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Appendix A Selected Research on Economic and Strategic Impacts of Information Technology 217
218 INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY TABLE A.1 Selected Research on Economic and Strategic Impacts of Information Technology Type of Unit of Performance Reference Research Analysis Construct and Measure(s) Alpar and Kim (1990) Econometric Time series Cross-sectional (1979 to 1986) Firm/small business unit (759 banks) Productivity (multifactor) Applegate et al. Theory, description Managers Productivity (1988) Flexibility Creativity Attewell and Rule Review of Individual Number and quality of jobs, (1984) management Management management decision information Organization making, organizational systems literature dealings with clients and customers Baily and Economic analysis Company White-collar productivity Chakrabarti and simulation (1988) Baily and Gordon Methodology Aggregate Average labor productivity (1988) review economy vs. and multifactor productivity industry Banker and Econometric Firm/small Competitive advantage Kauffman Cross-sectional business unit (marginal bank branch (1988) (508 branch banks) deposit share as contribution to reducing costs) Bender Correlational Firm (132 life Operating cost efficiency (1986) Cross-sectional insurance (1983) companies) Benjamin et al. Case studies and 24 companies Strategic opportunities (1984) surveys; prescriptive Bikson and Literature review, Organization "Successful" implementation Eveland retrospective (diverse range) (user, management (1986) application of satisfaction) sociotechnical systems Blumenthal Theory review International Productivity and impacts (1987) National on industry and employment
APPENDIX A 219 Input Measure(s) Key Findings (Brynjolfsson and Bimber Hypothesis Code)a Total information 10% increase in IT associated with a 1.9% decrease in total costs. system expenses; labor; IT contributed to reduction in demand deposit amount and an capital; time deposits increase in time deposits. IT is capital using and labor saving. IT Discusses present and future impacts of computers on managers. Emphasizes increased flexibility, new structures. (IE) Computing Significant disagreement and/or conflicting studies in every major dimension examined. (IE) Electronics innovation Proposes 3 potential explanations for the IT paradox in white collar context: mismeasurement, distributional rather than productive effects, information value problem: Price decreases in technology lead to more technology purchased rather than decreased cost; also suggests may be just transitional time lag. (IC) Output per hour, Uncovers large measurement errors but finds that they explain at multifactor most 0.5% of the 1.5% slowdown in aggregate productivity. Key contributing errors are undervaluing of variety, service quality, and convenience. Adjustments applied to the banking industry produce much stronger productivity growth than do government analysis/statistics of productivity growth. (IA) Presence of ATM at a Use of ATMs enables branch to protect rather than grow market branch. Connection to share. Bank customers evidenced willingness to pay for regional regional shared ATM access to shared electronic banking networks. network Total IT expenses Higher IT spending associated with higher unit cost efficiency. IT IT can help firms establish new markets and redistribute profits in existing markets. (IE) Process of What is needed is an integrated view, in which decisions about introduction of new tools, uses, and users are seen as essential properties of a strategy technology that is iterative and emergent, learning from its own successes and failures over time and committed to change as a continuous fact of life. (IIE) Programmable Confronts dilemma in the popular view: increased use of automation programmable automation leads to increased competitiveness and other benefits to industry while threatening job loss and other negative consequences to workers. (JIB)
220 TABLE A. 1 Continued INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY Type of Unit of Performance Reference Research Analysis Construct and Measure(s) Bresnahan Econometric Financial sector Spillover to customers (1986) methodology downstream Cecil and Hall Prescriptive, Company Performance (1988) descriptive Cron and Sobol Correlational Firm (138 Profitability (return on (1983) Cross-sectional surgical assets; profits/sales; wholesalers) return on net worth). Competitive advantage (5-year sales growth) Curley and Pyburn Case studies of 13 46 manufacturing Improved productivity (1982) organizations, survey and service (managerial, clerical, of additional 33 industries professional) Dertouzos Descriptive, Economy Productivity (1989) prescriptive, models Feldman and Review of literature, Organizations Use of information March (1981) theory (wide range) Franke Econometric Financial sector Productivity (average (1987) (1958 to 1983) (insurance and labor). Capital (ROI) banking) Fudenberg and Economic model Firm Net cash flow Tirole (1985) development Giesler and Descriptive, survey Bank Competitive performance Rubenstein of 20 banks and (1988) interviews Graham Firm Performance (1976) Harris and Katz Correlational Firm (40 life Operating cost efficiency (1991) Time series insurance (operating expenses" (1983 to 1986) companies) premium income) Hirshleifer Economic models Private vs. social (1971) Kraut et al. Case with lagged, Company (one Productivity, quality of (1989) time-series design public utility) work, attitudes toward (methodology computers emphasis)
