Computerworld
September 15, 1997 p. 92
by Paul A. Strassmann
There they go again. Once more, the IT optimists say computers are the key to propserity because they increase productivity.
And once again, it's just wishful thinking-only the people making the wishes are gaining influence.
Wall Street bankers, CEOs and even Federal Reserve Chairman Alan Greenspan are linking much of the 90s bull market to IT-induced productivity gains.
The reasoning goes like this: The boom is caused by investors' expectations that the economy will continue to deliver superior profits [because of] steadily rising productivity. That largely comes from the use of IT. The optimists make their case with an assortment of isolated observations about work acceleration and labor cost reductions based on anecdotes that appear in the media.
The stakes in these debates are enormous. On one hand, the stock market's performance, the prospects of achieving a balanced federal budget and the ability to finance Social Secunty and Medicare all depend on the expectation that productivity will rise steadily. On the IS front, the presumption that computers improve productivity legitimizes proposals to invest in computers and increase advertising in computer magazines.
The Bureau of Labor Statistics' own numbers can't pop these bubbles of opti- mism, even though they indicate that the rate of productivity increases has slowed, not risen, in recent years. But those statistics can't be relied upon because they don't properly account for output in the public and service sectors.
The only way to settle the argument is to look at corporate performance data.
U.S. industrial corporations include in their financial statements an item called Sales, General & Administrative Cost (SG&A). It represents the costs of coordinating, controlling, guiding, promoting, motivating, training and managing employees, customers and suppliers while making and delivering the goods. It's a reasonable approximation of the costs of managing information, including the costs of computer hardware, software, networks and staff. The SG&A largely accounts for a firm's overhead. It also reflects the costs devoted to the generation and consumption of all data.
If IT would have increased the productivity of those involved in handling information, then it would now take less SG&A to manage every dollar's worth of Cost of Goods Sold (COG). That accounts for the expenses for materials and labor to make those goods.
A more information-productive firm would be able to process more goods with less money spent on informahon-related activities.
Take a case where a firm spends $IOO million in COG to make boxes. It also needs $40 minion in sales and administrative expense to manage production, distribution and selling. An advanced informanon system is then introduced. The company still spends $IOO minion to make the same boxes, but it now requires only $30 minion in sales and administradve expense to operate, induding the cost of the new computer system. Clearly, the productivity of information management shows an improvement.
Whether U.S. industrial firms, after a decade of intensive computerization and spending about $500 billion on new computer applications. can now operate with less information management is something that can be tested. How much COG is supported for every dollar spent on SG&A?
To give the optimists their best shot, I examined the financial records over the past 1O years of the 66 largest and most prestigious U.S industrial corporations, each with annual revenue of more than $10 billion (see chart).
Contrary to expectations, productivity hasn't improved during the past decade. The amount of SG&A required to manage every dollar's worth of COG hasn't fallen, despite massive IT investments. There was a steady increase in SG&A from 1987 through 1993.
Though I shove gains in the productivity ratio since 1993. the cost of informa- tion management relative to COG was still higher last year than it was in 1987 and 1988.
I completed a similar analysis for 16 of the largest U.S. banks. The declining trend in the ratio of revenue to payroll costs confirms a drop in productivity.
SIGNIFICANCE FOR CIOS
Information costs have risen, not declined, in relation to other production costs. Neither client/server, the Internet nor computer networks have so far matenally improved the productivity of informabon hand ing by the premier U.S. industrial corporations. In 1996, $1.1 trillion in cost of goods required $300.5 billion in SG&A expense. That ratio is now lower than it was in the period from 1987 through 1990. I found a similar gap in the productivity for the U.S. banks I surveyed.
I consider this proof that productivity of the information-handling workforce, which now accounts for 59% of U.S. employment, has worsened, not improved.
The time has come to face the facts: The stock-market analysts and the overoptimistic CEOs are being misled.
It's a myth that computers have measurably increased the overall productivity of information management Whatever gains may have happened took place in factories and warehouses.
Such a realization will lead to placing IT expenses-which now support mostly office workers-under much closer scrutiny to make sure that costs are not only contained, but that the computerized work creates an innovative stream of new profits.
Whatever productivity gains may have been achieved through computerization of office work in the past decade have been squandered by the profligate waste of human and technological resources The bureaucratization and complexity of business processes have also increased how much information processing is necessary to get anything accomplished without benefits for the consumer
If prosperity is to continue, we need to fulfill the promise of the Informatior Age. We must deploy IT so the office workforce can consistently deliver more valuable results with less effort.
Strassmann (www.strassmann. com) has tracked the productivity of information management in his books, The Informa- tion Payoff f ~985), The Business Value of Computers (~990). The Politics of In formation Management (~993) and The Squandered Computer (~997). This col- umn is excerptedirom his upcoming book Information Productivity, due next fall.