to realise when investing in I.T.; and is there evidence that faith in I.T. to deliver improved performance is
(still?) well placed?”
The question that follows this of course is;
“What do management need to do to ensure that benefits are delivered?”
I am not speaking then about innovative use of I.T. where a new technological capability delivers a hitherto
unavailable good. So, the fact that I can now communicate using my mobile ‘phone in previously unimaginable
ways is not important here; we know that everyone else (practically) can have the same capability after a while.
How then can we see the performance benefits of purchasing a technology, once it becomes main stream? The
‘phone example is instructive when you consider the greater part of the benefit from a mobile phone results from
the novel conjunction of telephone and mobility. And the benefit to the user lies in what is done with this capability.
The benefit lies in what is done, not with the technology. The relative benefits amongst and between mobile
‘phone users will depend entirely on what each does with the ‘phone. If they are in competition in some way that
depends upon the ability to communicate wherever they are and at any time, the person without access to effective
mobile telephony, or the willingness to use it, will be at a disadvantage to others who have. Translating this to I.T.
as whole, what evidence is that when I.T. investments are made, a change occurs in what is done (the business
processes if your like) that is sufficient to confer a performance benefit upon the organization?; particularly if it is
the case that other companies are able to easily buy the same technology (gain access to the came potential
capability). And, I have now re-framed the argument about I.T. and Business Performance as an economic one.
The remainder of the talk will examine various sources for evidence of how investments in I.T. lead to
improvements in business performance. Firstly, I intend to look (briefly) at evidence from a small sample of
economic literature. We shall find that this evidence is equivocal on the subject. Next, after essaying a tentative
conclusion on the question, I shall see what a small sample I.T./I.S. and Management literature has to say on the
subject. Finally I will return to my own experience of working over a period of 35 years in I.T. and related fields.

ECONOMIC STUDIES

Economists mostly speak of business performance in terms of productivity growth. To briefly argue the point
that productivity growth underpins competitive advantage; productivity is about the ratio between outputs and
inputs, which serves as an effective measure in both profit and non-profit organisations. Competitive advantage
must emerge from more efficient use of resources than competitors (if there are any) or the ability to premium
price. Premium pricing is based upon product features with perceived benefits. But products will tend to converge
over time as less expensive products gain more features as standard (the technology becomes less scarce). So, I
contend that productivity underlies the value proposition of all products and services and forms the bedrock of
competitive advantage for all forms of organisation.
(A further point emerging from the above is that we should see organizations that do not have competitors
increase their productivity at a much slower rather than those that do – which I think is what we do generally
observe.)
Economists use a measure called Total Factor Productivity (TFP) which looks at how efficiently you produce
your outputs for a given input. If you improve your internal processes, the way you apply the inputs to obtain the
outputs, you improve TFP. And it is clear that non-profit making organizations can, in principle, be dealt with
identically to profit making ones. The usual difficulty with non-profit making organizations is that we have problems
measuring the output so we have difficulty in finding a basis measure for improvements in TFP. (leading to more
debates about definitions..). Profit making organizations are much easier to deal with; they have turnovers and
profit margins. So let us now see where this concept of TFP can lead us.
The first source (also cited by Carr in his work) I want to consider is a talk by Martin Baily, a Senior Fellow at the
Institute for International Economics , reported in Baily, M, (2004). In the speech and in this article he critically
analyses the growth in U.S. productivity from the 1990s to the early 2000’s that has be widely considered to result
from the investment in I.T. over this period. There is a correlation between developments in I.T. and increases in
spending on new I.T. that corresponds to growth in TFP. But Baily draws upon known problems in economic
modelling together with industry studies and work on I.T. and productivity published by, amongst others, McKinsey
Global Institute (2002), to argue that the picture is far from simple. There are reasonably well understood
difficulties in working out the measures of capital input and labour input, the main factors in productivity growth,
which make the calculation of TFP, resulting from the way capital and labour are employed, subject to uncertainty.
Moreover, revisions in historical data (which is a particular problem for economists) can lead to work being
inaccurate. Looking at particular industry sectors can help explain what is happening ‘on the ground’ so to speak.
Here messages are mixed. Drawing upon McKinsey, Baily cites a number of examples of how productivity growth
occurs when I.T. is employed. On the one hand the case of computer chip design companies exhibits a clear and
significant contribution to productivity growth from new I.T. investments. On the other hand, banks who upgrade
their PCs with newer models often gain little in large parts of their business, the majority of staff continue to do
largely what they have been doing previously; no change in business process, no efficiency gains and hence no
increase in productivity. In many ways the third example, that of retailers such as Wal-Mart and Costco, is the
most instructive. There are some very good examples where retailers have used I.T. investments to increase
productivity and profits by better management of their supply chain and better understanding of customer buying
patterns. An even finer look at this data reveals that a good deal of the growth in productivity results from the
displacement of retailers by competitors who generally run more efficient processes – in other words, the incoming
retailers have an inherent competitive advantage. Baily discerns a thread running through these studies,
innovation. He considers that it can prove difficult to disentangle the I.T. component contributing to such
innovation from process and other innovations such as larger sized, so called ‘big box’ stores. A straw in the wind
is that European retailers have not typically seen such good productivity growth as those in the U.S. and this can
partly be attributed to the difficulty of opening large stores in many countries due to regulatory restrictions and
shortage of available sites.
If we take a key message from Baily’s argument, it may therefore be that, in order to lead to increases in
productivity, I.T. is usually associated with innovation resulting in new ways of carrying out business. Moving back
across the Atlantic I found a British study both more recent and echoing Baily’s conclusions. In Information
Technology, Organizational Change and Productivity Growth: Evidence from UK Firms (Crespi G, Criscuolo C,
Haskel J, 2007) and using data from the Community Innovation Survey in the U.K (period 1998-2000) the authors
show that, when modelling productivity growth, with organizational changes taken into account the contribution
from I.T. investments alone is drastically reduced. The authors conclude that a combination of I.T. and
organizational change has driven productivity growth, and they note that this is consistent with number of ‘micro’
(Industry?) studies.
Summarising my brief foray into a very limited range of economic sources then, I think it is possible to conclude
that all investments in I.T. will not lead to large productivity benefits. Some combination of innovation and change
in business processes together with investments in I.T. will generally be required.

