Magazine article Management Review

The Productivity Paradox: Do Computers Boost Corporate Productivity?

Magazine article Management Review

The Productivity Paradox: Do Computers Boost Corporate Productivity?

Article excerpt

Technology marches on, followed by an unquestioning corporate America. Businesses spend in excess of $2 billion a year on computers, software and other types of office automation. They upgrade to the latest personal computers, buy the newest versions of software applications and, in general, perform the business equivalent of "Keeping up with the Joneses."

But does all of this technology pay off in the form of increased productivity? The answer really depends on how you measure it. Until recently, economists couldn't find a link between technology expenditures and increased productivity based on its classic definition: producing more units faster and less expensively.

The Mystery of Productivity

Take the research of Paul Strassmann, a noted author on the topic of computer productivity. He compared two corporate financial indicators, "sales, general and administrative costs" (SG&A) and "cost of goods" (COG), at 66 corporations between 1987 and 1996. SG&A is a company's overhead, and Strassmann believes it to be a good stand-in for technology costs. COG is a basic measure of the costs involved in the production of products or services.

His findings: despite a massive investment in information technology, the companies' SG&A expenses rose steadily over the 10-year period while their COG failed to fall. As Strassmann sees it, part of the problem is that, even though computer prices have dropped, related costs have gone up. These include the costs of supporting and maintaining equipment, training employees to use new software and paving an MIS staff to keep the computers humming. Of his research, Strassmann says, "I asked the question: Does the economy today require more information to do the same thing?" To a large extent, he finds that today's corporate giants already have all the information they need and computers are costing them more than they're worth.

Not everyone agrees with that assessment. Erik Brynjolfsson, professor of economics at the Massachusetts Institute of Technology's Sloan School of Management in Cambridge, Mass., comes to another conclusion, in part because he measures productivity differently. He believes that government-productivity yardsticks are out of-date because they look at the aggregate economy rather than individual companies' performances.

In conjunction with Lorin M. Hitt, associate professor of operations and information management, at the Wharton School at the University of Pennsylvania, Brynjolfsson studied 600 companies from 1987 to 1994 and found a productivity increase. In his studies, Brynjolfsson included variables such as improved customer service, which are hard to measure against the bottom line but may impact a company's sales. The two academics found that the gross return on investment for computer capital averaged 81 percent between 1987 and 1991 for the companies in their sample.

Who's right and who's wrong? It would be unfair to judge. Both Brynjolfsson and Strassmann make valid points. Brynjolfsson admits that only in the past couple of years has he been able to make the case that computers increase corporate productivity. On the other hand, Strassmann and others correctly say that computers aren't the only reason that U.S. productivity grew 4.5 percent in the third quarter of 1997.

Stephen S. Roach, head economist at Morgan Stanley Dean Witter, New York, believes that much of corporate America's increased productivity has come at the expense of today's labor force. What really helped to boost productivity were cost-cutting measures such as downsizing and outsourcing. "There is no productivity miracle in cost-cutting," Roach says. "The productivity gains, for the nation as a whole, have been disappointing and will continue to be so. The risk is that we are spending too much on hardware...and without reducing costs."

The Everyday View

That's how the economists and computer science experts view things. …

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