Investment in Technology — The Service Sector Sinkhole?

OVER THE PAST DECADE, senior managers in banking, insurance, health care, and other service industries have invested billions of dollars in computers and communication equipment—technology investments that promise to hone operations into an acute competitive weapon. But executives have been deluded; the payoffs have not been fully realized.

  • Recent studies by the American Quality & Productivity Center show that in the service sector—finance, insurance, wholesale, retail, and business service companies—the effectiveness of labor and capital utilization is only slightly higher today than it was ten years ago.1 This despite nearly $180 billion invested in hardware and software to automate the spectrum of manual-intensive tasks.2
  • Service quality, while difficult to measure, is generally perceived to be deteriorating. The news media frequently call this deterioration to our attention, as does our day-to-day experience as consumers of services. Bank teller lines seem longer. Flight delays are more frequent.
  • Operating and administrative costs—driven in large part by technology expenses—continue to spiral upward. For its investment, management expected just the opposite.
  • Pretax profitability is deteriorating in the service sector, declining from a high of 10 percent in 1965 to 5 percent in 1987.3 In addition, foreign competition is making inroads. The balance of trade has dropped to about $30 billion from $70 billion in 1981.4 The financial service, entertainment, and real estate industries have been most vulnerable.

Why have technology investments in the service sector been so disappointing? The leading reason is that companies are relying too heavily on technology to achieve competitive advantage. Firms have invested in technology in hopes of leapfrogging their rivals using competitive barriers, improved service levels, technology-based products and services, and lower employee-related expenses. There have been some success stories—most notably American Airlines’ reservation booking system and Federal Express’s letter and package tracking database. But for most companies the goal has been elusive.

The primary reason is that technology alone does not determine corporate performance and profitability. Employee skills and capabilities play a large role, as do the structure of day-to-day operations and the company’s policies and procedures. In addition, the organization must be flexible enough to respond to an increasingly dynamic environment. And products must meet customer requirements.

Technology Investments Are Staggering

During the past twelve years, service industry investments in technology have grown at an inflation-adjusted compound annual rate of 20 percent.

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References

1. Multiple Input Productivity Indexes (Houston: American Productivity & Quality Center, December 1988).

2. "Annual IS Survey," Datamation, 1977–1987.

3. U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, July 1988, July 1984, Special Supplement, July 1981;

U.S. Department of Commerce, Bureau of Economic Analysis, Business Statistics 1986: A Supplement to tbe Survey of Current Business;

U.S. Department of Commerce, Bureau of Economic Analysis, Tbe National Income and Product Accounts of tbe United States, 1929–1976, Statistical Tables, September 1981.

4. Council of Economic Advisers, Economic Report of tbe President, January 1989.

5. S.S. Roach, "Information Economy Comes of Age," Information Management Review, September 1985. Supplemented by Booz, Allen & Hamilton interview with representative of the Federal Reserve System.

6. Ibid.

7. Based upon the author's experience shopping for shoes at the Florsheim Shoe Shop, Belden Village Mall, North Canton, Ohio.

8. National Operations and Automation Survey (Washington, DC: American Bankers Association, 1986).

9. R. Lane and R. Hall, "Elusive Returns—Managing Information Technology Investments," Booz, Allen & Hamilton, Information Technology Viewpoint, 1987.

Acknowledgments

The author wishes to thank Mark W. Henneman and Elizabeth E. Brumbaugh for their assistance.