The efficiencies gained from investments in information technology will not ensure organizational success and prosperity. While ROI is important, there are other key dimensions to consider as you prioritize your investments in IT.
When I first started working in information technology in Toronto, our company had a $2-million mainframe computer with 512 thousand bytes of main memory. We used this massive computer to pay insurance claims, maintain our financial records, and write new computer software. Today, my 11-year old plays games on a machine with more memory than that $2 million mainframe. Moreover, these games provide graphics capabilities that we would not have thought possible 20 years ago, and, at $9 billion annually, they have become a larger industry than the motion picture business.
However, information technology's rapid advances in price/performance have done a lot more than make video games possible. Within business, investment in information technology has enabled significant improvements in efficiency, and more value for the customer.
Undermining profits while improving efficiency
A recent Massachusetts Institute of Technology study of 370 large firms found evidence that information technology (IT) has significantly boosted efficiency during the past decade. Interestingly, however, the study also found that the benefits of this efficiency flowed mostly to consumers at the expense of business profits and margins. The study concluded that, while the value created by information technology did not necessary flow to the bottom line, business needed to continue to invest in IT to remain competitive. Do marketplace events corroborate these finding? Consider some examples.
Increased efficiency in the banking and financial services industries has lowered unit costs significantly. Firms have been able to substitute IT stock, which is computer capital and labor, for real estate and service labor. So, we see bank machines displacing tellers across the industry. We also see branches being consolidated or eliminated as banks move to capture the financial benefits enabled by IT. The net impact of this increased efficiency in banking and finance has been to promote consolidation, as firms chase lower unit costs through technology and consolidation. Increased competition has driven down costs, and improved the level of service consumers expect.
The value-added by IT investments in these industries has been significant, enabling consumers to demand increasing value at ever decreasing cost. In the United States, banks now command only 15 per cent of the home mortgage market. Firms, such as Countywide Mortgages, now compete nationally, providing customer-oriented service that was not imaginable 20 years ago. Thanks to computer technology, Countrywide can approve a mortgage in 24 hours, and process the entire transaction in a fraction of the time required earlier.
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Similar efficiencies, and consolidations, have occurred in manufacturing. In tire manufacturing, for instance, new technologies have led to large efficiency and quality improvements. Tires cost less to manufacture, and they last longer than ever before. What resulted from these efficiencies was over-capacity and massive, global consolidation. Just like in banking and finance, a cost-reduction strategy led not to more profit, but to the elimination of some profitable business and greater consumer value.
Look at what has happened to internet service providers over the industry's brief lifetime. Five years ago service providers could command a setup fee, a fixed minimum charge, and hourly charges for access to their networks. By 1996, the low cost of entry to the internet service provider marketplace led to an increase in low-cost, flat-rate providers. This drove down prices to a flat $14-20 per month for unlimited access. These service providers are incredibly …