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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-1.5

-1.0

-0.5

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-4 -2 0 2 4

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