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Summary and Overview
The use of information technology (IT) has revolutionized the structure
of management and the nature of competition in a variety of indus-
tries.i IT is especially important in the service sector, which now ac-
counts for about 74 percent of the value added in the U.S. gross domes-
tic product (GDP) and about 76 percent of national employment (Table
S.1) and enjoys a healthy $52 billion trade surplus. Estimates indicate
that about 85 percent of all measured investments in IT hardware are
in services. Contrary to the widespread misconception of services as
predominantly simple, labor-intensive activities, the service industries
include many large, technology-intensive and technically sophisticated
firms in transportation, financial services, banking, insurance, retail
and wholesale trade, telecommunications, health care, and professional
and personal services. As IT becomes less expensive, more portable,
better integrated and interconnected, and embedded in a wider variety
of devices, new applications in these fields and whole new industries-
such as interactive multimedia systems for business, home entertain-
ment, and communications purposes are likely to evolve and to have
profound effects on industry structures, employment, and economic growth.
Moreover, the U.S. economy revolves increasingly around various
important white-collar service activities (e.g., research, design, financ-
ing, education, accounting, marketing, logistics planning, communica-
tions, and information management) rather than blue-collar shop floor
production. These activities are central to the individual service indus
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2
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
TABLE S.1 The Scale of Services and Investments in IT in 1991
Value AddedEmploymentInvestment in IT
(billions of(millions of(billions of
Industry1991 dollars)FTE jobs)1991 dollars)
Nation4,587.5103.3
Agriculture, Forestry, Fisheries90.91.6
Mining36.70.70.9
Construction210.14.50.5
Manufacturing841.018.025.3
Total goods sector1,178.724.8
Transportation140.83.33.8
Communicationsa95.31.221.1
Utilitiesb99.00.98.0
Wholesale Trade266.05.917.0
Retail Trade403.316.217.9
FIREC685.06.538.7
Other servicesd1,002.426.120.3
Government699.418.6
Total service sector3,391.278.7
NOTE: All figures presented are for calendar year 1991.
aIncludes telephone, telegraph, and broadcasting.
bIncludes electric, gas, and sanitary services.
CIncludes financial services, insurance, and real estate.
dIncludes health care and delivery, business services, legal services, hotels, and recreation.
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis. 1992. Survey of
Current Business, July. Data on value added are from Table 6.1C (National Income Without
Capital Consumption Adjustment), p. 82. The relationship between national income without
capital consumption adjustment and gross domestic product (or gross product originating by
industry) is specified in Table 1.9, p. 52, and is essentially gross domestic product without
capital consumption or property and sales tax. Data on employment are from Table 6.5C, p. 84.
Data on investment in IT include hardware costs only and are from Stephen Roach, Morgan
Stanley & Co.
tries and are critical in producing value within manufacturing and other
goods-producing companies. The effectiveness with which IT is de-
ployed in services thus strongly influences U.S. standards of living and
competitiveness in world trade.
THE INFORMATION TECHNOLOGY PARADOX
The magnitude of the investment in IT in the past decade (as measured
roughly by investment in hardware; Figure S.1) has prompted questions
about payoff for both the nation and individual enterprises. Because IT is
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SUMMARY AND OVERVIEW
often used to automate processes (that is, to perform tasks that might other-
wise require substantial human intervention), and because automation is
popularly associated with efficiency and cost reduction, questions about
payoff have usually centered on productivity. Productivity is a concept that
relates the level of outputs to the level of inputs used in their production. In
particular, some economic studies have suggested that the large investment
in IT by the service sector has not been associated with substantial gains in
productivity as measured by national macroeconomic statistics-the so-called
IT paradox. While some studies indicate that U.S. productivitys levels them-
selves compare quite favorably with those of international competitors in
several important service industries, others suggest little correlation be-
tween investments in IT and productivity, profitability, or return on invest-
ment at the industry or enterprise level.
120
110
100
90
=
o
o
o
. _
._
m
80
70
60
50 -
40 -
30
20
10
/
/
/
-
-
/
/
/
-
O
1981 1982 1983 1984 1985
Year
1986 1987 1988 1989
FIGURE S.1 Growing investment in information technology (IT) by the service
sector. The only systematic data available on IT expenditures account for hardware
components but exclude software and services. Thus this figure shows expenditures
only for office, computing, and accounting equipment, communications equipment,
instruments, and photocopy and related equipment; it does not include expenditures
for software, electronic information services, data processing and network services,
computer professional services, custom programming, systems integration, consult-
ing, or training services. SOURCE: Stephen Roach, Morgan Stanley & Co.
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4
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
The committee concluded, however, that these studies by themselves
provide an overly narrow picture of what is happening in services.
Macroeconomic data and traditional measures of productivity do not
capture many of the crucial performance elements that are important
to customers and are critical to service industry executives when they invest
in IT. For most service companies, the use of IT now appears more essen-
tial than optional, because IT is often an integral part of the infrastructures
on which such organizations depend. Obvious elements of such informa-
tion infrastructures are the telephone and transaction-processing systems
without which most businesses could not function, the electronic navigation
and control systems without which airlines could not operate, and the inter-
connected networks of computers that are increasingly necessary to com-
pete at all in financial services, wholesale and retail distribution, transporta-
tion, entertainment, and health care. In addition, highly sophisticated systems
can provide some innovators with important strategic leadership positions.
