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INFORMATION TECHNOLOGY
SERVICE SOCIETY
RT
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Committee to Study the Impact of Information Technology on
the Performance of Service Activities
Computer Science and Telecommunications Board
Commission on Physical Sciences, Mathematics, and Applications
National Research Council
NATIONAL ACADEMY PRESS
Washington, D.C. 1994
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NOTICE: The project that is the subject of this report was approved by the Governing Board
of the National Research Council, whose members are drawn from the councils of the National
Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine.
The members of the committee responsible for the report were chosen for their special competences
and with regard for appropriate balance.
This report has been reviewed by a group other than the authors according to procedures
approved by a Report Review Committee consisting of members of the National Academy of
Sciences, the National Academy of Engineering, and the Institute of Medicine.
The National Academy of Sciences is a private, nonprofit, self-perpetuating society of
distinguished scholars engaged in scientific and engineering research, dedicated to the further-
ance of science and technology and to their use for the general welfare. Upon the authority of
the charter granted to it by Congress in 1863, the Academy has a mandate that requires it to
advise the federal government on scientific and technical matters. Dr. Bruce Alberts is presi-
dent of the National Academy of Sciences.
The National Academy of Engineering was established in 1964, under the charter of the
National Academy of Sciences, as a parallel organization of outstanding engineers. It is
autonomous in its administration and in the selection of its members, sharing with the National
Academy of Sciences the responsibility for advising the federal government. The National
Academy of Engineering also sponsors engineering programs aimed at meeting national needs,
encourages education and research, and recognizes the superior achievements of engineers.
Dr. Robert M. White is president of the National Academy of Engineering.
The Institute of Medicine was established in 1970 by the National Academy of Sciences
to secure the services of eminent members of appropriate professions in the examination of
policy matters pertaining to the health of the public. The Institute acts under the responsibility
given to the National Academy of Sciences by its congressional charter to be an adviser to the
federal government and, upon its own initiative, to identify issues of medical care, research,
and education. Dr. Kenneth I. Shine is president of the Institute of Medicine.
The National Research Council was organized by the National Academy of Sciences in
1916 to associate the broad community of science and technology with the Academy's pur-
poses of furthering knowledge and advising the federal government. Functioning in accor-
dance with general policies determined by the Academy, the Council has become the principal
operating agency of both the National Academy of Sciences and the National Academy of
Engineering in providing services to the government, the public, and the scientific and engi-
neering communities. The Council is administered jointly by both Academies and the Institute
of Medicine. Dr. Bruce Alberts and Dr. Robert M. White are chairman and vice chairman,
respectively, of the National Research Council.
Support for this project was provided by the following organizations: the Alfred P. Sloan
Foundation (under Grant No. 90-10-4) and Apple Computer Inc., International Business Ma-
chines Corporation, the AT&T Foundation, Digital Equipment Corporation, and Xerox Corpo-
ration, under unnumbered contracts.
Library of Congress Catalog Card Number 92-85596
International Standard Book Number 0-309-04876-1
Copyright 1994 by the National Academy of Sciences. All rights reserved.
Available from:
National Academy Press
2101 Constitution Avenue, N.W.
Washington, D.C. 20418
B-132
Printed in the United States of America
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COMMITTEE TO STUDY THE IMPACT OF
INFORMATION TECHNOLOGY ON
THE PERFORMANCE OF SERVICE ACTIVITIES
J. BRIAN QUINN, Dartmouth College, Chair
MARTIN BAILY, McKinsey & Co., Vice Chair
JORDAN BARUCH, Jordan Baruch Consulting
TORA BIKSON, RAND Corporation
DAVID CARLSON, Kmart Corporation
DENNIS CHAMOT, AFL-CIO
KENNETH COATES, Ford Motor Credit Company
WILLIAM CURTIS, Carnegie Mellon University
ROBERT ELMORE, Arthur Andersen & Co.
CHARLES GOLD, Ernst & Young
MAX HOPPER, American Airlines
ELLEN KNAPP, Coopers & Lybrand
HENRY LICHSTEIN, Citibank
JEROME MARK, Bureau of Labor Statistics (Retired)
STEPHEN ROACH, Morgan Stanley & Co.