IT/IS AND MANAGEMENT

Literature focussing on the application of I.T. to industry as a whole, and to particular milieus, offers some other
pointers to the importance of organizational change complementary to successful I.T. projects. Specialists in
information management consider that change must occur within the using organizations’ business processes if
I.T. is to contribute positive benefits. The POT framework of Laudon and Laudon makes clear the relationship
between People, Technology and Organisation in this field. How people are managed, their roles and the way they
do their day to day tasks and shoulder their responsibilities is crucial to making an I.T. investment work. All of
these contribute to the competence of the organization to use I.T. effectively and all of these deserve appropriate
investment and attention. That the attention and the investment pattern may be too much slanted in the direction
of technology, is supported by work by John McKane of the centre for information based competition at the Sloan
Management School in MIT. His research with 35 leading firms, throughout the world, indicated that a greater
proportion of investment was spent upon I.T. than the positive effects of I.T. from such investment suggest should
be spent. And I wonder to what extent these results resonate with the reader?

The wider IS literature also tends to support that effective I.T. implementations require significant organizational
change. For example, Boddy , Boonstra and Kennedy (2005) consider that “IS will often support or drive process
change” (p109). And the intermingling of I.T. with ‘administrative innovations’ is borne out by research
“It goes without saying that a full examination of administrative innovations has to be made in conjunction with
IT innovation”, Pennings (1998, p175).
The other side of the coin to this is that I.T. alone cannot initiate significant changes in business processes. My
own research (Hassall 1999, p209) suggests that improvements in administrative processes need to be explicitly
and expressly designed to stand a chance of succeeding
“'...the evolutionary process in relation to the use of GroupWise may be enhanced and further enabled by
development of specific workflow applications linked to business processes and by addressing the failure of people
to engage fully with the capabilities of the new technology." (Minutes of ISCMG Meeting , 30th June 1998). An
argument developing from this is that GroupWise and related CIS technologies may have been oversold in terms
of their ability, of themselves, to affect the way in which work is carried out. “

Indeed the experience of many organizations with ERP, tend to prove that management structures, cultures and
processes are remarkably resistant to any sort of I.T. silver bullet. We may conclude that success in gaining
benefits from I.T. are dependent upon well prepared ground and appropriate investment in modified business
processes and practices.

CARR’S MESSAGE

We can return here to Carr’s article and subsequent book. I have implied that a lot of the trouble with the whole
debate is about definitions. At the one end of the scale we have new and innovative uses for I.T. every day;
Mobile ‘phones, RFI, CTI in customer service, CRM and Data Mining for example. At the other end of the
spectrum we have I.T. projects that fail to deliver benefits because associated changes of business process and
practice, innovations that should be complementary to the I.T investment, are not carried out.
 Smith and Fingar in their response to Carr “IT Doesn’t Matter, Business Processes Do” also think that the
definitions are the problem, and that Carr’s approach is too simplistic. They conclude that Carr’s definition of I.T. is
too narrow; mainly equating to the hardware together with system and standard application software. The authors
consider that the rising and relevant discipline is not I.T. (application?) but Business Process Management
supported by ever new and more ingenious software support tools whereby business processes can be
increasingly rapidly re-designed and implemented. And they may have an important point that relates to the way in
which software applications will be delivered in future. Service Oriented Architecture aims to provide web services
with appropriate application granularity , chunks of business support functionality. If or when this future emerges
fully; a future in which many companies can simply get their applications out of a digital pipe by using a simple
standard interface such as web browser, what will the expertise needed to support the information requirements of
such companies consist of? It can only be. I suggest. a good understanding of how to design, redesign and
configure information functions available via computing utilities on a service basis; business process management
in short.

