Alright, let’s delve deeper into the highest value stream in information systems, which fundamentally revolves around IT-created value. Think about it: nearly every paper related to information systems has IT value as its underlying theme. If IT doesn’t create value, then what are we doing studying it? It would imply that we’re not very valuable as researchers if we’re dealing with technology that doesn’t enhance value.
So, the IT value stream is essential to what we do. When we talk about value, we’re primarily referring to economic value. Sure, IT can affect quality of life, improve process efficiency, and influence various intermediate variables that lead to economic value. But the crux of the matter is: Does IT create economic value?
Now, many of these value streams started gaining attention around the 1980s—specifically around 1987. We had a series of studies known as the productivity studies. A lot of these studies were championed by Erik Brynjolfsson at MIT—he’s at Stanford now, but back then, he was at MIT. He conducted numerous studies examining how IT improves productivity. And during that time, a common phrase emerged: the “productivity paradox.”
The Productivity Paradox: A Clash of Expectations and Statistics
The productivity paradox refers to the observed disconnect between substantial investments in information technology and the lack of corresponding growth in productivity metrics. In 1987, economist Robert Solow famously remarked, “You can see the computer age everywhere but in the productivity statistics.” Similarly, economist Stephen Roach of Morgan Stanley noted that despite the widespread adoption of computers across various industries—including manufacturing, services, and banking—there was no corresponding increase in productivity statistics.
So, we had this big push towards computerization—not just in manufacturing but also in the service and banking industries. Companies were investing heavily in technology. The question was: Why aren’t we seeing a significant increase in productivity in these industries despite all this IT investment?
It was very curious. Dozens of studies were conducted by highly qualified researchers—economists, information systems scholars—but they consistently found no significant productivity improvements from IT investments. This led to a lot of confusion and debate. The dilemma often centered around the question of measurement.
The Measurement Dilemma in Assessing IT Productivity
So, how do we accurately measure productivity in the context of IT? Let’s take the banking industry as an example.
Banking Industry Example
In the banking industry, a common productivity metric was the number of checks processed per hour. The idea was that the more checks you process, the more productive you are. Now, with the introduction of technology like ATMs, what happens to the number of checks processed? It decreases.
Why? Because ATMs provide customers with convenience—they can withdraw cash 24/7 without needing to write or process checks. So, the traditional metric—the number of checks processed—actually goes down with the advent of technology.
This presents a problem: If our productivity metrics don’t capture the benefits that IT brings, then we’re not measuring productivity accurately.
Impact on Traditional Metrics
This is the measurement dilemma. If we use traditional productivity measures, we might find a negative relationship between IT investment and productivity. That’s because while customers are gaining significant benefits—like convenience and improved service—these benefits aren’t reflected in the traditional productivity statistics.
So, if we study the impact of IT investments on traditional productivity measures, we’re going to find a negative relationship. That was a confounding issue with a lot of the early productivity studies.
Reassessing Productivity Measures: The Need for Better Data
In the early 1990s, data improved significantly. We had access to panel data, which allowed us to track individual companies over time. This meant we could get better metrics on IT dollar investments and their impact on the bottom line, such as revenue and profitability.
However, even then, the dozens of studies conducted showed mixed findings. Some relationships were non-significant, some were positive, some were negative. Researchers thought that maybe the issue was timing. When you look at IT investment in year X and benefits in terms of revenue in the same year, those benefits may not accrue right away. There may be a lag effect.
Lagged Models and the Lag Effect in IT Investments
IT investments take time to yield benefits because organizations need to adjust—people have to be trained, processes have to be modified, and systems have to be integrated. So, researchers started using lagged models, where:
- IT Investment: Measured at time X.
- Benefits: Measured at times X+1, X+2, X+3.
By accounting for this lag, they began to find more positive results. A number of papers in the 1990s concluded that we had resolved the productivity paradox—at least partially—by recognizing that IT benefits are often realized over time.
The 2000s: Emphasis on Process Change and Reengineering
Moving into the 2000s, more work was done on IT and firm performance within this value stream. Studies published in journals like MIS Quarterly and Information Systems Research looked at IT impacts on firm performance. Generally, the results were encouraging, but they became more so when considering contextual factors—things like organizational or process change.