APPENDIX A 221 Input Measure(s) Key Findings (Brynjolfsson and Bimber Hypothesis Code)a Technological Benefits to the public that were derived from computerization of innovation financial services were five times the expenditures on computers. (LA) IT Fundamental changes in strategy and organization are required to produce significant benefits. (IE) Number of Firms with extensive automation are either very strong or very software applications weak financial performers. Office automation Meaningful improvements in productivity require active management of an ongoing learning process that brings about changes in the way people think about the work they do. (IB) Computer field, Questions value of increased work quality; develops method for technology, and theory measuring computer productivity and defines a value of information. (IIC) Acquisition of Offers a critique of the decision-theoretic model of information information acquisition and use in organizations; provides alternative explanations for the common observation that information often seems to be acquired excessively. (ID) Total IT capital stock Declines in productivity of capital vs. labor productivity associated with specific technological innovations. (ID) Early or late adoption Develops game-theoretic model of rent-dissipation in the timing of introduction of new technologies. (IC) IT Three-quarters lacked any formal evaluation procedure; only 3 viewed IT in terms of strategic goals and long-term growth. (IID) Better managerial decision making would apparently contribute positively to performance, yet questions if IT materially contributes to the quality of decision making. (IIC) IT expense ratio Top-performing firms had higher growth in IT expense ratios and IT cost efficiency ratio lower growth in operating expense than did weak performers. Private value of information may have no relationship to the social value, principally because of rent dissipation; shows that information may have negative social value if it destroys opportunities for insurance and risk-sharing. (IC) Automation of Extends a simple impact model (1) by expanding what one record system considers the technology to be, (2) by identifying individual and organizational contingencies that moderate impact, and (3) by recognizing bidirectional nature of technological change. (IIF)
222 TABLE A. 1 Continued Reference Loveman (1988) Malone et al. (1987) Mark (1982) Nelson (1981) Noyelle (1990) OECD (1988) Osterman (1986) Parsons et al. (1990) Pentland (1989) Porter and Millar (198S) Roach (1991) Sassone and Schwartz (1986) INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY Type of Research Unit of Analysis Performance Construct and Measure(s) Econometric Time series Cross-sectional (1978 to 1984) Conceptual framework and prescription Methodology review Critique and economic model development Correlation socio-economic analysis Econometric time series (1972 to 1987) Model Survey (1988) Some case examples, prescriptive Trend comparisons (1950 to 1989) Method to quantify benefits Firm/small business unit (60 manufacturing small business units) Productivity (average labor) Firm and market Costs of coordination structures Service industry Labor productivity U.S. and French retailing industry Individual to international Industry (40 service and manufacturing industries) Firm (2 large banks) Individual (1100 Internal Revenue Service agents), Department Productivity measure and employment Employment, productivity growth Productivity (clerical employment volume/output; managerial employment volume/output) Multifactor productivity Productivity (labor hours/ audit), Output quality (client reports) Competitive advantage Service sector Productivity (employment volume/output) Departments (4) of Dollars saved by large corporations restructuring work activities (587 individuals)
APPENDIX A 223 Input Measure(s) Key Findings (Brynjolfsson and Bimber Hypothesis Code)a Total IT capital stock Increases in shares of IT capital have insignificant effects on productivity. (IA) Electronic IT reduces the costs of coordination and thus leads to more communications, coordination-intensive organizational forms, such as markets. (IE) electronic brokerage, and electronic integration Labor Describes the problems in measuring service productivity and attempts of the Bureau of Labor Statistics to correct them. (IA) Emphasizes evolutionary models over traditional economic theory of productivity. (ID) Conventional Severe measurement problems in services. productivity New technologies Possible reasons for failure at aggregate levels: (1) economy, (2) lags in translating potential gains in productivity into actual gains because of problems of organizational and institutional adaptation, (3) disequilibrating effects of technical change in relation to international trade. (IIE) Aggregated number Each 10% increase in computing stock associated with 1.8% of mainframes; decrease in clerical employment and 1.2% decrease in managerial number of central employment. Found lagged effect; displacement partially reversed processing units after initial impact. IT and operating data IT coefficient in translog production function small and often negative. Laptop computer use No discernible improvement in productivity. Major discrepancy between users' perceptions of improved productivity and actual results. IT IT affects competition in 3 ways: (1) it alters industry/value chain structure, (2) it supports cost and differentiation strategies, and (3) it spawns entirely new businesses. (IE) Total IT capital stock Large-scale increases in ratio of IT capital stock to other shares of capital, coupled with stagnant productivity, suggest no payoff from IT investments. (IID) Office automation Reports on poor status of costjustification procedures, difficulty of measuring the dollar value of investments in new technology. (IIA)
9 224 TABLE A. 1 Continued INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY Type of Unit of Performance Reference Research Analysis Construct and Measure(s) Strassmann Correlation Company (38 Percent return to (1990) service companies) shareholders Thurow Theory challenges Service-sector Productivity growth (1987) economic businesses assumptions Prescriptive Venkatraman and Quasi-experiment Individual Productivity Zaheer Time series (78 insurance (number of policies in force, (1990) (1985 to 1987) agents) number of new policies) Effectiveness (total premiums and commissions) Weitzendorf and Model case study Company (2) Wigand (1991) Performance aCode gives elements of Brynjolfsson and Bimber hypotheses outlined below: I. Economic Hypotheses A. Measurement error: Outputs (and inputs) of information-using industries are not being properly measured. B. Lags: Time lags in the payoffs from information technology make analysis of current costs versus current benefits misleading. C. Redistribution: Information technology is especially likely to be used in redistributive activities among firms, making it privately beneficial without adding to total output. D. Mismanagement: The lack of explicit measures of the value of information make it particularly vulnerable to misallocation and overconsumption by managers. E. Business transformation: Measures of gross output do not well capture the benefits that motivate expenditures on information technology and information workers.