IRWIN SITKIN, Aetna Life and Casualty (Retired)
MICHAEL ZUBKOFF, Dartmouth Medical School
Special Advisors
JOHN OPEL, IBM Corporation (Retired)
MORRIS TANENBAUM, AT&T (Retired)
WALTER WRISTON, Citibank (Retired)
Staff
MARJORY S. BLUMENTHAL, Director
HERBERT S. LIN, Senior Staff Officer
LESLIE M. WADE, Project Assistant
. . .
ADZ
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i COMPUTER SCIENCE AND
TELECOMMUNICATIONS BOARD
WILLIAM WULF, University of Virginia, Chair
RUZENA BAJCSY, University of Pennsylvania
JEFF DOZIER, University of California at Santa Barbara
DAVID J. FARBER, University of Pennsylvania
HENRY FUCHS, University of North Carolina
CHARLES GESCHKE, Adobe Systems Inc.
JAMES GRAY, Digital Equipment Corporation
JOHN L. HENNESSY, Stanford University
DEBORAH A. JOSEPH, University of Wisconsin
RICHARD M. KARP, University of California at Berkeley
KEN KENNEDY, Rice University
BUTLER W. LAMPS ON, Digital Equipment Corporation
BARBARA H. LISKOV, Massachusetts Institute of Technology
ROBERT L. MARTIN, Bell Communications Research
DAVID G. MESSERSCHMITT, University of California at Berkeley
ABRAHAM PELED, IBM T.J. Watson Research Center (until August 1993)
WILLIAM PRESS, Harvard University
CHARLES L. SEITZ, California Institute of Technology
EDWARD SHORTLIFFE, Stanford University School of Medicine
CASMIR S. SKRZYPCZAK, NYNEX Corporation
LAWRENCE T. TESLER, Apple Computer Inc.
LESLIE L. VADASZ, Intel Corporation
MARJORY S. BLUMENTHAL, Director
HERBERT S. LIN, Senior Staff Officer
JAMES MALLORY, Staff Officer
GREG MEDALIE, Staff Officer
RENEE A. HAWKINS, Staff Associate
GLORIA BEMAH, Administrative Assistant
JANET QUARLES, Project Assistant
LESLIE M. WADE, Project Assistant
IV
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COMMISSION ON PHYSICAL SCIENCES,
MATHEMATICS, AND APPLICATIONS
RICHARD N. ZARE, Stanford University, Chair
RICHARD S. NICHOLSON, American Association for the Advancement of
Science, Vice Chair
STEPHEN L. ADLER, Institute for Advanced Study
JOHN A. ARMSTRONG, IBM Corporation (retired)
SYLVIA T. CEYER, Massachusetts Institute of Technology
AVNER FRIEDMAN, University of Minnesota
SUSAN L. GRAHAM, University of California at Berkeley
ROBERT J. HERMANN, United Technologies Corporation
HANS MARK, University of Texas at Austin
CLAIRE E. MAX, Lawrence Livermore National Laboratory
CHRISTOPHER F. McKEE, University of California at Berkeley
JAMES W. MITCHELL, AT&T Bell Laboratories
JEROME SACKS, National Institute of Statistical Sciences
A. RICHARD SEEBASS III, University of Colorado
CHARLES P. SLIGHTER, University of Illinois at Urbana-Champaign
ALVIN W. TRIVELPIECE, Oak Ridge National Laboratory
NORMAN METZGER, Executive Director
v
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Preface
In the spring of 1991, The Computer Science and Telecommunications
Board (CSTB) of the National Research Council (NRC) convened the Com-
mittee to Study the Impact of Information Technology on the Performance
of Service Activities. Asked initially to assess the impact of information
technology (IT) on productivity in the service sector, the committee met
five times over a 1 6-month period, deliberating over concepts and the analyses
of subgroups convened to assess specific issues.
