The true value of enterprise IT

In times of economic turmoil, businesses tend to focus on the short term. Never mind blue-sky thinking; getting through the next 12 months is the priority for most executives.

But a new report published by professional services firm Deloitte argues that if corporations are to prosper in future, they must look beyond the cost-cutting imperatives of today and ask themselves a bigger question. That question is: does the way we think about and deploy technology actually help us succeed in business?

According to the report, entitled the Shift Index 2009, the answer is no. Oft-cited economic data shows that since the widespread introduction of IT in business during the 1960s, employee productivity has soared (at least among US companies). But that does not mean that businesses are performing any better than they used to. In fact, they are performing much worse. Looking at the financial performance of US companies since 1965 reveals that the average business’s return on assets (RoA), a key measure of efficiency, has shrunk to a quarter of what it was. The reason for this is that, as well as improving employee productivity, IT has also drastically reduced the barriers to entry in all industries, massively intensifying competition.

“That intensified competition has led to a deterioration in business performance,” explains John Hagel, co-chairman of Deloitte’s Centre for the Edge research unit, which produced the study. “And the productivity boost of IT has not been enough to compensate for this intensification of competition.” That is not to say that the impact of IT has been a negative one overall. “This is actually quite positive for the consumer,” explains Hagel. But as far as individual companies are concerned, the advent of IT has made it harder, not easier, to succeed.

Knowledge flows

Compounding that troubling trend is the fact the way businesses conceive IT is not conducive to ongoing performance benefits, Hagel argues.

“To date, enterprise IT investment has focused on standardising and automating processes in order to reduce cost,” he explains. “This has yielded some benefits, but it is ultimately a game of diminishing returns. It gets harder and harder to deliver a performance improvement if you just focus on cost reduction.”

Hagel argues that businesses’ preoccupation with what IT can take away, namely cost and inefficiency, has distracted them from what it contributes. And that is to support and accelerate ‘knowledge flows’, he says.

A knowledge flow is a process of information transfer, within an organisation or with other parties, that imbues it with the knowledge required to compete effectively. “The more the business environment changes, the faster the value of what you know at any point in time diminishes,” the Shift Index report explains.

"Standardising and automating processes in order to reduce cost is ultimately a game of diminishing returns"
John Hagel, co-chairman of Deloitte’s Centre for the Edge

“For instance, when an organisation tries to improve cycle times in a manufacturing process, it finds far more value in problem solving shaped by the diverse experiences, perspectives, and learning of a tightly knit team (shared through knowledge flows) than in a training manual alone.”

So while the Deloitte report is somewhat damning of the contribution that IT has made to business to date, it also casts technology in a leading role in countering the performance decline it arguably triggered.

“Technology plays a central role in this concept of knowledge flows,” explains Hagel. However, this renewed focus on knowledge transfer, rather than simply storing and filing information, has ramifications for the kinds of systems that businesses need. “There is a lot you can do with existing technology,” explains Hagel, “but ultimately this is going to require a very different kind of IT architecture.”

Indeed, he goes as far as to suggest that the term ‘information technology’ is no longer appropriate. “I would much rather call this relationship technology than information technology,” Hagel says. As that suggests, Web 2.0 technologies in particular will play an important part in enabling and accelerating knowledge flows, Hagel says. Unlike some enterprise social media proponents, he expects there to be a demonstrable improvement in the financial performance of companies that successfully deploy Web 2.0 technologies.

“I believe that we will see correlations between investment in technologies that support knowledge flows and performance improvements, even at a company level,” he says. That begs a question: why has the introduction of email, surely a significant ‘knowledge flow’ tool, not triggered an uptick in RoA? Hagel argues that email “in many respects is simply automating what we already had. It was not until later generations of social media technology like wikis, blogs, social network platforms, that we really started to see very different ways to generate and participate in scalable knowledge flows.”

That, and some of the other assumptions underpinning the Shift Index, could be debated unendingly. But what the report certainly does is provide a framework with which to describe the positive contribution of IT to businesses, even as it articulates its negative impact. And for IT executives whose efforts to prove that IT is more than just a cost centre have been severely hampered by survivalist management practices, that framework could prove invaluable.

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Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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