The committee believes that understanding the impact of IT on the
overall performance of service activities, not simply determining how
the use of IT affects productivity in services, is the real challenge. And
in contrast to what one would conclude based on the results of studies
mentioned earlier, many observers of the service industries (including sev-
eral members of the committee) and many service industry executives (in-
cluding the majority of those interviewed in the course of this study) be-
lieve that IT has had and will continue to have a real and significantly
positive impact on overall service-sector performance.
ANALYZING THE IMPACTS OF
INFORMATION TECHNOLOGY
To understand more fully how IT has changed the service sector and
what the societal impacts of that transformation have been, the committee
examined these issues at four different levels of analysis and considered
both quantitative and qualitative observations (primarily collected during an
extensive series of interviews with industry executives).
Macroeconomic Analysis
From the standpoint of readily available government statistics on the
U.S. economy, during the 1980s the service sector showed limited gains in
productivity despite an extraordinary burst of spending on IT. The service
sector spent over $750 billion on IT hardware alone in that decade (Figure
S.1) enough to result in the virtual doubling of the IT endowment of the
average white-collar worker. At the same time, government economic sta-
tistics point to only a 0.7 percent average growth in productivity in the
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SUMMARYAND OVERVIEW
service sector during this period- a distinct slowdown compared to that of
previous years and far short of the average gains in the manufacturing
sector during the same period.
However, as mentioned earlier, there are various reasons why the
readily available government statistics may not accurately reflect the
full impact of IT on performance in the service sector. It is well known,
for example, that the existing data on productivity do not capture im-
portant elements of service quality, e.g., how well a hospital, airline,
restaurant, hotel, or bank has satisfied its customers. In addition, sta-
tistics on industry productivity are available for only a limited set of
service industries that accounts for only 42 percent of all service work-
ers. For some major service industries notably banking and other
financial services, education, health care, and government- output is
imputed solely on the basis of input; thus, by definition, output divided
by input is a constant for these industries. This imputation affects
measurement of output in about 25 to 30 percent of the service sector.
Data collected at the industry level also tend to understate or ignore the
influence of whole new service markets, even though a primary use of IT is
to enable new services.
Another factor that may distort the macroeconomic picture of IT's
impact on performance in service industries (particularly telecommuni-
cations, transportation, and finance) is the fact that such impacts may
be reflected more in measurements of the productivity of customers of
these service industries (often manufacturing) than in those of the ser-
vice industries themselves. Competitive pressures often constrain ser-
vice pricing, with the result that benefits enjoyed by customers may not
appear in the revenue measures of the service-providing industry, while
the costs of providing such benefits (e.g., the costs of IT) always will
appear. For example, margins and prices in the wholesale trade, fi-
nance, and transportation industries have dropped in real terms, al-
though companies now provide a much more complex array of services
to customers.
Two other factors should be recognized when interpreting macroeconomic
data on productivity and the use of IT. First, the effects on productivity
of investing in and using IT cannot be isolated from other things that
significantly influence productivity, such as the quality of the work force
and management, training efforts, and most importantly, investment in other
(non-IT) technologies necessary to achieve a desired result. Second, al-
though the same is true for any other type of investment, macroeconomic
data cannot account for the alternative costs and potential risks that compa-
nies and industries might have encountered if they had not invested in IT.
However, the central limitation of macroeconomic analysis is the fact
that the usual measure of productivity industry or sector output (usually as
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6
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
assessed by some dollar measure such as deflated revenue or price) divided
by input (often as assessed by hours of work or number of employees)-
ignores important dimensions of performance in service industries (and goods-
producing ones as well) that are critical to customers and to the managers of
individual businesses making decisions about investments in IT. High among
these dimensions of performance is the availability of new service functions
that would be impossible without IT-such as the rapid deployment of
hospital emergency services or 24-hour-per-day securities trading. Of per-
haps greater importance are the handling of increased complexity and the
provision of the greater quality, convenience, reliability, timeliness, safety,
flexibility, and variety that use of IT makes possible in services. As firms
begin to compete along these dimensions, the very nature of a service often
changes in ways that make comparisons of service output and hence pro-
ductivity measures increasingly problematic.
Because of the above limitations, generalizing from macroeconomic
data about the impact of IT on overall service-sector performance is likely
to be misleading. Significant improvements have been made in macroeconomic
data and analysis techniques relative to measuring IT's impacts on perfor-
mance in the service sector. However, major challenges remain. Chapter 1
is devoted to exploring these issues.
Industry-level Analysis
Nearly all service industries make substantial use of IT. However,
patterns of IT's use and impact vary widely across industries, in part
because of differences in and limitations posed by industry structures,
degrees of regulation, the timing of IT's introduction, and the adapt-
ability of processes and products to change. In some service industries
like transportation, communications, utilities, and wholesale trade, growth
in productivity (in GDP per labor-hour) from 1948 to 1973 led that of
the construction, durable goods, and nonelectrical machinery manufac-
turing industries; in other service industries, it did not (Table S.2~.
Nevertheless, since 1973, measured growth in productivity in most ser-
vices appeared to drop despite large investments in IT, although there
were still great variations among industries.
