Value for Money

Value for Money

Does IT matter? The McKinsey Institute says it does . . . if you're in the right industry

It has been a long time since I've witnessed an uproar in the IT industry to rival that generated by Nicholas Carr in his "IT Doesn't Matter" article. But late in 2003 Harvard Business Review featured another analysis of the IT industry, the message of which has been largely overlooked. The authors of "The New Real Economy" were from the McKinsey Global Research Institute, and the research they conducted into where IT has increased productivity and generated value does much to refute Carr's claims.

The authors used the US Bureau of Labour Statistics definition of "productivity" as their base. This says productivity is a factor of the outputs generated by a business, divided by the inputs incurred to create those outputs. McKinsey argued that to improve productivity and generate value IT must raise outputs, lower inputs or do a bit of both. In simple terms, this means the business must strike a balance between using IT as a force for cost cutting and using it as a mechanism for adding value. In the former scenario IT is used to reduce production costs, such as labour or inventory. In the latter approach IT is employed to create newer or higher-value products.

In the study, the McKinsey authors reach some startling conclusions. They believe that six sectors of the US economy - which account for only 32 percent of the nation's GDP - have been responsible for 76 percent of the US net productivity gains recorded in the late 1990s. These sectors are: retailing, securities brokerage, wholesaling, semi-conductors, computer assembly and telecommunications.

In each case the authors of the McKinsey report argue that deregulation and increased competition in these markets have fuelled innovations, which have in turn fostered increased productivity. They also point out a number of other industries also invested heavily in IT but failed to reap the expected benefits because they lack the motivation of added competition. They also show how the productivity gains differ between countries, linking these variances to different levels of market deregulation.

McKinsey argue that when competition intensifies, and businesses face the possibility of losing customers and profits, executives have strong incentives to conjure up new ways to cut the cost of operations and to increase the value they provide buyers. In the 1990s McKinsey believe that IT did this in three ways. First of all, it helped develop new products or efficient new business processes, such as Internet banking or online tax returns. Next, IT offered trading efficiencies through things like EDI, which both accelerated data processing and offered greater accuracy. Finally, once you make an investment in IT the cost in growing that system is low or marginal. This encourages people to examine how they can get more value out of their existing IT investments.

McKinsey emphasize that not all organizations within these six sectors reaped the same rewards from their IT investments. The study identified the three key characteristics of successful IT investments. First, they target the productivity levers that matter most in that particular business. In banking, for example, this means lowering the costs of customer transactions. Second, effective IT investments reflect a gradual evolution from a strong foundation. McKinsey offer the example of the many failed CRM investments of the 1990s, which they believe were laid on an inadequate IT infrastructure. Lastly, McKinsey claim that all IT innovations need to generate change within business processes if they are to succeed.

McKinsey conclude their report by stating that the success of IT investments hinges on the particular characteristics of different industries and the practices of different companies. They believe the evidence from their research goes a long way towards explaining the lack of a link between the levels of IT spending and increased productivity in an organization. In the end McKinsey stress that while IT itself is not a silver bullet, if aimed correctly, it can be a very important competitive weapon for business.

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