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D. Murali

... the skaters walk away with the prize. Information and communication technologies will yield the prize of productivity if they are implemented with suitable assets and organisational change at every step of the journey.

NOBEL laureate Robert M. Solow had remarked in 1987 that the computer age could be seen everywhere but in the productivity statistics.

There have been many responses to this statement, a.k.a. the Solow computer paradox. For instance, http://en.wikipedia.org/wiki informs about the view of economists Stephen Oliner and Dan Sichel, that information technology accounted for no more than 2 per cent of the capital stock in any country in the world.

Here's another response, in the form of a paper by Alan Hughes and Michael S. Scott Morton, titled `ICT and productivity growth - the paradox resolved?' (Centre for Business Research, University of Cambridge).

"There is now persuasive evidence that the information and computer technology (ICT) investment boom of the 1990s has led to significant changes in the absolute and relative productivity performance of firms, sectors and countries," aver the authors.

Complementary investments

ICT is getting ubiquitous, but there is a caveat the authors lay down, lest you trip into the paradox. Use ICT to creatively enhance the business and thus make technology strategically significant. And, embed ICT in a relevant set of complementary assets.

"The extent to which the computer age shows up in the productivity statistics depends ultimately on the ability of business organisations to match internal structures, processes and culture with an effective strategy for capturing the product market opportunities and production possibilities afforded by changing information and computer technology," explains the paper.

Since ICT is available to almost all organisations, `the distinguishing variable' is the effectiveness in exploiting ICT-related investments in human and physical capital, point out the authors. Make your strategy effective by positioning and combining activities, and also modifying the organisation structure to match the emerging strategy and the technological realities with "the new economics of ICT's impact on production and coordination work."

The paper states that ICT has made `activity systems' into dynamic reconfigurable elements. To benefit from the change, it is necessary to build "a network of complementary assets, woven together by information and `process know-how'," but only a few organisations have begun to take advantage of the shift.

Earlier research had also pointed out the need for complementarities. Hughes and Morton cite the work of `Brynjolfsson, Hitt and Yang (2002)' thus: "New intangible organisational assets complement IT capital just as new production process and factory redesign complemented the adoption of electric motors over 100 years ago. To realise the potential benefits of computerisation, investments in additional `assets' such as new organisational processes and structures, worker knowledge and redesigned monitoring, reporting and incentive systems may be needed."

The trio had found that intangible assets associated with IT were about 10 times the investment in the IT assets. They also found "a clear link between IT investment, investment in organisational capital and firm performance, at least as measured by its market value". Firms with both a high level of IT investment and high investment in work organisation were found to have "relatively high market valuations compared to those which score heavily on only one of these dimensions".

Wal-Mart effect

Another citation is of `McGuckin, Spiegelman and van Ark (2005)', in a section where the paper on hand discusses the impact of ICT on retailing. Solow had pointed out in 2003 that retailing and wholesaling were the top two of the six sectors that accounted for the whole of the US productivity acceleration after 1995. Along with financial services they had accounted for three quarters of the aggregate improvement in productivity growth, one learns from the paper.

"Warehouse centralisation and automation were based on `old' IT, but as scale gains and functional reorganisation were exploited, it changed the face of this industry out of all recognition. This was the so-called `Wal-Mart effect'," explain Hughes and Morton.

There are impressive statistics about the retailing giant. Such as, how the `Arkansas family start-up' garnered a market share of 40 per cent in mid 1990s, from a mere 9 per share in retailing in the US in 1987; and how, between 1995 and 1999, when competitors raised productivity by 28 per cent, "Wal-Mart's productivity advantage rose to 48 per cent." Contributing factors to productivity growth were "scale effects in warehousing, electronic data interchange and bar code scanning."

And there was something more than productivity, point out the authors. "It was Wal-Mart's ability to choose new store sites as well as their organisational and management innovation and the competitive response they generated as much as technology change that drove the productivity dynamic." Citing M. Schrage's article titled, `Wal-Mart Trumps Moore's Law', the paper notes that Wal-Mart not only invested in the physical assets of their new stores, but also pumped in over $4 billion on "ICT-integrated `retail link' supply system".

Two lessons that the authors draw from the retailing example are: One, "technology users have a powerful effect in the diffusion process whereby ICT impacts on overall productivity growth at a national level." And two, it takes time for the process to work through into the productivity transformation.

For the latter, an interesting example is that of barcode. Though the bar code patent dates from 1949, "the first retail product was not scanned at a checkout until 1975". In the beginning, "it was seen primarily as a cost saving device at checkout by a consortium of food producers and grocery retailers". The industry took 10 more years to realise `key savings from inventory control', which occurred through the use `uniform communications standards' and appropriate software.

The case of Schneider

"Any organisation, no matter how apparently prosaic, can alter its growth rate and competitive position if it develops the `fit' and investment among the key complementary assets of the organisation," declare Hughes and Morton. They study Schneider, a company in the business of long distance, full truck load, transportation, with "revenues of over $3 billion and 20,000 employees".

Schneider's identity statement reads: `The Orange On-Time Machine: Safe, Courteous, Hustling Associates Creating Solutions That Excite Our Customers.' And the company believes in investing in technology as a means to achieve an end - that of achieving the operational performance demanded by its customers.

A quote of Don Schneider sums it up: "When we first put a satellite in, I was telling one of our major customers, an automotive company, how good this communication would be. They said, `Look Schneider, I don't care if you use carrier pigeons to talk to your drivers. All I care about is that your price does not go up and that you deliver on time, any way that you know how.'"

The paper discusses at length two of the key technologies of the company. One, Schneider Utility for Managing Integrated Transportation (SUMIT), an On Line Real Time (OLRT) system providing subsystems for order management, load management, and carrier management, and acting as base for all Schneider's operational processes.

The other key technology is satellite communications technology. "Schneider National invested some $3,500 per truck to install satellite communications and tracking systems in every truck. Beyond this initial investment, Schneider National spends an additional $7-$10 million per year (about 0.5 cents/mile) on satellite transmission costs."

Amazingly, "every communication between truck and centre is automatically tagged with the trucks true location (accurate to within less than 100 metres)," and "even in the absence of messages between the centre and the truck, the system automatically polls every truck every two hours to check their locations."

Statistics of success

The complementary approach has proved fruitful for Schneider. For instance, between 1980 and 1998:

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