Within the major service industries, increases in productivity (as
measured by GDP per labor-hour) ranged from a very respectable 4.6 per-
cent per year in communications to an anemic 0.17 percent in the finance,
insurance, and real estate segment from 1973 to 1989 (Table Sib. The
committee examined the impact of IT on service performance in six more
disaggregated service industries: air transport, telecommunications, retail
and wholesale trade, health care, banking, and insurance. Within these
industries, some showed strong growth in GDP per labor-hour. Others,
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SUMMARY AND OVERVIEW
TABLE S.2 Average Annual Growth in Gross Domestic
Product Per Labor-Hour for Major Sectors of the
U.S. Economy, 1948 to 1989
Industry
1948-73 1973-89
Business
Goods producing
Farming 4.64 2.04
Mining 4.02 -0.82
Construction 0.58 -1.20
Manufacturing 2.87 2.75
Durable goods excluding
nonelectrical machinery 2.56 2.05
Nonelectrical machinerya 2.03 6.01
Nondurable goods 3.40 2.37
Service producing
Transportation 2.31 0.65
Communication 5.22 4.63
Utilities 5.87 2.46
Trade 2.74 1.18
Wholesale 3.14 1.18
Retail 2.40 1.13
FIREb 1.44 0.17
Other services 2.17 0.32
Government enterprise -0.15 0.26
General government 0.21 0.34
aNonelectrical machinery hours from Bureau of Labor Statistics.
bFinance, insurance, and real estate.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
1991. Survey of Current Business, April, Tables 6.2 and 6.11.
notably insurance and health care, showed negative growth in GDP per
labor-hour from 1981 to 1989 (Table S.3~. Many service industries are
currently undergoing significant restructuring at least partially enabled by
their IT systems.
However, available data on industry-level productivity do not convey
important aspects of the ways IT has affected these industries and their
overall performance:
.
In airlines, innovations using IT have been associated with com-
petitive leadership and with survival as complexity has increased. Air-
lines depend on IT within aircraft and airports, in air traffic control
systems, and for sales, marketing, maintenance, and safety systems, as well
as for capacity, load management, and logistics planning. Computerized
7
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8
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
TABLE S.3 A Comparison of Various U.S. Service Industries in 1991
Average Compound
Annual Annual
Rate of Rate of
IT Capital Change in Growth in
Revenues Employment Stock GPO per Investment
(billions of (millions of (billions of Labor-Hour, in IT,
current FTE current 1981 to 1989 1981 to 1989
dollars) employees) dollars) (% per year)a (% per year)
Industry
Air transport 87.5 0.7 11.1 3.1 14.1
Telecommunications 129.7b 0.9 114.0 5.7 -5.1
Wholesale trade 469.5 5.9 60.2 2.8 11.0
Retail trade 884.5C 16.2 58.8 2.3 9.6
Health care 475.0b 7.4 19.6 -1.3 9.3
Bankingd 209.5b 2.1 28.5 0.1 27.9
Insurance
(carriers plus
agents) 226.7b 2.2 17.1 -1.4 30.8
aLabor productivity is often measured in terms of gross product originating (GPO) per hour of
labor input. The GPO of an industry is a value-added measure of that industry's contribution
to the gross domestic product.
bl990 figure.
CIncludes restaurant trade.
dIncludes depository institutions only; excludes federal credit agencies, security commodity
brokers, and mortgage bankers.
SOURCES: Unpublished data on revenues are from the Bureau of Labor Statistics. Employ-
ment data are from U.S. Department of Commerce, Bureau of Economic Analysis, 1992,
Survey of Current Business, July, Table 6.5C (Full-Time-Equivalent Employees by Industry),
p. 84. IT capital stock data are from Stephen Roach, Morgan Stanley & Co.
reservation systems have changed the entire pattern of competition and profit
making in the airlines industry, although in the 1980s, airline profits were
highly erratic in the shakeout that resulted from the deregulation of the
industry. Competition has forced airlines to pass on to customers the sav-
ings gained through increased efficiency, but new route structures enabled
by the use of IT have also allowed airlines to pass certain costs (notably
inconveniences caused by the "hub-and-spoke" system) on to customers.
· Telecommunications companies depend on IT for operations man-
agement, billing and customer service, product differentiation, and new-
product development. These companies further provide the infrastruc-
tures of telephone, cable television, satellite, microwave, and fiber-optic-cable
connections that enable other industries to operate effectively. They pro-
vide the pathways over which a variety of new concepts and products have
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SUMMARYAND OVERVIEW
9
been (and can be) introduced by the financial services, entertainment, data
services, software, direct distribution, education, travel, and health care in-
dustries, among others. Deregulation in the 1980s increased the variety of
services available and decreased their costs for most customers. Improved
communications have allowed companies to manage materials and services
purchased anywhere in the world, control inventories on a just-in-time ba-
sis, gather information, and manage diversified producing locations in ways
that have changed basic premises about industry boundaries, the organiza-
tion of enterprises, and many traditional management techniques. At the
same time, the use of IT has enabled telecommunications companies to shift
to the consumer much of the labor of placing calls, although consumers
themselves often find self-service dialing a convenience.
· Retailers and wholesalers have used IT to collect and analyze sales
data more quickly and effectively, to plan purchasing and marketing activi-
ties better, to communicate more rapidly with their suppliers, and to offer
more differentiated services to customers. To improve the cost, quality, and
timeliness of their offerings, many maintain worldwide sourcing and logis-
tics systems that use IT. The variety of items carried and the hours retail
stores remained open increased substantially during the 1980s. However,
the industry found it difficult to convert its investments in IT into finan-
cially measurable gains in productivity because of heavy and rapidly chang-
ing competition. The basic structure of retail competition, sourcing of products,
inventory management, and retailers' power relative to that of manufactur-
ers shifted during the 1980s.
In some cases, wholesaling and retailing
merged. In addition to powerful general-merchandise and supermarket chains,
highly specialized "category-killer" chains (e.g., Toys "R" Us or Foot Locker),
warehouse clubs, superstores, and chain boutiques emerged as new forms of
competition. All were highly dependent on IT and broad geographical
sourcing.
