‘Productivity Paradox’ is the poor returns that many organizations experience from their investments in information systems.
Or The productivity paradox (also the Solow computer paradox) is the peculiar observation made in business process analysis that, as more investment is made in information technology, worker productivity may go down instead of up.
- In 1988, OECD found that IT expenditure was not linked to overall productivity increases.
- Gartner found that the average ROI in IT was around 1 percent for the period 1985-95.
- In 2009, AT Kearney stated only 44 percent of senior executives believe they can measure IT’s bottom line contribution.
- Brynjolfsson and Hitt(1999)claim that investment in information systems did make a substantial difference to the firm output during 1987 – 91.
- Organisations varies greatly in their ability to harness IT to enhance productivity and performance (WillcocksandLester,1999) .
The dispute over the existence of the productivity paradox centres on a number of issues Berghout&Powell (2010):
- Measurement Errors: Argued that conventional statistics ignore a number of aspects as to why organisations invest in IS such as faster services, flexibility, variety and information access
- Experience: Many org’s have little long-term experience of multiple types of IS, meaning that at firm level there is not much data to base estimates upon
- Poor Quality: Systems that are hard to use and understand may mitigate any benefits that occur
- Learning Org’s must restructure to benefit from new IS
There is an issue regarding IT evaluation (Bannister 1998 ):
- Continued quest for the Holy Grail (partisan composite, Meta methodologies)
- Relationship between It investment and organisation performance is poorly understood and applied
- Evaluation methodologies – distinctly finite, yet there are an infinite number of possible IT evaluation decisions.
The problem areas for IT evaluation:
- Budgeting practice conceals full costs
- Understanding human and organisational costs
- Undertaking knocks on effects
- Using traditional finance based evaluation techniques
- Inappropriate measures
- Neglecting ‘intangible’ benefits
- Not fully investigating risks
The costs associated with IT are:
Tangible Costs
In simple terms, they are things that are measured via traditional accounting methods, such as invoicing
Examples would be
- the cost of the hardware
- cost of training
- the cost of consultants time
- the cost of software
Intangible Costs
Are difficult to mathematically or statistically identify, measure and predicate their impact.
When a new information system is introduced it will change the status quo of how the organisation works, behaves and reacts to events internally and externally to it. These are an impact of introducing the new information system in terms of resistance to change, a reduction in morale, increase in staff stress levels, etc, which are often associated with the poor implementation of information systems.
Hochstrasser(1990) suggested that indirect costs may be 4 times the direct costs and that the total costs underestimates of 50 percent are not unusual.
The associated benefits have many perspectives.
Tangible benefits are quantified and ‘hard’ such as cost reductions, savings on materials, building space or inventory levels. They may involve cost avoidance or the avoidance of ‘competitive loss ’.
Intangible benefits are unquantified or ‘soft’ .These may involve such issues as:
- better management through improved planning
- more timely information
- improved decision-making
According to Strassmann (1990), there is no correlation between IT expenses and corporate performance. Similar technologies and / or expenditures can lead to either monumental successes or to dismal failures.
IS/It investments compete with alternative investments (e.g. buildings, etc.)Generally: not all demand can be satisfied
If no consistent justification approach is followed, the more beneficial applications may be deferred.
Possible consequences: Opportunity completely forgone or poor ROI.
Organisations find it difficult to evaluate and justify IT/IS because of:
- Act of faith
- Difficult to estimate and often hidden costs of It investments
- Problems of evaluating and measuring the benefits of It(cost Benefit analysis)
- Substantial Risks (financial , technological and organisational)
- Problem of theory and practice not meeting
- Techniques very rigid and very formal
- Ritual Dance/ Symbolic
Techniques and Tools for financial aspects of IT
- Traditional Financial Based: Net Present Value: For Is Projects is preferred as it takes full account of all cash flows and risks. It is the summation of all anticipated risk- adjusted cash flow. Or Cost benefit analysis
- Portfolio: Investment portfolio: Recognise that most organisations will have the number of information system under development and some may already be in operation. Therefore, any proposed system needs to be considered too.
According to an article in “The Economist” productivity growth did not accelerate until 40 years after the introduction of electric power in the early 1880s. This was partly because it took until 1920 for at least half of American industrial machinery to be powered by electricity.”
Therefore, it argues, we won’t see major leaps in productivity until both the US and major global powers have all reached at least a 50% penetration rate for computer use. The US only hit that mark a decade ago, and many other countries are far behind that level of growth. However, it is unsurprising that rapid changes in technologies cause problems for organisations and evaluation practices struggle to keep up.
IT application should be driven by strategy.
