IT productivity? Let the good times roll

IT productivity? Let the good times roll

Summary: Dana Gardner, formerly with the Yankee Group and the Aberdeen Group, recently launched Interarbor Solutions, a consultancy focusing on enterprise applications, software infrastructure, RSS and other topics. Dana has agreed to post some of his insights on Between the Lines.

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TOPICS: CXO
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Dana GardnerDana Gardner, formerly with the Yankee Group and the Aberdeen Group, recently launched Interarbor Solutions, a consultancy focusing on enterprise applications, software infrastructure, RSS and other topics. Dana has agreed to post some of his insights on Between the Lines. Today, he takes issue with economists who forecast that IT can't possibly maintain significant productivity gains.


Economists are missing the trees due to the forest when it comes to IT productivity. I draw this conclusion from a New York Times story (registration required) this week.

The consensus in question, which apparently is helping to guide the U.S. Federal Reserve in its deliberations over short-term interest rate adjustments, is that IT is not going to achieve the productivity boost it did during the 1990s. The economists don't seem to think that the wonderful tango of rapidly lowering IT costs and rapidly increasing functionality and efficiency reach has any quick-step left for the next five years. IT, yawn ... will just sit this one out.

They are probably seriously wrong, which is really good news. First, the reasoning for why IT spending shot up over the past 10 years is flawed. The story says, "...many analysts say they believe that plunging technology prices were responsible -- along with the dot-com stock market bubble -- for a big part of the huge investment in [IT] equipment during the 1990s."

Nope, the relationship is that IT standardization around such key technologies as TCP/IP, Java, SQL, Ethernet, UNIX, SMTP, LDAP, Windows, and HTML spurred volume purchases, i.e. investment, of servers, PCs, routers, LAN/WANs, and applications. It was the volume and fierce competition within standardized (rather than closed) products that drove prices down, and then led to the speculative bubble (as if standards-oriented sellers could reap profits like monopolies). The engine of growth was fueled first by innovation and standardization, then volume, then lower prices, then more adoption, and more lower prices, which all leads to generally higher productivity. Let's get the order straight, and recognize that the process takes years (even at Internet time).

Now, the future is not so bright, we're told. "The rate of technical change, which is the most difficult thing to measure, seems to be slowing from the unprecedented pace of a few years ago," said Mark Zandi, chief economist at Economy.com, in the Times story.

Technical change is hard to measure if you only look at IT sales.

Allow me to point out a few gargantuan trees in this forest: open source tools and development frameworks; standardization around XML; open source middleware stacks, databases, and business applications; low-cost multi-core 64-bit x86 processors; hardware and software virtualization; even more dirt-cheap and super-fast storage; RSS; application lifecycle management methods and uniform modeling and testing; 64-bit file formats; grid and utility computing efficiencies, Java virtual machines running on silicon; advanced search and indexing; Web services standards; IPTV, cheap and ubiquitous land-line and mobile broadband; services-oriented architectures; composite applications; G3 handsets; software as a service; the Foveon camera; embedded devise development standards and embedded Linux; subscription-based purchasing models for IT products and services; and let's not forget outsourcing, off-shoring, and mixed-source purchasing.

Now most of these trends have yet to kick in sufficiently to significantly impact the IT investment and productivity cycle. But is there much doubt that they will? If we measure only the revenues of the IT vendors, we see mid-single-digit growth, and we may see some leveling of the price decreases for what are or are becoming commodities, which by definition resist price weakness below their established floors.

But when we examine the buy side, the enterprise, SMBs, SOHOs, and carrier-host organizations, we can expect a much different impact over the next five to 10 years. I'm no economist, but these IT trends and business model shift impacts will in no way slow down productivity growth. I believe they will accelerate it beyond what the 1990s offered, and without the waste of the stock market bubble and Y2K drag.

For the enterprises and business buyers, the total cost of computing operations and IT-driven business process innovation is going down in real terms, based on total productivity. This total cost-benefit relationship will improve a lot more for a long time. IT buyers are now getting a lot more bang for the buck, and a rapid return on investment. IT innovation is rampant, global, and easier to absorb than ever given all the qualified labor in locations far and wide.

Enterprises have a lot to bite off to enjoy these benefits, granted, but they have large coffers to begin the process. My research shows them eager.

"Over the past decade, the U.S. economy has benefited from a remarkable acceleration of productivity," Mr. Greenspan told the Senate Banking Committee last month. "But experience suggests that such rapid advances are unlikely to be maintained in an economy that has reached the cutting edge of technology."

We may be standing on the shoulders of giants, but we have not reached the cutting edge of technology. The IT vendors may have reached some turning point in terms of pricing and lock-in, but for those buying and using IT smartly -- let the good times roll, and roll, and roll, and roll.