· In health care, the use of IT has become increasingly important in
diagnosis and therapy (e.g., medical imaging, radiation therapy, and patient
monitoring). For business operations, IT has generally been less well used
in health care than in other industries, and there may be great untapped
potentials for its use in such operations as well as in new clinical applica-
tions, outpatient care, and monitoring of outcomes. Measures of economic
output in health care are extremely tenuous because of the presence of many
nonmarket forces and problems in defining quality. Although numerous
new and improved cures, therapies, and diagnostics have been introduced
since 1970, there is wide consensus that measured productivity in health
care has been dropping. Yet few would like to do without the potentially
better diagnosis and treatment that electronic devices permit in health care
today. And the costs of dealing with today's complex reporting require-
ments would soar further without electronic systems.
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10
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
.
The banking industry has used IT to enable increases in the volume
of transactions as well as the development of new products; applications
have ranged from back-office (check and accounts) processing, mortgage
and loan application processing, and electronic funds transfer to more stra-
tegic innovations such as automated teller machines and new kinds of secu-
rities. IT has been used to interlink financial services, banking, and invest-
ment systems worldwide thus decreasing a nation's capacity to control its
currency value or its economy by conventional policy interventions. IT has
also been used to manage trillions of dollars in daily transactions by the
securities markets of the world, functions that physically could not be handled
without IT. Yet despite the fact that customers have benefited from the
greater variety, convenience, and accuracy of services as the result of ex-
panded use of IT in the 1980s, measured productivity in banking has grown
only slightly, although this is at least partly because the output of banking
is difficult to measure. Banks now compete with many other (nonbank)
enterprises to provide credit card, investment, and other services. Systems
for personal savings, credit extension, and management of financial transac-
tions have been substantially improved.
· Insurance companies have relied on IT for back-office claims pro-
cess~ng and account updating and now use IT to enhance links to agents, to
customize policies, to manage risks globally, and to develop new services
(e.g., managed health care systems) nationally. Although industry-level
data indicate that the insurance industry did not capture measurable produc-
tivity benefits during the 1980s from its use of IT (Table S.3), the industry
did introduce a variety of complex new services much more specifically
tailored to individual customers' needs. The use of IT also radically im-
proved in the cycles of new-product introduction in the insurance industry,
and increased the scale and accuracy of the services provided.
IT has been associated with growing complexity and customization in
each of these different industries. At the same time, growth in the volume
of transactions, in the number, variety, and linkages among enterprises, and
in the kinds of equipment available has led to demands for greater technical
standardization. Across all industries studied, lags in the development of
standards, software, and management systems rather than hardware limita-
tions have been the main constraints to progress. Cycle times for the
introduction of products in all major service industries have dropped, and
greater control over the mix and size of inventories (whether of airline
seats, financial holdings, or distributed products) has become essential to
success.
The economies of scale offered by back-office automation have led to
waves of mergers and acquisitions and increased concentration in financial
services, health care, and air transport. IT has been used effectively to central
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SUMMARY AND OVERVIEW 1l
ize these new larger enterprises and also to facilitate later geographical decen-
tralization into networks of local affiliates and branch offices. Chapter 2
discusses the impact of IT at the industry level in greater detail.
Enterprise-level Analysis
The enterprise level is where most of the decisions are made about the
use of IT. Executives who actually make such decisions find that measures
related to revenue, profitability, alternative costs, growth potentials, market
share, and return on investment (ROI) are more relevant than the more
abstract measures of "productivity" used at the industry and macroeconomic
levels. When meaningful financial measures are not available, executives
use engineering or quality metrics such as response time, reliability, and
customer satisfaction to estimate IT's impact. For most investments in IT,
executives interviewed by the committee tended to use decision-making
processes (such as capital budgeting) similar to those used for investments
in any other type of advanced technology. But, as for investments in ll&D
and other new technologies, their decision making relied on intuitive and
nonfinancial measures as well as formal ROI analyses and financial justifi-
cations. The committee found that the companies it interviewed were not
consistent in their use of postproject audits to determine benefits received
from IT investments and projects.
For some uses of IT, results are readily measurable. For others
they are not. Companies interviewed by the committee often reported
great difficulties in predicting strategic effects precisely, measuring certain
types of output (such as increased flexibility), assessing benefits that might
be diffuse or delayed (such as those made possible by desktop communica-
tions, spreadsheets, and word processing), and separating the contributions
of IT from those of other factors.
IT has often been used (especially in early applications) to reduce per-
sonnel costs in large paper-intensive departments such as accounting or
purchasing, and in some cases even to eliminate or consolidate certain back-
office operations. Better information-handling capabilities have also helped
decrease other costs such as excessive capital float or inventories, billing or
payment errors, logistics costs, and customer complaints. In addition, IT
has been used to create new or improved services that a firm can offer to
the public, such as the call-waiting service made available to residential
telephone customers or the new "synthetic securities" offered by the invest-
ment banking community. Providing more customized insurance policies to
customers with special needs or reducing the time needed for a retail-store
cashier to tally a customer's total purchase are examples of improved ser-
vices.
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SUMMARYAND OVERVIEW
13
and with more customized service products. Such improvements help to
generate long-term loyalty among customers. IT has been especially impor-
tant in helping to improve reliability, ensuring more consistent levels of
performance, minimizing errors, and improving customers' and employees'
perceptions about companies and their products. IT is also a powerful tool
for companies with life-critical operations in which real-time systems help
to improve the safety of employees, customers, and the public.
