IT-enabled process improvements increase productivity 7 ways

Cost breakdown of initial projects to implement new information technology in large manufacturing firms, the start of developing IT-enabled process improvements.

Cost breakdown of initial projects to implement new information technology in large manufacturing firms. The IT investment is just a part, and the total project is just a part, of developing IT-enabled process improvements.

IT-enabled process improvements show that IT is a general-purpose technology

…criteria for a general-purpose technology…

  • wide scope for improvement and elaboration
  • applicability across a broad range of uses
  • potential for use in a wide variety of products and processes
  • strong complementarities with existing or potential technologies.

…David… described the invention of the dynamo and its effect on the organization of the factory. …decades passed before factories reorganized themselves internally and made truly significant productivity gains possible.

Bresnahan and Trajtenberg… developed a model of the use of semiconductors as a general-purpose technology, characterized by “pervasiveness, inherent potential for technical improvements, and ‘innovational complementarities’”… On one level, computing invention-possibility can make existing processes run faster.

…a more exciting use of computing would be to push out the frontier. Computing can change the way business is done. …we believe that there are decades’ worth of potential innovations to be made by creatively combining inventions that we already have in creative ways.

IT-enabled process improvements use hard-to-value capabilities to generate, in part, hard-to-value results

…the literature agrees on one basic point: the size of the total stock of intangible capital in the United States is very large—as much as several trillion dollars. Often this capital does not show up in balance sheets or economic figures, either in government accounts or as an item in firm-level balance sheets.

If we used consumer surplus data to examine the effects of technological innovation over the decades, we would find hundreds of billions, perhaps trillions of dollars of unmeasured benefits in the economy.

Although decreasing communications costs have been affecting incentives for innovation for centuries, free and perfect copies that are easy to distribute were never possible until recently. But the Internet, so far, has not killed innovation. Rather, it has created an entire generation of individual innovators. If history is any guide, the Internet will encourage vast amounts of innovation.

IT-enabled process improvements led by the United States are increasing productivity

…IT is playing an important role in the US productivity resurgence since 1995, and… something unique is occurring in the United States.

The further productivity acceleration since 2001 in the absence of substantial investments in IT remains a subject of debate in the literature. …our hypothesis is that firms benefited from the organizational capital that they built at the end of the 1990s. That is, there may be a lag of approximately 3 or 4 years before the process improvements to IT appear in the productivity statistics.

Major empirical and case studies from the period 1995– 2008 point to business-process reorganization as a major factor in explaining productivity differences across plants or firms.

IT-enabled process improvements have come from seven practices

…the firms that simultaneously invested in IT and in the practices did disproportionately better than firms that did only one or the other. In other words, the practices are complementary to IT investment.

  1. Move from analog to digital processes
    Moving an increasing number of processes into the paperless, digital realm…
  2. Open information access
    Digital organizations… encourage the use of dispersed internal and external information sources.
  3. Empower the employees
    Digital organizations decentralize authority—pushing decision rights to those with access to information.
  4. Use performance-based incentives
    Meritocratic pay structures, incentive pay for individuals and groups, and stock options are common at digital organizations.
  5. Invest in corporate culture
    Part of making productive use of IT is to define and promote a cohesive set of high-level goals and norms that pervade the company.
  6. Recruit the right people
    The fact that technology gives employees more information and authority implies that such employees need to be more capable…
  7. Invest in human capital
    …digital organizations provide more training… Many of the changes… call for increased levels of thinking and ingenuity on the part of employees.[1]

  1. Brynjolfsson, Erik, and Adam Saunders. Wired for innovation: how information technology is reshaping the economy. MIT Press, 2009.

Better ideas take over in the 1930s, giving everyone a free lunch

General Motors Futurama visitors at the 1939-1940 New York World’s FairGeneral Motors Futurama visitors
at the 1939-1940 New York World’s Fair [1]

When better ideas take over, they add more value than the sum of the capital and labor inputs

A rough measure of the technological and organizational progressivity of an era is how much more rapidly output grows than a weighted average of the growth of labor and physical capital (structures and equipment). That difference, or residual, represents the growth of total factor productivity.

This chapter examines the years 1929-41 in the United States…

…output rose very rapidly… almost entirely as the consequence of the growth of total factor productivity.

Total Factor Productivity  annual growth rates in the US for 1873-2010

Double digit unemployment for more than a decade represented a terrible waste of human and other resources, and untold hardship for the millions of people out of work.

And yet the Depression years were also a triumph of American ingenuity, inventiveness, and hard work. What I have called the country’s Great Leap Forward…

Better ideas take over in the 1930s in processes and materials

…the 1930s were… a great age of process and materials innovations.