POSITIVE EFFECT ON BUSINESS PERFORMANCE

Attempting a synthesis of this (my preference has always been for holistic rather than analytic approaches) I
draw upon 35+ years of computer and application experience as user, application developer, technology provider,
manager. consultant and academic. It has long struck me that the interesting questions about I.T. are what to do
with it rather than how to do them. What questions require us to look outwards from the technology, the how
question inevitably lead us into the technicalities. In my working experience I have seen a range of I.T.
investments involving innovation and technology. The close relationship between business processes and the
willingness to modify them has often been there in the case of successes with I.T.. In the case of failures, a
technology focus is often present – the how rather than the what. An engineer or technician will see a problem to
be solved, it is what they do. “The purpose of a system is what it does”, Stafford Beer famously remarked.
I think therefore that we need to keep asking the question “..what are we trying to achieve? “ at every turn. The
benefits management approach to I.T. investments (Ward and Daniel, 206) does just this, encouraging managers
to construct their I.T. initiatives backwards based upon the active management of benefits achieved. Similarly, the
agile approach to projects (Highsmith, 2004), emphasis an incremental approach to the delivery of business value.
These approaches are pragmatic, seeking to ensure that we do not reify I.T. and assume that it can, on its own,
bring about needed organizational change. They encourage focus on incremental gains rather than huge all
embracing projects, and they concentrate on process, management and culture change rather than technology.

DOES IT MATTER?

I conclude then that I.T. continues to have the capability to have a positive effect upon business performance.
And, of course, the answer to Carr’s question is that, yes I.T. matters, in the same way that all our technologies
matter. I am probably slightly more on Carr’s side than of some of his critics though. My experience leads me to
believe that I.T. probably matters a deal less than we sometimes think it does. In particular, I think that the use of
specific (new) technology only provides transient special benefit in most adopting organizations. Once scarcity
value has been eroded, usually quite quickly, organizations risk spending money that does not result in much if any
differentiation from their rivals. For the majority of organizations, truly effective I.T. initiatives must be
accompanied by innovation in business processes if benefits are to result (NHS beware!).

REFERENCES

Baily M, 2003, Recent Productivity Growth: The Role of Information Technology and Other Innovations, Federal
Reserve Bank of San Francisco, Economic Review, 2004.
Beer S, 1985, Diagnosing the System for Organizations, Wiley, 1993, ISBN 0-471-90675-1.
Boddy D, Boonstra A, Kennedy G, 2005, Managing Information Systems – an Organisational Perspective,
Pearson, 2005, ISBN 0-273-68635-6.
Carr, N G. IT Doesn’t Matter Harvard Business Review, May2003, Vol. 81 Issue 5, p41-49.
Carr N, 2004. Does IT Matter? Harvard Business School Press, 2004, ISBN 1-59139-444-9.
Crespi G, Criscuolo C, Haskel J, 2007, Information Technology, Organizational Change and Productivity Growth:
Evidence from UK Firms, Centre for Economic Performance, London School of Economics, Discussion Paper no
783, March 2007.
Hassall J, 1999, Development of Performance Models for Co-operative Information Systems in an Organisational
Context, PhD Thesis, Aston University, 1999.
Highsmith, 2004, Agile Project Management, Addison Wesley, 2004, ISBN 0-321-21977-5
McKane J, 1998, Information Masters, Wiley 1999, ISBN 0-471-98801-4
McKinsey Global Institute, 2002a, How I.T enables Productivity Growth, MGI Reports, November,
www.mckinsey.com/knowledge/mgi/IT
McKinsey Global Institute, 2002b, Reaching Higher Productivity Growth in France and Germany, MGI Reports,
March www.mckinsey.com/knowledge/mgi/europe
Pennings J, 1998, Innovations as Precursors of Organizational Performance, in Information Technology and
Organizational Transformation - Innovation for the 21st Century Organization, Robert Galliers and Walter Baets,
Eds, John Wiley and Sons Ltd, 1998, ISBN 0-471-97073-5, Chapter 7.
Smith H, Fingar P, 2003, IT Doesn’t Matter – Business Processes Do, Meghan-Kiffer Press, 2003, ISBN 0-928652-
35-5.
Ward J, Daniel E, 2006, Benefits Management – Delivering Value form IS and IT Investments, Wiley, 2006, ISBN
0-470-09463-X.