An important common finding was that, in the companies surveyed,
decision-making processes for IT projects were comparable to those
used for other complex advanced-technology projects. In many instances,
decisions about investments in IT are like decisions about R&D. Pay-
offs from both R&D and IT are likely to be uncertain in both scale and
timing. Companies readily admitted that they had made investment
errors. Expected value is often not quantifiable or even estimable, let
alone predictable. It is not surprising that the experience of firms
investing in IT varies considerably within an industry and by type of
investment.
When IT is used to reduce costs or to provide a specific new service,
managers are often able to calculate rates of return and payback times with
relative accuracy. However, for many other investments in IT like the
strategic and infrastructure expenditures noted above it is nearly impos-
sible to estimate such figures. Strategic uses of IT can change a firm's
entire competitive or risk posture within an industry, affecting many differ-
ent elements of customer, cost, and competitive relationships simultaneously-
not just revenues or costs. Programs or systems such as MCI's Friends and
Family program, American Airlines' SABRE computerized reservations system,
Morgan Stanley's TAPS system for integrated trading, and McKesson's
ECONOMOST system for ordering and inventory control affect those firms'
quality of customer service, flexibility, reliability, breakeven points, re-
sponse times, and market positioning in ways that cannot be measured in
precise financial terms.
When IT is used in this fashion, a firm's most valuable assets may
become the professional know-how, flexible response and capabilities
for innovation, information and management systems, and knowledge
about customers and markets embodied in its IT and supporting sys-
tems. These assets also are not reflected in the firm's accounting state-
ments or in the nation's accounting system. When successful, such
companies can redefine the standard to which other firms in the indus-
try (and all cross-competing industries) are held by consumers of their
services. A firm's use of IT may affect the entire structure of the firm's
industry, its competitiveness with other industries, and even the nation's
international competitiveness. Competitors may be forced to choose be
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4
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
tween making similar investments or being forced out of the business. En-
tirely new subindustries can result from particularly fortuitous strategic changes,
as cellular telephone, overnight package delivery, "swaps" and synthetic
securities, and facsimile services demonstrate. But, as the failed experi-
ments of Zap-mail, videotext, and AMRIS's CONFIRM system also show,
favorable outcomes are far from assured. Chapter 3 deals in depth with
these issues.
Finally, IT has become a significant element in the cost structure of
many companies. Even the service sector's $750 billion expenditure on
IT in the last decade understates by a substantial amount the total cost
of IT, since it includes only hardware and excludes essential elements
such as software, training and support, and maintenance and upgrad-
ing; the costs of these excluded elements may well be substantially greater
than the costs of the hardware. The costs of a significant IT infrastruc-
ture become more fixed than variable in nature and are especially bur-
densome when revenues and margins are squeezed by recessions or
competitive pressures and overcapacity results. In some cases, this problem
leads to sizable financial losses even though the services being provided
using the IT infrastructure may be of higher absolute value to the customer.
The problem of overcapacity applies to entire industries and not just indi-
vidual enterprises, since IT systems, especially large, complex ones, must
be purchased in predetermined sizes that are not in direct proportion to
demand and therefore usually provide more capacity than warranted by
average levels of demand.
Activity-level Analysis
Although it is perhaps easiest to evaluate IT's impact on performance
in services at the enterprise level by considering a firm's profitability, growth
in market share, or survival, many of the impacts of IT can be understood
only by an examination of IT's application in specific activities within
enterprises, such as customer service, product design, image creation, qual-
ity and cost control, and R&D. These activities may be performed within
one functional organization or cut across several functional areas within one
enterprise. Moreover, these activities may not all be performed within a
single enterprise, but may be spread between the enterprise, its suppliers,
and its customers. Because measures of performance at the enterprise level
aggregate the effects of all activities within an enterprise, they may fre-
quently miss critical shifts in structure or performance occurring at the
activity level. Those shifts, however, may affect the structure and perfor-
mance of many enterprises and industries.
Examining the use of IT at the activity level allows more penetrating
insight into why and how IT has been associated with major changes in job
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SUMMARYAND OVERVIEW
15
content, forms of internal organization, industry structures, and cross-indus-
try competition. For example, most overhead functions are merely services
an enterprise has chosen to produce internally. If desired, many could
easily be purchased externally. In fact, this is the way many service indus-
tries started. Important tasks in services and manufacturing often resemble
each other so much that the lines separating the two sectors are becoming
~ ,
arbitrary if not misleading for policy purposes.
Within companies, an obvious impact of using IT in service activities is
in providing specialized tools that enable more effective performance of
particular activities (e.g., substituting on-line databases for paper records).
Firms may also invest in IT-based systems that lower internal costs and
prices but require more effort by the customer, a concept fundamental to
many of the do-it-yourself "services" Provided by businesses (e.g., credit
card gas pumps, long-distance dialing, machine-operated parking facilities,
automated teller machines). Since these firms gain at the expense of the
customer, the net performance gains (taking the customer into account) are
clearly less than the gains to the firms themselves. In other instances, firms
have used IT to rework how they perform service activities such as logistics
activities that cut across individual functional organizations such as pur-
chasing, inventory control, manufacturing, and distribution.