APPENDIX A Input Measure(s) 225 Key Findings (Brynjolfsson and Bimber Hypothesis Code)a Various IT ratios, weighted differently Movement to bonus system, value-added maximization, delayed management fast track Electronic integration with insurance carriers IT No correlations between various IT ratios and performance measures. Our institutions, styles, and beliefs have not adapted to realities of new technologies, leading to too many managers and too much information gathering. (ID) No improvement in operating efficiency. No improvement in effectiveness. Interactive model of information use. II. Behavioral Hypotheses A. Quantity of work: For the production of a fixed level of output by a firm, the introduc- tion of information technology increases rather than decreases the volume of work re- quired. B. Nature of productivity: Information technology increases the efficiency of individuals, work groups, or departments in the performance of certain tasks without contributing to the overall productivity of the firm. C. Quality: Improvements in work quality from the use of information technology are not affecting productivity. D. Purchase decision: The decision to purchase information technology is not made on the basis of maximization of quantifiable productivity. E. Organizational factors: Firms are failing to undertake the necessary organizational adaptations to realize the potential productivity gains inherent in the information tech- nology that they have purchased. F. Technology: Other problems are so strongly depressing service-sector and white-collar productivity that any small gains from new technology are not noticeable. SOURCES: Derived from the literature reviews in papers by Brynjolfsson, Erik, and Bruce Bimber, 1991, "Information Technology and the 'Productivity Paradox,"' Working Paper, Brookings Institution, Washington, D.C., Feb. 7; Brynjolfsson, Erik, 1991, "The Productivity Paradox of Information Technology: Review and Assessment," Center for Coordination Science Techni- cal Report #130, December; and Wilson, Diane D., 1992, "Assessing the Impact of Informa- tion Technology on Organizational Performance," Sloan School of Management, Massachu- setts Institute of Technology, (revised), May 1.
226 INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY REFERENCES Alpar, Paul, and Moshe Kim. 1990. "A Microeconomic Approach to the Measurement of Information Technology Value," Journal of Management Information Systems 2:55 69. Applegate, Lynda M., James I. Cash, Jr., and D. Quinn Mills. 1988. "Information Technology and Tommorow's Manager," Harvard Business Review, November-December, pp. 128- 136. Attewell, P., and J. Rule. 1984. "Computing and Organizations: What We Know and What We Don't Know," Communications of the ACM 27:1184-1192. Baily, Martin, and Alok Chakrabarti. 1988. Innovation and the Productivity Crisis. Chapter 5, "Electronics and White-Collar Productivity," Brookings Institution, Washington, D.C. Baily, Martin Neill, and Robert J. Gordon. 1988. "The Productivity Slowdown: Measurement Issues and the Explosion of Computer Power," pp. 347-431 in Brookings Papers on Economic Activity, William C. Brainard and George L. Perry (eds.), Brookings Institu- tion, Washington, D.C. Banker, R.D., and R.J. Kauffman. 1988. "Strategic Contributions of Information Technology: An Empirical Study of ATM Networks," in Proceedings of the Ninth International Con- ference on Information Systems, Minneapolis, Minn., December. Bender, D.H. 1986. "Financial Impact of Information Processing," Journal of Management Information Systems 3. Benjamin, Robert I., John F. Rockart, Michael S. Scott Morton, and John Wyman. 1984. "Information Technology: A Strategic Opportunity," Sloan Management Review, Spring, pp. 3-10. Bikson, Tora K., and J.D. Eveland. 1986. New Office Technology: Planning for the People. Work in America Institute Studies in Productivity, #40, Pergamon Press, New York. Blumenthal, Marjory S. 1987. "Economic Impacts of Automation," Oxford Surveys in Infor- mation Technology 4. Bresnahan, Timothy F. 1986. "Measuring the Spillovers from Technical Advance: Main- frame Computers in Financial Services," American Economic Review 76(34, September). Cecil, John L., and Eugene A. Hall. 1988. "When IT Really Matters to Business Strategy," McKinsey Quarterly, Autumn, p. 2. Cron, W.L., and M.G. Sobol. 