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A Step Ahead

Economist Erik Brynjolfsson leads the charge toward a greater appreciation of IT.

For the past 15 years, Erik Brynjolfsson, the George and Sandi Schussel Professor of Management at the Massachusetts Institute of Technology’s Sloan School of Management, has been studying the economic impact of corporate IT investment and, more recently, the strategic drivers behind E-business. As a longtime believer in the power of IT to improve business productivity, he has at times been something of a lone voice in the wilderness; only recently has economic data seemed to confirm his optimistic view. Co-director of the Center for eBusiness@MIT, co-editor of the Ecommerce Research Forum, and co-editor of Strategies For e-Business Success (Jossey-Bass, 2001), he recently sat down with CFO IT editor Scott Leibs to discuss IT’s contribution to the bottom line.

Does the debate still rage as to whether the massive investments that companies have made in IT have resulted in greater productivity?

For much of the 1990s, people were still very skeptical about IT’s overall impact on the U.S. economy, but my sense is that most economists, from Alan Greenspan on through the academic and business economists, would agree that a big part of the productivity resurgence that the United States has experienced since the mid ’90s can be linked quite directly to investments in information technology. I presented a series of analyses that showed that computers were contributing quite significantly to productivity growth, and I feel a little bit vindicated. There’s still [some] debate about its overall impact, and there will always be a debate — there should be — about specific projects and technologies.

To what degree can one quantify the benefits?

I think that there are myriad ways. One of the special characteristics of information technology is that it’s what economists call a general-purpose technology that can be used in so many different ways. Much of the benefit depends on the co-invention of new uses by users themselves. So when somebody installs an ERP system to reduce inventories, there’s a first order of benefit there, but often the bigger benefit comes when the managers who work with it learn more about how to interface with their suppliers and their customers and understand their product line better and make decisions that build off that. You can go through lots of industries and see changes in, say, retailing with efficient consumer response and vendor-managed inventory, and in banking through a whole host of services, but each of them is different, not just by industry but even at the level of individual firms.

Does much of the productivity gain come from reducing head count?

A lot of the easiest-to-measure parts do, although those reductions often don’t happen until there’s some kind of pressure on the organization. (Editor’s note: Benchmark the cost-management performance of your company, or thousands of public companies, with the CFO PeerMetrix interactive scorecards.) Time after time you see companies install systems but not actually make the cuts that are possible until they’re under some kind of external pressure, and then they find that they can operate with fewer people. But I would caution managers, including CFOs, to not fall into the trap of overemphasizing easy-to-measure benefits such as staff cuts and cost reductions. In our analysis, we found that the companies that emphasize more customer-facing applications — things like improved customer service and responsiveness, handling greater product variety and faster timeliness, those kinds of benefits — ultimately lead to significantly greater shareholder return on average than the ones that are focused purely on cost-cutting and management control. The difficulty of course is that many of the customer-facing uses are not as easy to quantify, and that can be very frustrating for numbers-oriented people.

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