IT is also used to facilitate the separation, reorganization, and recombi-
nation of activities without regard to their location in space or time. This
had led to the widespread development of "network" organizations. Flexibilities
enabled by IT may also result in the flattening of organizations or the
decentralizing of decision-making authority, thereby allowing more autonomy
at lower levels and broadening the mix of tasks for which individuals are
responsible. At the same time, managers have used IT to enhance dimen-
sions of performance that depend on greater centralization (e.g., the consis-
tency of fast foods or the accuracy of bank reports).
IT-based linkages now allow managers to separate out many traditional
activities (like payroll or accounting) from their core operations, procure
them from outside suppliers, and still integrate them with important activi-
ties that continue to be performed internally. Decisions to use "outsourcing"
often rest on the fact that outside providers of highly specialized service
activities who may have invested in or developed specialized IT technol-
ogy and applications can often perform them more effectively or at less
cost than firms that do not specialize in that activity. IT-based linkages
often provide an opportunity to expand such choices by facilitating the
monitoring and integration of service activities provided off-site with those
kept in-house. Not only are large enterprises reorganizing or shedding
entire departments and divisions, but they are also in some instances selling
some of their skills in internal activities to outsiders, becoming the external
service providers for other firms (as Federal Express has done with its
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
telephone answering service). Electronic data interchanges now bind many
firms in a web of worldwide purchasing, shipping, billing, and receiving
connections.
IT-based linkages have also been used to establish broader and more
complex patterns of interconnections or alliances among different firms
(which themselves may or may not be in the same industry). Entire
industries such as telecommunications and investment banking compete
largely as networks of independent enterprises temporarily linked to
accomplish a specific task, for example, building a new telecommunica-
tions system for a country. Such interconnections are frequently estab-
lished to improve the performance of tasks by taking advantage of each
enterprise's expertise in performing particular activity-level tasks.
As the use of IT alters the nature and location of activities, it also
alters the nature and location of work. Use of IT is one important force
facilitating realignment of work flows, job redesign, organizational restruc-
turing, and work relocation. As a result, the nature of jobs, skill require-
ments, and requirements for training are changing rapidly.
Radically revised organizational structures entailing different lines
of managerial authority and different flows of information have emerged.
Restructurings affect the tasks of personnel at all organizational levels,
but middle-level technical and administrative managers may face the
greatest challenges in retraining and adjusting to faster, less bureau-
cratic decision-making structures. These trends have been the focus of
much commentary in business publications. The committee's analysis
underscores how using IT has amplified these trends. Chapter 4 ex-
pands on these vital issues.
KEY FINDINGS
In the course of its deliberations, the committee examined the impact of
IT on performance in the service sector not only from the standpoint of
understanding the IT paradox, but also in terms of broader implications for
decision making by business executives and government policymakers. De-
tailed below are the committee's overall findings. The broader implications
of these key findings as well as more specific findings as they relate to
management and policy decision making are described in the remainder of
this summary.
· Traditional macroeconomic data collected to date do not cap-
ture many important benefits or costs that accrue to firms from deploy-
ing IT. Accordingly, it is not appropriate to use these data as a basis for
judging the impact of service-sector investments in IT on the sector's per-
formance. Even if growth in service-sector productivity were uniformly
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17
poor, which it is not, traditional measures rarely take into account improve-
ments in quality, convenience, and reliability for customers, or losses that
using IT has helped avoid all important issues to individual firms. More-
over, as with other important technological advances (such as electrification
and telephones), it may take decades before aggregated measures fully re-
flect the results achieved by the use of IT.
· The use of IT has had a direct and positive operational impact
on the performance of services by many individual firms, but the finan-
cial impact of the use of IT has not always been as positive. Although it
is often difficult to isolate the effects of IT use from other factors that
may influence operational performance in service activities (e.g., qual-
ity of the work force), individual firms have used IT to improve effi-
ciency by reducing costs (e.g., through better logistics scheduling in
airlines or more efficient routing in deliveries from suppliers to retail
stores). In nearly all of the service industries, including those examined by
the committee, firms have used IT to handle tremendous volumes of trans-
actions. IT has been used to provide timely information that can substan-
tially influence profits (e.g., investment bankers capture and analyze stock
and bond price movements instantaneously; retail executives track sales
from hour to hour; airlines perform real-time yield management). There are
a variety of reasons why the use of IT has not always had a positive finan-
cial impact on service firms. One reason is that many applications have
used new technologies and other applications of IT have been experimental,
and a basic characteristic of innovation is that experiments and new tech-
nologies sometimes fail. A second reason is that the range of problems to
which IT can be applied continues to expand so quickly that some compa-
nies are forced to invest in new technologies to obtain new capabilities even
before they have captured the full anticipated benefits of their installed IT
infrastructures.
· The use of IT has had important customer-supplier effects. For
the customers of service providers, IT has been used to help improve
the quality and variety of services in many industries, especially through
its ability to amass, analyze, and control large quantities of specialized
data. Such improvements include error reduction or increased preci-
sion (e.g., more reliable medical diagnostics and procedures, more ac-
curate billing on checkout activities); faster or more convenient service
(e.g., computer-aided repair services, credit-card purchases, automated
teller machines); improved security, safety, and reliability (e.g., auto-
mated maintenance protocols, monitoring systems, or on-line audits).
On the other hand, some important costs have been passed on to cus-
tomers (e.g., while the hub-and-spoke routing systems and complex yield
management strategies now used by airlines lower airline operating
costs and sometimes the cost of tickets, they also may vastly increase
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
the inconveniences associated with air travel; while certain users find auto-
mated communications systems and direct dialing procedures more conve-
nient and private and they lower the price per call for everyone, many users
are greatly frustrated by them) and on to suppliers (e.g., IT systems such as
electronic data interchange have led to closer relationships and working
partnerships between companies and their suppliers but also to greater costs
for suppliers in terms of inventory carrying and coordination). The net
effect of these changes is not always calculable.