In addition to using the standard macroeconomic data collected and
developed by government agencies, the committee drew on observations
from managers and executives in industry (a group including some of the
committee's own members, as well as numerous others). These observa-
tions were obtained through interviews that were used to develop and check
insights, not to generate quantitative data. Appendixes A through D pro-
vide methodological and supporting details about the committee's sources
of information and its approach to using this information. Appendix E lists
the interviewed executives, whose observations helped the committee to
understand the processes by which IT projects are planned, implemented,
and evaluated.
At the macroeconomic level, the committee was concerned about the
constraining effects of looking at services from the traditional perspectives
of goods-producing industries (Chapter 1~. At present, most of the termi-
nology, methodology, and data for analyzing productivity (and performance)
derive from earlier studies in the goods-producing industries, but to the
. .
Vll
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. ~ .
V111
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
committee, most of these seemed inadequate for understanding trends in the
service sector. For example, whereas productivity in goods-producing ac-
tivities is measured in terms that refer to relatively concrete units of output,
dollar sales, or profits, performance in services may relate best to more
subjective qualities such as timing, quality, comfort, or convenience. Mea-
surement difficulties are a theme that runs through the entire report.
In refining its approach to reflect its initial findings, the committee
chose to investigate the full range of impacts of the use of IT on perfor-
mance in the service sector. Thus, the committee examined the nature and
measurement of performance in services at progressively less aggregated
levels of analysis: the macroeconomic level (Chapter 1), the industry level
(Chapter 2), the enterprise level (Chapter 3), and the activity level (Chapter
4~. Chapters 1 through 4 culminate in Chapter 5, which discusses implica-
tions for managers in organizations wishing to improve their management
of information technology, and Chapter 6, which presents issues and recom-
mendations for public policy.
To put this report in perspective, some observations on the committee's
operation and scope of concern are appropriate. First, this report was shaped
by interactions within a multidisciplinary committee that included business
executives, economists, behavioral scientists, management theorists, and tech-
nologists. Second, the committee considered the context of international
competitiveness in conducting its analysis, but detailed investigation of in-
ternational conditions was beyond its scope. Third, although smaller com-
panies were represented in the data that supports industry- and macroeconomic-
level analyses, the committee's resources did not permit a systematic examination
of the distinguishing characteristics of smaller enterprises.
Many parties outside the committee contributed to this report. First and
foremost were the executives of major service companies who participated
in the committee's extensive series of interviews. The time, thoughtfulness,
and candor of these executives were invaluable to the committee in under-
standing a variety of complex and otherwise hidden experiences. The anonymous
reviewers convened by the NRC also played a key role; their probing com-
ments on the initial draft resulted in a much stronger final report. The
contributions of Patricia Higgins (Dartmouth College) in providing research,
moral, and logistic support throughout the project were essential to its suc-
cessful completion. Penny Paquette and Scott Anfinson of Dartmouth Col-
lege, Debbie Perrault of Kmart, and Ashley Maddox (intern at Arthur Andersen)
also contributed to this report.
The committee chair, James Brian Quinn, integrated the contributions
from those inside and outside the committee. He also demonstrated a sig-
nificant personal involvement in shaping the ideas, the concepts, and even
the detailed wording of this report. As importantly, his involvement dem
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PREFACE
IX
onstrated a central finding of the study that good work and high perfor-
mance demand strong and enlightened management and leadership.
CSTB is grateful for the support of the Alfred P. Sloan Foundation,
Apple Computer Inc., International Business Machines Corporation, the AT&T
Foundation, Digital Equipment Corporation, and Xerox Corporation, which
made this project possible. In accordance with NRC policy, the majority of
the funding for this study did not come from private industry.
William Wulf
Chair
Computer Science and Telecommunications Board
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Contents
SUMMARY AND OVERVIEW
1 INTRODUCTION AND IMPACT OF INFORMATION
TECHNOLOGY AT THE MACROECONOMIC LEVEL........
