Why Some Companies Benefit More from IT Investments than Others

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On average, investments in information technology are associated with greater productivity for companies — but why do some companies get greater productivity benefits from IT than others? That was one of the questions MIT Sloan Professor Erik Brynjolfsson addressed at a presentation at the MIT Center for Digital Business today.  (Brynjolfsson and Wharton’s Adam Saunders have a new book out, Wired for Innovation, that addresses this topic and others related to IT, innovation and productivity.)

Erik Brynjolfsson

Erik Brynjolfsson

As part of his presentation today, Brynjolfsson discussed findings from research that involved studying 1167 large firms over 10 years — and that concluded that business performance depends on both IT and organizational capital. The researchers found that there is a very measurably different set of management practices that are much more common in IT-intensive companies than in others. What’s more, these practices — which Brynolfsson calls practices of “the digital organization” — are correlated with generally higher productivity and higher market value in the companies that implement them.

The downside? It’s possible to “spend a lot on IT without getting much of a return,” if you invest in IT without adopting digital organization practices, Brynjolfsson commented. A similar problem, he noted, can occur if you change a company’s work practices to adopt digital organization practices — but don’t make the corresponding IT investments.

What are the practices that characterize the “digital organization”? In Wired for Innovation, Brynjolfsson and Saunders write that digital organizations:

  • move from analog to digital processes
  • open information access
  • empower the employees
  • use performance-based incentives
  • invest in corporate culture
  • recruit the right people
  • invest in human capital.

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Comments (6)
Gerry
These findings support my own experiences. Putting money into IT without changing the culture is a recipe for wasted dollars.
Anonymous
It's time to budget for IT in 2010, but many firms are still stuck in 2009. Given the exposed shortcomings of typical budgeting process and the acute pain that they caused organizations across the past 9 months, now is the time to finally evolve the way budgeting is done. Research from the Corporate Executive Board's CIO Executive Board advises that controllers adopt the following techniques:
- Zero-Based Budgeting: Building the budget from scratch ensures that all expenses, not just new ones, are justified. Plus, changes to the IT cost base resulting from restructuring are fully reflected.
- Scenario-Based Budgets: Scenario plans should outline both the conditions that will trigger the move to a new scenario and how the budget will change in response.
- Rolling Budgets: Rolling budgets foster flexibility, smooth out the effort associated with annual budget creation, and embed sustained planning, as the budgeting horizon never falls below one year.
Martha E. Mangelsdorf
Good comments and questions! Jimmy, in answer to your question, Brynjolffson made the argument in his presentation that information technology and the digital organization practices (see the  blog post for his and Saunders' list of digital organization practices ) are complements -- and that companies that adopt digital organization practices and simultaneously invest more in IT tend to have disproportionately higher performance. 

Interestingly, though, spending a lot on computers is not what IT spending is about these days, according to Brynjolfsson. He made the point during his presentation that when, say a company installs an ERP (Enterprise Resource Planning) system module, most of the costs are implementation and deployment, including user training (rather than hardware and software costs).
lauraduncan
According to the Corporate Executive Board, it's critical you balance a "security at all costs" mind-set with a view of your organization's business realities. Recently, the Information Risk Executive Council committed heresy and asked whether members in our network were spending too much to protect information. Information security at most organizations does not necessarily require more funding; instead, executives should focus on improving the efficiency and effort allocation of their existing activities. New projects with new spending should usually focus on either implementing future cost savings or enabling business activities that are currently avoided due to risk.
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Jimmy Guterman
Martha, did he talk about what sort of IT investments work better than others? What separates a real digital organization from one that just spends a lot on computers?