· IT has been an important element in promoting many broad
restructuring and strategic changes in service industries. IT has been
used to create new industries (e.g., the cellular telephone business) and
has contributed to changes in traditional relationships between indus-
tries (e.g., retailers dictating designs, packaging, and specifications to
manufacturers). Entirely new lines of business have appeared, such as
interest swaps, securitized mortgages, and indexed mutual funds. The economies
of scale offered by back-office automation have supported some mergers
and acquisitions, leading to reductions in the work force and increased
concentration in some industries such as financial services or airlines. In
other cases, the falling cost of IT has often facilitated the entry of relatively
small businesses into new markets and the development of efficient local
branches, franchises, or affiliates through which larger companies can ser-
vice broader geographical areas or remote locations more effectively. IT
has been used to increase cross-competition among various industries and
among individual activities within companies in different industries. IT has
been an enabling force in creating entirely new forms for economic activity
(e.g., worldwide research networks, global sourcing arrangements, large-
scale development and sharing of new databases, new training and educa-
tional capabilities, faster-response innovation systems, and competition through
disaggregated alliances or networks of companies).
· The widespread use of IT in services has a profound effect on
employment patterns. The committee's analysis of IT's roles at the
activity and enterprise levels revealed changes in production processes,
products, and lines of business that will produce substantial changes in
employment patterns. When an industry's productivity increases and
its output remains constant, jobs in that industry are of course lost. If
that industry is committed to enhancing productivity through downsizing
alone, those jobs will be lost permanently. However, if past patterns
continue, total output is likely to grow, though jobs may well shift to
different firms and industries or between geographical regions. Fore-
casts indicate that the new jobs created and old jobs restructured will
demand a new mix of skills. Emerging new forms of organization often
require a wider range of skills than traditional forms. Future jobs are
predicted to be more knowledge-based than in the past. Forecasting
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SUMMARY AND OVERVIEW
19
specific skill needs is complicated by the fact that the job displacements
and skill changes that typically accompany any major technological change
will unfold at the same time that international competitive pressures, de-
regulation, and other factors are causing major changes in the overall economy.
Compounding analyses of these changes is the fact that many service activi-
ties can easily be physically separated from their producing clients. As it
has in software, the creation of domestic demand for other services might
well result in substantial export of certain jobs overseas.
MANAGEMENT IMPLICATIONS
The use of IT can have a significant impact on the performance of
service firms, both strategically and operationally. However, success-
fully applying IT and reaping maximum payoffs from IT investments
require good management. The question is not, Is IT useful? but rather,
How can IT be successfully applied to enhance service performance?
The committee's interviews with senior executives revealed several spe-
cific areas that affect the likelihood of successfully managing applica-
tions of IT. While not completely new, each provides an important
focal point for concern and attention by managers investing in and
using IT. The committee concludes that for maximum effectiveness:
.
._ ~- - 1 ~
~_
~ A ~
There needs to be a comprehensive IT-based strategy designed not
only to support the basic business but to create competitive advantage. Top
management must understand this strategy, be deeply involved in its gen-
eration. and be committed to its implementation if the strategy is to have
. . · · .
company-wide significance and transcend divisional boundaries.
· Business processes should be examined and when appropriate rede-
signed before IT is installed, paying special attention to functions that cross
existing organizational boundaries. New management techniques and per-
formance-reward structures are generally needed to support cross-functional
systems. And internal activities and formal organizations should be explic-
itly restructured to make the best use of these systems.
· Customer and user needs (especially those of external customers)
should normally drive the design, installation, and evaluation of IT systems.
Users and customers should be involved whenever possible in system de-
signs, and customer-driven metrics of quality should be used whenever pos-
sible to assess the impacts of using IT. Customer-driven performance mea-
surement systems (as opposed to hierarchically driven systems) should be
important elements in evaluating cross-functional team performance.
Most IT projects should focus on relatively short-term payoffs and
should have well-defined goals within a long-term strategic framework.
While "bet-the-company" IT projects have at times resulted in revolution
.
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
ary changes that have benefited their initiators, mega-projects are likely to
be overly complex, over budget, delayed, and mismatched to customer needs
by the time they are implemented.
.
The goals and desired outcomes of IT projects should be estab-
lished using benchmarks for service performance established by exten-
sive examination of possible "best-practice" processes as implemented
in other firms, including specialized external service providers. Re-
stricting searches for best-practice processes to peer firms may limit man-
agement perspectives severely.
As reported by executives interviewed by the committee, most of
the problems in achieving payoffs from investment in IT came not from
the investment decisions themselves but from inadequate planning and
implementation of IT applications by management. Inadequate retraining
and failure to continuously upgrade worker skills were a major prob-
lem. Another was a failure to follow up installations of IT with appro-
priate organizational structures, performance measurement systems, and
reward and incentive plans. Details of the management implications of
the committee's findings are found in Chapter 5.
POLICY CONCERNS
While the committee believed that it was beyond its scope and expertise
to develop major policy or action recommendations, four primary areas of
concern to policymakers were identified: enhancing the diffusion of IT
throughout the service sector, dealing with the impacts of IT on employ-
ment patterns, obtaining better data as well as a better understanding of
organizational and structural changes occurring in the economy as a result
of IT, and reassessing the impact of these changes on the effectiveness of
traditional policy measures. Detailed recommendations on how to address
these areas of concern are explored in Chapter 6.
