Information Technology in the Service Society A Twenty-First Century Lever (1994) / Chapter Skim
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Pages 1-23
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Contrary to the widespread misconception of services as predominantly simple, labor-intensive activities, the service industries include many large, technology-intensive and technically sophisticated firms in transportation, financial services, banking, insurance, retail and wholesale trade, telecommunications, health care, and professional and personal services. As IT becomes less expensive, more portable, better integrated and interconnected, and embedded in a wider variety of devices, new applications in these fields and whole new industriessuch as interactive multimedia systems for business, home entertainment, and communications purposes are likely to evolve and to have profound effects on industry structures, employment, and economic growth.
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82. The relationship between national income without capital consumption adjustment and gross domestic product (or gross product originating by industry)
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by the service sector. The only systematic data available on IT expenditures account for hardware components but exclude software and services.
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believe that IT has had and will continue to have a real and significantly positive impact on overall service-sector performance. ANALYZING THE IMPACTS OF INFORMATION TECHNOLOGY To understand more fully how IT has changed the service sector and what the societal impacts of that transformation have been, the committee examined these issues at four different levels of analysis and considered both quantitative and qualitative observations (primarily collected during an extensive series of interviews with industry executives)
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For some major service industries notably banking and other financial services, education, health care, and government- output is imputed solely on the basis of input; thus, by definition, output divided by input is a constant for these industries. This imputation affects measurement of output in about 25 to 30 percent of the service sector.
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Significant improvements have been made in macroeconomic data and analysis techniques relative to measuring IT's impacts on performance in the service sector. However, major challenges remain.
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Airlines depend on IT within aircraft and airports, in air traffic control systems, and for sales, marketing, maintenance, and safety systems, as well as for capacity, load management, and logistics planning. Computerized 7
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Industry Air transport 87.5 0.7 11.1 3.1 14.1 Telecommunications 129.7b 0.9 114.0 5.7 -5.1 Wholesale trade 469.5 5.9 60.2 2.8 11.0 Retail trade 884.5C 16.2 58.8 2.3 9.6 Health care 475.0b 7.4 19.6 -1.3 9.3 Bankingd 209.5b 2.1 28.5 0.1 27.9 Insurance (carriers plus agents) 226.7b 2.2 17.1 -1.4 30.8 aLabor productivity is often measured in terms of gross product originating (GPO)
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Deregulation in the 1980s increased the variety of services available and decreased their costs for most customers. Improved communications have allowed companies to manage materials and services purchased anywhere in the world, control inventories on a just-in-time basis, gather information, and manage diversified producing locations in ways that have changed basic premises about industry boundaries, the organization of enterprises, and many traditional management techniques.
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has become essential to success. The economies of scale offered by back-office automation have led to waves of mergers and acquisitions and increased concentration in financial services, health care, and air transport.
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Enterprise-level Analysis The enterprise level is where most of the decisions are made about the use of IT. Executives who actually make such decisions find that measures related to revenue, profitability, alternative costs, growth potentials, market share, and return on investment (ROI)
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Market share is a key measure of competitive success and a basis for gaining relative marketing or purchasing power as well as improved economies of scale or scope. To maintain their market share, all companies in an industry may be forced to install an IT system even though it does not increase their own or the industry's output.
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Strategic uses of IT can change a firm's entire competitive or risk posture within an industry, affecting many different elements of customer, cost, and competitive relationships simultaneouslynot just revenues or costs. Programs or systems such as MCI's Friends and Family program, American Airlines' SABRE computerized reservations system, Morgan Stanley's TAPS system for integrated trading, and McKesson's ECONOMOST system for ordering and inventory control affect those firms' quality of customer service, flexibility, reliability, breakeven points, response times, and market positioning in ways that cannot be measured in precise financial terms.
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Finally, IT has become a significant element in the cost structure of many companies. Even the service sector's $750 billion expenditure on IT in the last decade understates by a substantial amount the total cost of IT, since it includes only hardware and excludes essential elements such as software, training and support, and maintenance and upgrading; the costs of these excluded elements may well be substantially greater than the costs of the hardware.
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IT-based linkages often provide an opportunity to expand such choices by facilitating the monitoring and integration of service activities provided off-site with those kept in-house. Not only are large enterprises reorganizing or shedding entire departments and divisions, but they are also in some instances selling some of their skills in internal activities to outsiders, becoming the external service providers for other firms (as Federal Express has done with its
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Chapter 4 expands on these vital issues. KEY FINDINGS In the course of its deliberations, the committee examined the impact of IT on performance in the service sector not only from the standpoint of understanding the IT paradox, but also in terms of broader implications for decision making by business executives and government policymakers.
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IT has been used to provide timely information that can substantially influence profits (e.g., investment bankers capture and analyze stock and bond price movements instantaneously; retail executives track sales from hour to hour; airlines perform real-time yield management)
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The economies of scale offered by back-office automation have supported some mergers and acquisitions, leading to reductions in the work force and increased concentration in some industries such as financial services or airlines. In other cases, the falling cost of IT has often facilitated the entry of relatively small businesses into new markets and the development of efficient local branches, franchises, or affiliates through which larger companies can service broader geographical areas or remote locations more effectively.
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but rather, How can IT be successfully applied to enhance service performance? The committee's interviews with senior executives revealed several specific areas that affect the likelihood of successfully managing applications of IT.
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Details of the management implications of the committee's findings are found in Chapter 5. POLICY CONCERNS While the committee believed that it was beyond its scope and expertise to develop major policy or action recommendations, four primary areas of concern to policymakers were identified: enhancing the diffusion of IT throughout the service sector, dealing with the impacts of IT on employment patterns, obtaining better data as well as a better understanding of organizational and structural changes occurring in the economy as a result of IT, and reassessing the impact of these changes on the effectiveness of traditional policy measures.
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Since service activities are integral to both service and manufacturing industries, IT applications that lower service costs or improve service performance are likely to have a significant positive impact on competitiveness in both sectors despite the low measured productivity increases seen to date. Moreover, given their importance, the nonhardware aspects of IT such as software and training should be included along with hardware in any definition of IT for investment and/or tax purposes.
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Past studies indicate that education in general skills is likely to prove more beneficial in times of uncertainty and rapid change than education in specifically targeted and narrowly focused skills. Obtaining Improved Data and Conducting Research on Structural Changes The rapid growth of services and changes in the nature of service activities in the last two decades underscore the need for a better understanding of changing conditions.
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NOTE Throughout this report, unless otherwise specified, the term information technology includes computer and communications hardware, as well as the software and associated services required to effectively use that hardware.
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