The Hindu Business Line : IT opens productivity valve

HOW does information technology affect productivity? This is the question that Ann P. Bartel and Casey Ichniowski of Columbia University, and Kathryn L. Shaw of Stanford University answer in a recent paper on www.nber.org (National Bureau of Economic Research).

For this, the authors select `a narrowly defined industry' such as valve manufacturing and study the effects of new IT on "product innovation, production process improvements, employee skills and work organisation."

You may wonder what can be so special about valve, and ask if it isn't just a commodity product?

True, it is `a metal device attached to pipes to regulate the flow of liquids or gases', which till less than half a century ago was made by `highly skilled machinists using manual machine tools'.

Much water has flowed through the valve ever since. Because, now, "much of valve manufacturing is highly automated with new computer-based IT features embedded directly in the production equipment," point out the authors.

"The central piece of equipment in the valve manufacturing process is a computer numerically controlled (CNC) machine that fixes the raw material on the pallet of the machine and automatically machines the valve component using commands entered as code into the machine's operating software via the machine's controller."

Do you know that the key IT element of the CNC machine is in the CNC controller? This `box' tells the machine exactly `what to do', meaning "where to cut, how deep, the angle of the cut, the diameter, how many times to cut, how to move the steel to re-cut, and so on".

The paper informs that after 1998, CNCs came to be equipped with `fusion control', which is an operator-friendly technology, to help reduce `setup time', that is, "the time spent programming the CNC to produce the next model."

IT has also helped reduce run-time, or "the time it takes machines to perform the machining processes". For instance, with improved `axis capabilities', the "newer 5-axis CNC millers can machine a valve component on five different angles or axes in one `fixturing' operation," compared to the 3-axis predecessors which required "the valve to be manually repositioned within the machine tool to machine on a fourth or fifth axis."

Another example that the authors provide is of "`curve interpolation', which allows CNC machine tools to create smooth curves on a valve component instead of having to approximate curves using a large number of linear cuts". As a result, software size has shrunk, demanding less of memory space. "Smaller programs are also easier to edit, troubleshoot and optimise, thus reducing setup and run-times," notes the paper.

Other technological advances in the valve industry that find mention in the paper are: FMS (that is, flexible manufacturing system), involving "a separate computer that is connected to the controls on several CNC machines"; inspection improvements with the use of `automated inspection sensor machines' that deploy `touch-probe technology', given the accuracy of 1/1000 of an inch; and 3D-CAD (or, three-dimensional computer-aided-design) "reducing the time that elapses from order placement to design presentation to the customer".

What are the findings of the authors? "The adoption of new IT-enhanced machinery involves much more than just the installation of new equipment on the factory floor," they write and identify the following three impacts. One, change in business strategy; thus, valve manufacturers move away "from commodity production based on long production runs to customised production in smaller batches". Two, setup time reduction leading to `efficiency of all stages of the production process'. And three, improvement in skill requirements of workers.

Are there any lessons from the valve study for the rest of the economy? "Increasing customisation of products and services is common across many areas of the economy, and this change often appears to be accompanied by the adoption of new computer-aided IT," state the authors about the commonality, and offer a few examples. "In call centres, new IT reduces preparation times between calls. In hospital emergency rooms, new technologies speed the time between a patient coming into the hospital and treatment by the proper experts. And in concert events, IT allows for customisation of ticket packages based on current demand conditions and ticket supply."

A paper that merits productive perusal, for using IT to unlock value in your industry by opening the productivity valve!

Electronic filing to draw in more returns

WOJCIECH Kopczuk and Cristian Pop-Eleches of Columbia University have written a paper titled, "Electronic Filing, Tax Preparers, and Participation in the Earned Income Tax Credit".

First, a primer on the Earned Income Tax Credit (EITC) a.k.a. the Earned Income Credit (EIC). It is a refundable federal income tax credit for low-income working individuals and families, explains www.irs.gov, the site of the Internal Revenue Service.

The US Congress originally approved the tax credit legislation in 1975 to offset the burden of social security taxes and to provide an incentive to work.

One learns from the site that to qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return. And that if the EITC exceeds the amount of taxes owed, there is a tax refund to those who claim and qualify for the credit. In 2002, more than 18 million low-income individual taxpayers received the EITC benefit.

The paper notes that `non-participation' in the scheme is a major worry of the Government. Does technology have an answer, wonder the authors, and study another aspect of tax law, electronic filing, because filing of return is a must for obtaining the credit. The IRS introduced electronic filing in 1986, to reap many advantages, such as lower cost of handling paper returns, lower error rate, reduced risk of audit and penalties, quicker potential refund, immediate confirmation of return's acceptance, and better chance of discovering tax saving opportunities.

Yet, such electronic filing "usually required (at least at the lower end of income distribution) relying on a tax preparer," who charged a fee for the service, and that meant a cost on those whom the system is supposed to help. But, there are RALs or Refund Anticipation Loans, provided by institutions once the IRS confirmed that the refund was forthcoming.

In 1991, "the fee for electronic filing was $29.95 and the fee for the loan was $35," that some tax preparers charged. "According to a 2003 report by a consumer advocacy group (Wu and Fox, 2003), a tax filer could expect to pay on average $75 for a RAL fee, $40 for an electronic filing fee, $100 for a tax preparation fee and another $33 for additional processing fees. The estimated drain of all these fees on the overall EITC program was around $1.2 billion, roughly 4 per cent of total EITC spending," cites the paper.

Not a dead issue. "Some commercial tax preparers have faced a barrage of lawsuits over `Rapid Refund' programs. Rapid refunds are short-term loans based on an expected tax refund. In Minnesota, those loans on average carry annual interest rates of more than 200 per cent," reads Elizabeth Stawicki's story dated November 14 with the headline `Rapid refunds can be a ripoff for the poor' on http://news.minnesota.publicradio.org.

Kopczuk and Eleches find that the introduction of electronic filing led to an increase in EITC participation. The increase is mostly from `the pool of non-filers', that is, `individuals who otherwise would not file their tax returns'. Though cheating can't be ruled out of any system, the authors are of the view that the hike in participation isn't due to motivation to defraud.

On RALs which amount to receiving refund earlier (at times, instantaneously), the authors observe that the loans relaxed liquidity constraints for taxpayers, and involved little risk, "given the relatively short time that it takes for the IRS to process an electronic return". Though the fee charged by tax preparers may amount in some cases to exorbitant interest rates, RALs gave the preparers "an additional incentive to assure that taxpayers apply for the benefits they are due," reasons the paper.

"As a result, the RALs may be considered to be the price of the (arguably socially beneficial) market solution to the problem of complexity." Thus, on the one hand, the tax preparation industry reaped the benefits of electronic filing technology; on the other, "the additional rents made it worthwhile to expand and reach taxpayers who would otherwise not file their tax returns."

Useful lessons for our taxman. Or, is there a new sector to explore for BPO?

ITWorks@TheHindu.co.in

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