Diffusing the Benefits of IT in Services
In general, market mechanisms have worked well in developing IT for
services. Many individual companies have reaped substantial economic
benefits from using IT, notwithstanding the fact that these benefits are fre-
quently not reflected in traditional economic data and that certain attempts
to use IT have been undeniable failures. There are two key areas where
policy stimuli might affect future economic benefits from investments in IT.
The first is IT's potential inclusion in or exclusion from investment
incentives. To the extent that public policies are used to stimulate further
investment (whether in new capital spending or in R&D), such policies
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SUMMARY AND OVERVIEW
21
should treat investment in IT in services as they would any other capital or
R&D investment. Preference should not be accorded to other types of
capital investment or process experimentation- such as those for manufac-
turing or fixed equipment over IT applications. Since service activities
are integral to both service and manufacturing industries, IT applications
that lower service costs or improve service performance are likely to have a
significant positive impact on competitiveness in both sectors despite the
low measured productivity increases seen to date. Moreover, given their
importance, the nonhardware aspects of IT such as software and training
should be included along with hardware in any definition of IT for invest-
ment and/or tax purposes.
The second relates to continued support for the development of infor-
mation infrastructures, whether through public investment in certain critical
areas (such as advanced R&D) or through changes in laws and regulations.
The experiences of many large service enterprises illustrate the value of
broad access to interactive computing systems connected by telecommuni-
cations and data communications systems or integrated voice and data com-
munications between different facilities, localities, and countries. Large
U.S. firms have often been world leaders in the development and use of
information infrastructures, especially for their own multinational networks.
Increasingly, however, the emergence of relatively inexpensive desktop IT
can bring sophisticated information-processing capabilities into the reach of
the private home, as well as small and medium-size enterprises. Such
enterprises (and home users) will require affordable access to public infor-
mation infrastructures if they are to develop to their fullest extent. In some
geographical areas, selectively stimulating the growth of information infra-
structures, particularly for small businesses and for homes, could enhance
interactions among all enterprises, promote expansion in both the number
and types of jobs in the service sector, and lead to the creation of entirely
new service industries. Enabling homes to have broad access to IT may
also stimulate markets for many affordable products (e.g., multimedia de
vices or services).
Coping with the Impact of IT on Employment Patterns
Large-scale changes in employment patterns have already occurred, and
further changes seem inevitable. The real issue is how best to facilitate the
continuing shift in job mix. Extensive retraining, education, and job cre-
ation are essential tools for such facilitation. In a humane society, steps
should also be taken to minimize the disruption and hardship of displaced
individuals. As in the past, the volume of training and education needed is
likely to exceed the capabilities of private industry. In addition, the rapid
evolution of IT and other new technologies suggests that the need for re
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
training during a person's lifetime will be periodic. All this supports the
broad-based call for strengthening the literacy and numerary provided by
public K-12 education. Past studies indicate that education in general skills
is likely to prove more beneficial in times of uncertainty and rapid change
than education in specifically targeted and narrowly focused skills.
Obtaining Improved Data and Conducting Research on
Structural Changes
The rapid growth of services and changes in the nature of service ac-
tivities in the last two decades underscore the need for a better un-
derstanding of changing conditions. The analyses on which such under-
standing has traditionally rested have relied on statistical data collected
by the Bureau of Labor Statistics and the Bureau of Economic Analysis.
However, these data suffer from significant deficiencies. Efforts such
as the Boskin Initiative to increase the disaggregation of federal data
and statistics and to improve the scope of coverage (in terms of both
price and quality measurements and the industries measured) were begun,
and these efforts should continue.
Better statistical data is not the only need. Specific research and con-
tinuous monitoring are also needed to better understand (1) the nature of
structural changes occurring within enterprises and industries, (2) those is-
sues that are peculiar to small businesses, and (3) the large-scale impacts of
IT on employment patterns at the activity and enterprise levels. Ironically,
the United States funds research that addresses organizational and institu-
tional changes overseas (e.g., change as the result of political or economic
shifts in other nations), but funding for this kind of research tends to be
difficult to find domestically.
Reassessing the Effectiveness of Traditional Policy Measures
Further research is also needed on the way information technologies
affect the impact of traditional policy instruments. Some unintended results
are possible, and their likelihood should be assessed. For example, because
of integrated financial markets, interest rates lowered for policy reasons in
the United States may merely (1) enable domestic or foreign companies to
invest at lower costs overseas or (2) change the exchange rates for U.S.
currency. Because of outsourcing abroad, increases in government pur-
chases or government stimulation of consumer demand may simply increase
imports and create jobs overseas. Enhanced data and communications net-
works generally have international connections that increase access by for-
eign competitors to U.S. markets as well as U.S. access to foreign resources,
potentially increasing the pressure on and lowering returns for U.S. innova
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SUMMARYAND OVERVIEW
23
tors and suppliers. The internationalization of financial markets spurred by
worldwide IT networks makes it increasingly difficult to control a domestic
economy using the standard macroeconomic levers and brings into question
the entire concept of national sovereignty. Such subjects are worthy candi-
dates for investigation.
Additional conclusions and suggestions of the committee may be
found in the body of the report.
NOTE
Throughout this report, unless otherwise specified, the term information technology in-
cludes computer and communications hardware, as well as the software and associated services
required to effectively use that hardware.
Representative terms from entire chapter:
service sector
