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What's its secret? Productivity

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Opinion The quest for productivity is perhaps one of the most fundamental aims of any business and, in fact, most governments. Higher productivity leads to rising company profits, rapid growth rates, low-inflation and increasing prosperity.

Much has been made the difference between the productivity of American companies and Europe. Some of these differences can be explained away by different accounting practices but significant gap remains, a gap that many European governments are keen to diagnose and remedy.

Several hypotheses have been advanced as to why the Americans do better than the Europeans. A study for the government by McKinsey laid the blame on restrictive product regulations and planning laws: "The most pervasive explanation lies in the effect of regulations governing product markets and land use on competitive behaviour investment and pricing," it concluded. While this may be a problem for supermarkets it is less clear how planning laws affect the professional services firms that generate much of the growth in the UK.

Other economists thought that if we can only invested more in IT we would achieve the same results as America. Recently, the UK more or less caught up with the US in terms of investments but without the same astonishing productivity gains.

The McKinsey Quarterly recently reported on a study undertaken in partnership with the London School of Economics across companies in France, Germany, the United Kingdom and the United States. The McKinsey study rated a hundred companies on a scale from zero to five, measuring how they used three important tools: lean manufacturing that cuts waste in production; performance management that sets clear goals and rewards employees who reach them; and talent management that attracts and develops high calibre people. The report, entitled "When IT lifts productivity", identified a clear relationship between better management practices and improved corporate productivity.

This conclusion certainly matches my experience when consulting with many different companies. Differences in the way that companies recruit and promote management talent, motivate their work force, and make decisions, range from the highly professional to the bizarre and risible. It is not surprising that some companies do so much better than their rivals.

The results showed that a one-point improvement on the five point scale in management practice produced a 25 per cent increase in the company's total factor productivity (a measure that includes both labour and capital productivity). Their results showed that additional computing power delivered higher productivity but with a much more modest impact. The difference in productivity generated by increased IT investments was a mere quarter of that from improved management practices.

So, turning to the ongoing debate, does this mean that IT does not matter? Well not quite. What the results show is that when better management practices were combined with increased IT investments, the increase in productivity was several times larger than by increasing IT or improving management practices alone.

This powerfully supports one of the most useful ways of looking at IT management. IT acts as a multiplier, greatly increasing the potential for either great success or absolute disaster. This multiplier effect applies to every decision that management takes in selecting and using IT systems. It's not how much IT you have got but what you do with it that delivers productivity.

IT is too important to be left in the control of mediocre managers. Before you embark on major investments, be very sure that you have talent to bring them to fruition.

Copyright © 2004, IT-Analysis.com

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