1983. "The Relationship Between Computerization and Perfor- mance: A Strategy for Maximizing the Economic Benefits of Computerization," Infor~na- tion and Management 6:171-181. Curley, Kathleen Foley, and Philip J. Pyburn. 1982 "'Intellectual' Technologies: The Key to Improving White-Collar Productivity," Sloan Management Review, Fall, pp. 31-39. Dertouzos, Michael L. 1989. "Computers and Productivity," LCS 25th Anniversary Volume, Massachusetts Institute of Technology, MIT Press, Cambridge, Mass. Feldman, Martha S., and James G. March. 1981. "Information in Organizations as Signal and Symbol," Administrative Science Quarterly 26: 171 - 186. Franke, Richard H. 1987. "Technological Revolution and Productivity Decline: Computer Introduction in the Financial Industry," Technological Forecasting and Social Change 31:143-154. Fudenberg, Drew, and Jean Tirole. 1985. "Preemption and Rent Equalization in the Adoption of New Technology," Review of Economic Studies 52:383-401. Giesler, Eliezer, and Albert H. Rubenstein. 1988. "How Do Banks Evaluate Their Information Technology?" Bank Administration, November. Graham, John. 1976. Making Computers Pay, John Wiley & Sons, New York. Harris, Sidney E., and Joseph L. Katz. 1991. "Organizational Performance and Information Technology Investment Intensity in the Insurance Industry," Organization Science 2:263- 296.
APPENDIX A 227 Hirshleifer, Jack. 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, pp. 561-574. Kraut, Robert, Susan Dumais, and Susan Koch. 1989. "Computerization, Productivity, and Quality of Work Life," Communications of the ACM 32(February). Loveman, Gary. 1988. "An Assessment of the Productivity Impact of Information Technolo- gies," MIT Management in the 1990's Program, 88-054, July. Malone, Thomas W., Joanne Yates, and Robert I. Benjamin. 1987. "Electronic Markets and Electronic Hierarchies," Communications of the ACM 30(6, June). Mark, Jerome A. 1982. "Measuring Productivity in the Service Sector," Monthly Labor Review, June. Nelson, Richard R. 1981. "Research on Productivity Growth and Productivity Differences: Dead Ends and New Departures," Journal of Economic Literature 29:1029-1064. Noyelle, T., ed. 1990. Skills, Wages, and Productivity in the Service Sector, Westview Press, Boulder, Colo. Organisation for Economic Cooperation and Development (OECD). 1988. New Technologies in the 1990's: A Socio-economic Strategy, OECD, Washington, D.C. Osterman, Paul. 1986. "The Impact of Computers on the Employment of Clerks and Manag- ers," Industrial and Labor Relations Review 39:175-186. Parsons, D.J., C.C. Gotlieb, and M. Denny. 1990. Productivity and Computers in Canadian Banking. University of Toronto, Department of Economics, Working Paper #9012, June. Pentland, Brian. 1989. "Use and Productivity in Personal Computing," Proceedings of the Tenth International Conference on Information Systems, Boston, Mass., December. Porter, Michael E., and Victor E. Millar. 1985. "How Information Gives You Competitive Advantage," Harvard Business Review, July-August, pp. 149-160. Roach, Stephen S. 1991. "Services Under Siege-The Restructuring Imperative," Harvard Business Review, September-October, pp. 82-91. Sassone, Peter G., and A. Perry Schwartz. 1986. "Cost-Justifying OA," Datamation, February 15. Strassmann, P. 1990. The Business Value of Computers, Information Economics Press, New Canaan, Conn. Thurow, L. 1987. "Economic Paradigms and Slow American Productivity Growth," Eastern Economic Journal 13:333-343. Venkatraman, N., and Akbar Zaheer. 1990. "Electronic Integration and Strategic Advantage: A Quasi-Experimental Study in the Insurance Industry," Information Systems Research 1 :377- 393. Weitzendorf, T., and R. Wigand. 1991. Tasks and Decisions: A Suggested Model to Demon- strate Benefits of Information Technology, Working Paper, Institut fur Informationswissenschaft, Graz, Austria.
