the catalytic computer: information technology and enterprise transformation erik brynjolfsson mit...
TRANSCRIPT
The Catalytic Computer: Information Technology
and Enterprise Transformation
Erik BrynjolfssonMIT Sloan School
Transforming Enterprise ConferenceJanuary 27, 2003
Copyright © 2003 Erik Brynjolfsson. Reproduction prohibited http://ebusiness.mit.edu
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MFP
IT3
IT and Productivity: The Data Speak
IT Stock (relative to industry average)
Productivity(relative to industry average)
IT is associated with greater productivity...
...But what explains the substantial variation across firms?
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Web servers and email-based Interactions
Physical Retail Front Office
Transforming Organization, Strategy, Markets, Products, Incentives…
Traditional Brokerages
Online Brokerages
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Web servers and email-based InteractionsOutsourced, web-based informationFocus on frequent tradersSalaried compensationAlliances with other service providersBroker teams hand-off clientsLow Fees on trading
Physical Retail Front Office
Proprietary, custom information
Focus on “high net worth” investors
Commission-based compensation Specialized research staff in-house
Assigned broker provides personal advice
High fees tied to trading
Transforming Organization, Strategy, Markets, Products, Incentives…
Traditional Brokerages
Online Brokerages
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The Move to “Modern Manafacturing”
Flexible IT-based equipment
Supervisors can fill in on line
Flexible job responsibilities
All employees contribute ideas
Concurrent engineering
Vision given from top
Operators responsible for quality
Stop line if not running at speed
All operators paid same flat rate
Areas organized in work cells
All materials outsourced
Low inventories
Few management layers (3-4)
Line rationalization
Salaried employee make all decisions
Functional groups work independently
Designated equipment
Areas separated by machine type
Narrow job functions
Hourly workers carry them out
Keep line running no matter what
Thorough final inspection by QA
Raw materials made in-house
Large WIP and FG inventories
Pay tied to amount produced
Vertical communication flow
Several management layers (6)
Old vs. New
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Typical Cost Structure of an ERP Suite
Source: Gormely et al.
$millionsHardware Application, Web, and database servers $0.8
including storage
Software ERP application Suite License $3.2(HR, Financials, Distribution)1,000 regular trained users, 2,000 casual users
Implementation 9 months to complete pilot site including $9.3 process engineering, apps configuration, and testing30 external consultants as $1,200 a day30 internal staffers at an average salary of $100,000
Deployment 3 external consultants at 9 sites for 3 months $7.59 internal staffers at each site for 6 month5 days of user training at an average burdened user salary of $50,0003 full-time training staff at an average burdened salary of $100,000
Start-up Costs Total $20.5
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Typical Cost Structure of an ERP Suite
Source: Gormely et al.
$millionsHardware Application, Web, and database servers $0.8
including storage
Software ERP application Suite License $3.2(HR, Financials, Distribution)1,000 regular trained users, 2,000 casual users
Implementation 9 months to complete pilot site including $9.3 process engineering, apps configuration, and testing30 external consultants as $1,200 a day30 internal staffers at an average salary of $100,000
Deployment 3 external consultants at 9 sites for 3 months $7.59 internal staffers at each site for 6 month5 days of user training at an average burdened user salary of $50,0003 full-time training staff at an average burdened salary of $100,000
Start-up Costs Total $20.5
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DATA
Firm-level DataSample Coverage
» Sample: 1167 large firms over 10 years (10,473 observations)
» 41 industries (2-digit SICs) represented
54% manufacturing, 43% services, 3% mining & construction
Not a random sample of US firms
» Four Principal Types of Data Revenues and Market Value from S&P’s Compustat II
Computer Capital from Computer Intelligence
Ordinary Capital, other Assets, R&D from S&P’s Compustat
Organizational practices from surveys we conducted in 1996 and 2002
» Part of 5 year, $5 million project at MIT Support from the National Science Foundation and grant from Cisco Systems to the Center for eBusiness
Focus of new Information Worker Productivity Council at MIT
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Finding: IT is significantly more productive when combined with Organizational Capital
1. A distinct corporate culture and organizational practices are common at heavy users of computers and the Internet => The “Digital Organization”
2. Firms that adopt the Digital Organization have higher performance than firms which do not => Higher market valuations
=> Higher productivity
3. Firms that adopt the Digital Organization and simultaneously invest more in IT have disproportionately higher performance than firms that do one but not the other. => IT and Digital Organization are Complements
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IT Capital
Digital Org.
Ma r
ket v
alue
Interactions between IT and Digital Organization
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IT Capital
Digital Org.
Ma r
ket v
alue
Interactions between IT and Digital Organization
High IT andDigital Org.
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Computerization > Computers
Image by Ralph Clevenger
Information Technology Capital (10%)
Technological Complements (15%)
Organizational Assets (75%)Including Human Capital,Business Processes, Culture,
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TFP Revision
50
70
90
110
130
150
170
190
210
230
250
Year
TF
P L
evel (1
00 in
1960)
BLS TFP
Revised (l=5)
A New Estimate of Economic Growth
• Including the value of organizational capital catalyzed by computers, true economic growth is over 1% per year higher
• This amounts to over $1.6 trillion of unseen wealth created over past 8 years
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Summary1. IT is the catalyst but organization capital is the iceberg
» Successful IT investments require “investments” in organization» A specific set of practices – the “Digital Organization” – exists
2. Organizational capital is a real asset, but poorly measured» Organizational capital is most of the true investment in computers» It has a measurable impact on cost, valuation and performance» Like “human capital” (Jorgenson, 1966), organizational capital is a real asset
in the economy.
3. Transforming the enterprise => transforming economic statistics» Economic growth is even greater than we thought!
To learn more about this research, please visit:
http://ebusiness.mit.edu/erik
To learn more about this research, please visit:
http://ebusiness.mit.edu/erik
To learn more about this research, please visit:
http://ebusiness.mit.edu/erik
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Seven Practices of Digital Organizations
1. Move from analog to digital business processes
2. Distribute decision-rights
3. Foster open information access
4. Link incentives to performance
5. Maintain focus and communicate goals
6. Hire the best people
7. Invest in human capital
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IT is only an enabler of the real sources of value: Computers as Catalyst
– What we know» Many (most?) successful IT investments combine investments
in IT with investments in organization
» Organizational investments are expensive, painful and risky because they require large scale organizational change
» They represent most of the “true” investments in computers
» They have a measurable impact on valuation and performance
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5. Corporate focus and communication of strategic goals
• Weed out marginal or non-core products and services, maintaining their corporate focus
• Communicate strategic and financial goals throughout organization regularly
• Actively invest in promoting culture