This Study Approach, Scope, and Terms, 29
Current Data and Measures of Productivity, 30
National Income and Product Accounts Prepared by the
Bureau of Economic Analysis, 31
Industry-specific Measures of Productivity Developed by the
Bureau of Labor Statistics, 40
Alternate Measures of Productivity and Performance, 44
Observations and Conclusions, 45
Many Factors Influence Productivity: IT Affects Many
Aspects of Performance, 45
Organization and Scope of This Report, 47
Notes and References, 49
Bibliography for Chapter 1, 51
2 IMPACTS OF INFORMATION TECHNOLOGY AT
THE INDUSTRY LEVEL .........................
Air Transport, 57
Telecommunications, 62
Retail and Wholesale Trade, 69
Health Care, 75
xi
.. 24
.. 52
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. .
X11
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
Banking, 80
Insurance, 86
Observations and Conclusions, 91
Notes and References, 93
IMPACTS OF INFORMATION TECHNOLOGY AT
THE ENTERPRISE LEVEL ..................................
Why Firms Invest in IT, 98
How Companies Use and Invest in IT, 100
Types of Applications, 100
Decision Making About Investing in IT and the Rigor of
Program Evaluation, 118
Cross-cutting Observations Regarding All Uses of Information
Technology, 122
Controlling the Costs of IT, 122
Enhancing Technological Sophistication and Developing
Standards 124
Problems in Assessing Enterprise Performance, 125
Summary and Conclusions, 132
Notes and References, 133
4 IMPACTS OF INFORMATION TECHNOLOGY AT
THE ACTIVITY LEVEL......................
Introduction, 136
What Is an Activity?, 139
Some Observations About Service Activities, 141
Service Activities Are Everywhere, 141
Service Activities Are Increasingly Important, 141
Service Activities Are Generic and Elemental, 142
Roles for Information Technology in the Evolution of Activities, 143
New Tools and Tasks, 144
New Linkages and Transformations in Firms, 148
Outsourcing and Industry Transformation, 153
Consequences for Employees, 155
Conclusions, 160
Notes and References, 163
IMPROVING DECISION MAKING ABOUT INFORMATION
TECHNOLOGY ...........................................
Common Problem Areas in the Management of Information
Technology, 168
Lack of Competition, 168
Inadequate Planning and Follow-up, 169
97
136
165
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CONTENTS
. · ~
X111
Resistance and Inefficiencies in Work Practices, 170
Excessive Project Scope, 171
Technology-driven Investments in IT, 172
Difficulties in Software Development, 172
Critical Issues in the Management of Information Technology, 173
Information and IT Strategy Seeking Competitive Advantage, 174
Cross-Functional Reengineering and Reorganization, 175
Continuous User and Customer Involvement, 181
Customer-driven Measures of Quality, 182
Compressing Project Scope and Payback Time, 185
Postproject Audits, 186
Benchmarking Against Specialized Outside Providers, 187
Customer and Knowledge-driven Performance Evaluation and
Reward Systems, 190
Summary and Conclusions, 191
Notes and References, 192
6 INFORMATION TECHNOLOGY IN SERVICES:
IMPLICATIONS FOR PUBLIC POLICY........
Implications for Macroeconomic and Fiscal Policy, 194
Background on Employment Issues Raised by Information
Technology in Services, 195
The Need for Policy Intervention to Ease Employment
Transitions, 199
The Need for Additional Research to Guide Policy Making, 201
Improving Federal Macroeconomic Data Gathering and
Analysis, 203
... 193
Improving Data and Accounting Principles Related to
Investments in Information Technology, 205
Increasing Awareness of and Investments in Research Related to
Information Technology in Services and Service Quality
Measurements, 206
Other Policy Issues Identified by This Study, 207
Notes and References, 209
APPENDIXES
A Selected Research on Economic and Strategic Impacts of Information
Technology, 217
B Methods for Deriving Bureau of Economic Analysis Measures of
Output, 228
Procedures for Deriving Bureau of Labor Statistics Measures of
Productivity for Service Industries, 234
D How the Committee Conducted Its Study, 247
E List of Executives Interviewed, 266
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NfORklliON lI(HNO[O6T
S*RYi{[ SO{iElY