So maybe, just maybe, the IT productivity effect on GDP higher-growth-at-low-inflation trend isn't over after all.

Topic: CXO

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5 comments
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  • Gee maybe

    now that the pace of hardware tech is slowing, we can spend MORE time on SOFTWARE. The extra "time" should be used to take good software and ENGINEER it to become great software! Software engineering - what a concept! Once software development becomes a REAL engineering doctrine, the quality of software will make the same kind of gains that we saw in the last decade.

    Hey you forgot about the WiMAX steamroller when you listed the future tech breakthroughs! You heard it HERE first! ;)
    Roger Ramjet
  • But technology innovation alone is not enough

    Whilst I agree that IT innovation is far from over, it seems to me that the key to continued productivity gains is better alignment of that innovation with business innovation. IT has been put to good use in addressing the low hanging fruit - primarily transactional automation. But further productivity gains will depend on exploiting it effectively to address more sophisticated business requirements. Unless there is a clear understanding of what those requirements and their relative priorities are then much of the technology innovation could go to waste. In fact, one could argue that technology innovation alone is not innovation
    nmacehiter
    • Feel free to tell me I'm totally off base here...

      But I have to laugh at phrases like "business intelligence" and "business innovation". To me technological innovation is about making things possible that weren't before. It is ultimately about creating opportunity. "Business innovation" is about exploiting those opportunities that others don't see. There are possibilities yet imagined to extract the almighty dollar from the selective use of new technologies.

      Now, I consider technological innovation raw. That is unrefined. It is up to the market and a particular business' IT to hammer that innovation into something that betters that business' business!
      Zinoron
  • Alternative means to the same purpose.

    Hardware and software have already been purchased. If what they are doing can be done faster and cheaper by the next round, fine.

    Innovation related to productivity? None.

    Let's define productivity gains as the company doing what it does more efficiently, costs considered. Maybe the company expanding what it can sell.

    Notice, this is about the company, and not the company's IT support functions.

    Reading through the whole list of IT wonders given, I saw nothing related to productivity gains for the company. Discounting prices, I'm not certain I saw any productivity gains for IT.
    If you can correct this impression, please do.

    Maybe my definition of productivity is different, but I like it because company sales show up in the national economic statistics.
    Anton Philidor
  • It works like this

    David,

    I agree that ICT has yet to reach the end of the productivity rainbow, however...

    In order for us to achieve even greater productivity gains (on a par with those of the 1990s) we would need to see more standardization, and a change in business practices.

    Also, the story breaks down into two areas:
    - Micro-Economic (read: businesses and their profits); and
    - Macro-Economic (read: regions, particularly around large cities).

    I am only a part-time economist myself, but it seems to me that standardization is not a given, and the required changes in business practices are still a long way off.

    In 1994 the Net's governance was changed - thus thrusting a huge number of standards onto the World stage. But unlike previous technical and business process standards these were mostly not new - they were stable, well understood, tried and tested, and so on... In addition, the IETF and W3C found themselves in a largely uncontested position (historically an almost unique position from a communications perspective) - and rapidly developed a whole series of higher level standards. To avoid being left behind large ICT companies had to prove their Net credentials and the Net enjoyed the benefits of many ideas given freely.

    Compare and contrast that with today. Who is the main architect of Web Services? Every day I read news stories about this company or that wanting to make (or make more) money from so-called intellectual property rights. OASIS wants to be the WS architect, but is suffering a crisis of confidence among customers of ICT. The W3C also wants this crown, but has lost ground with the suppliers. As a result the two next big steps; Software as a Service and Service Oriented Architectures, suffer from a lack of industry cohesion. Until the ICT industry learns from older industries that in-fighting is bad and competition on a level field is good (for everybody) this problem can only get worse.

    Standarization at the next levels (WS up) are the essential prerequisites to automating flexible enterprises. In addition, standards are requred in the more esoteric areas of ICT business practice:
    - Legal
    - Risk Management (particularly insurance)
    - Financial modeling (particularly of services and outsourcing)
    - business process automation (particularly the flexible infrastructure support);
    - etc...

    Very little of this is going on. IBM Global Services and others have been laying peple off because the overall business model isn't lighting customer lights - and a big part of the reasons for that is a lack of technical standards and convergence - and a rapidly closing market due to big companies greedily building IPR portfolios, fighting OS, and lobbying governments for industry protection in these areas.

    What Greenspan meant by his remarks, it seems to me, was that everyone else have caught up with the ICT suppliers. With the above problems, the big ICT companies have created their own growth anchor.

    Until standardization is sorted at the Net level the micro-economy will continue to invest only to cut costs and, in a few cases, build proprietary (single business) solutions. Until then the ICT business practice changes will also bump along, with no-one seeing much reason to adventure beyond the classic IT Dept., and ICT-driven macro-economic growth will continue to evade us.
    Stephen Wheeler