  • The 1930s… saw the tail end of the revolution in factory layout and design that had produced such extraordinary TFP gains in manufacturing between 1919 and 1929 (over five percent per year). That revolution involved replacing systems for distributing power internally within a factory.
  • Machinery became larger… …capital and operating costs per unit of output dropped when capacity increased.
  • …topping techniques used the steam from high pressure boilers to heat lower pressure boilers.
  • More generally, throughout industry, exhaust gasses from stacks were used to preheat air to improve combustion, preheat materials for subsequent fabrication, or generate steam…
  • Improvements in thermal efficiency also benefited from attention to low cost but often high payoff investments in insulation.
  • Similarly, modest investments in instrumentation yielded big efficiency gains, facilitating automatic process control, which lengthened the life of equipment, and reduced downtime and maintenance costs.
  • Better treatments extended the life of wooden railroad ties from eight to twenty years.
  • Stainless steel reduced oxidization on railway cars, while chrome plating lengthened the lives of tools and moving parts. Carbon steel blades had to be removed and resharpened after cutting 60 feet of plastic. A tungsten carbon alloy blade could cut 10,000 feet without refitting.
  • Quick drying lacquers reduced the time needed to paint a car from more than three weeks in the early 1920s to a few hours, with consequent reductions in inventory costs.
  • During the 1930s mechanical refrigerators moved from a “bleeding edge” product to a mass production and mass consumption item.
  • In 1928 the Dupont Corporation lured Wallace Caruthers away from his laboratory at Harvard to Delaware, where he began to develop blockbuster new materials including neoprene and nylon. Caruthers… committed suicide in 1937…

Better ideas take over in the 1930s in transportation

The other major source… was spillovers in transportation and distribution resulting from the  buildout of the surface road network.

  • Railroad productivity soared, in part because of institutional and organizational changes involving freight interchange…
  • …there was enough production during the Depression to replace every truck and bus on the road in 1929 at least once, and add millions more to the transportation system. These newer vehicles were, on average, larger, more powerful, and more reliable.
  • …cars were much improved. Radios, heaters, and four wheel hydraulic brakes were now standard. Automatic transmission, power steering, and more powerful engines became options. Tires moved from the narrow profile high pressure products of the 1920s – reflecting the birth of the automobile in the bicycle industry, to the low pressure balloon tires upon which most of us roll today. Vehicles were streamlined and more aerodynamic, with headlights and trunks incorporated into the body rather than addons.
  • In 1936 Donald Douglas introduced the DC3 – arguably the world’s most famous and successful aircraft (it had a starring role in the closing scenes of the movie Casablanca, alongside Humphrey Bogart and Claude Rains). …all US aircraft that saw major service operation in World War II were already on the drawing boards (“substantially designed”) in December of 1941…[2]

  1. Field, Alexander J. A great leap forward: 1930s depression and US economic growth. Yale University Press, 2011.
  2. Field, Alexander J. “Economic Growth and Recovery in the United States: 1919–1941.” The Great Depression of the 1930s: Lessons for Today, edited by Nicholas Crafts and Peter Fearon, Oxford University Press, 2013, pp. 358-394.

Learning and communication drive projects

Learning by small teams and communication across projects drives productivity.[1]

Hiring and developing great people

“My first priority is to hire the best developers.”

Learning what customers want

The leading source of time delays in software development is rework: the redesign/recoding/retesting cycles made necessary by changes in requirements, changes in interfaces, etc.

To gain speed and productivity, managers must spend more time learning precisely what customers want in a software product and converting those wants into unambiguous specifications.

Devoting more resources to learning what customers want should be viewed as an investment, not just a cost.

…the high productivity firms tend to have a larger team devoted to determining customer requirements (which, if done right, may make coding more productive and less testing and correction necessary).

Front Loading is defined as the early involvement in upstream design activities of downstream functions– process engineering, manufacturing, and even customer service concerns.

Using proven components

When a component is reused in a subsequent product, the original design work is a form of virtual concurrency: in the initial effort, work is simultaneously carried out for all future products in which that component is used.

Concurrency across projects is the most difficult to visualize and accomplish, but also has the greatest downstream rewards.

Using small teams

…except for the customer requirements stage, faster firms tend to have smaller teams and smaller maximum team size. …smaller teams tend to be more productive (except in the early stages where input from many different sources is needed).

…adding bodies to a project to lower cycle time may have the opposite result because coordination and communication complexities make larger teams more difficult to manage.

…larger teams diminish productivity because of inefficiencies created by the difficulty of communicating within a large number of people. …communication demands increase in proportion to the square of the size of the team.

Helping information flow

…as you break problems into smaller pieces, interface complexities grow… …project managers… must ensure that the interfaces are simple and elegant.

…there are a number of important information flows…

Flying Start is preliminary information transfer flowing from upstream design activities to team members primarily concerned with downstream activities.

Two-way High Bandwidth Information Exchange is intensive and rich communication among teams while performing concurrent activities. The information flow includes communication about potential design solutions and about design changes to avoid infeasibilities and interface problems.

…project managers must establish two-way high bandwidth flows of information among the teams working on separate pieces of the problem…[2]

  1. Curtis, Bill, Herb Krasner, and Neil Iscoe. “A field study of the software design process for large systems.” Communications of the ACM 31.11 (1988): 1268-1287.
  2. Blackburn, Joseph D., Gary D. Scudder, and Luk N. Van Wassenhove. “Improving speed and productivity of software development: a global survey of software developers.” IEEE Transactions on Software Engineering 22.12 (1996): 875-885.