This was the era when business process reengineering (BPR) was a big buzzword in corporate America and around the world. Companies were reengineering business processes to become more productive because they realized that their traditional processes were built for markets that no longer existed. Those processes had failed to adapt to the changing environment.
Michael Hammer and Thomas Davenport wrote two important books on reengineering in the 2000s. Their mantra was: “If you automate a mess, all you’re going to get is an automated mess.” In other words, if you take a bad process and automate it, you’re not going to see significant productivity impacts. The only way to see productivity improvements is if you reengineer the process to take advantage of technology.
Case Studies Illustrating the Importance of Process Change
Mutual Benefit Life
Let me give you a classic example: Mutual Benefit Life, an insurance company. They had insurance claims processing that was very typical for the industry. The claim would go to Person Number One, the underwriter, who would underwrite the claim. Then it would go to Person Number Two, who would check the veracity of the claim. Then to Person Number Three, who might check with medical experts if it was a medical claim. Finally, Person Number Four would handle disbursement.
Every process was divided into very specialized steps—Step One, Step Two, Step Three, Step Four—with different people responsible for each step. The problem was, no one took responsibility for the entire application. When a customer called to inquire about the status, no one knew where the application was in the process.
If you automate this process without changing it, you can make the papers move faster, but you don’t change the basic inefficiencies. That’s why they said, “When you automate a mess, you get an automated mess.” You’re not going to get major improvements in productivity.
When Mutual Benefit Life reengineered their process, they assigned a single case manager to each claim. This case manager was supported by technology—they could underwrite through the system, get expert opinions, handle all the steps by interfacing with the technology. They provided expert systems, email access, and other tools.
By changing the process and having someone responsible, when the customer called, the case manager knew exactly what was going on. Supported by powerful technology, they could perform all the different steps themselves. When they did that, their productivity went up by 75%, and customer satisfaction improved significantly.
Ford Motor Company
Another example is Ford Motor Company. They had an accounts payable process with 500 people in the department. Papers went from the vendor to accounts payable to invoicing, with specialized functions along the way.
When they reengineered and integrated departments into a common database, they reduced the number of people from 500 to 100. They leveraged modern information technology to achieve this. They realized significant cost savings and efficiency improvements.
Complementary Assets: The Key to Unlocking IT Value
The key idea here is that IT and process change together create performance benefits. If you just throw IT at a problem without changing the underlying process, you’re not necessarily going to create dramatic impacts.
Studies have shown that IT creates value under certain conditions. And what are these conditions? They include having the right people, the right management, the right culture, the right knowledge assets, the right structure, and the right policies—in other words, the right complementary assets.
Just like Mata said, management is unique; it’s the only source of competitive advantage. The same applies here. IT will create value if you have the right complementary assets because IT by itself is undifferentiated.
Why Complementary Assets Matter
Think about it: IT is largely undifferentiated. If I can buy a network from the market, so can my competitor. If I can buy a PC or a router, so can my competitor. So, where does competitive advantage come from? It’s from how you integrate IT with complementary assets to create unique IT capabilities.
Examples of Complementary Assets in Action
- Otis Elevators: They have a cellular box in their elevators that allows for remote diagnostics. When an elevator breaks down, it sends a signal to the service center, and Otis can fix its own elevators remotely. Competitors can copy the technology, but they can’t copy the complementary asset—Otis’s vertically integrated maintenance service.
- Walmart’s Supply Chain: Walmart has spent years building relationships with suppliers, which is a complementary asset. These relationships allow them to make the supply chain more efficient. Competitors can copy the technology, but they can’t replicate these relationships.
- Thomson Holidays: They provide a variety of holiday packages and have cultivated relationships with hotels, airlines, and service providers. Competitors can copy the website technology, but they can’t copy these relationships.
These complementary assets create causal ambiguity. Competitors can see what’s visible—they can see the website and the services—but they can’t easily replicate the underlying complementary assets. They can copy the technology all they want, but without the complementary assets, they can’t replicate the competitive advantage.
Value Creation vs. Competitive Advantage
There’s a difference between IT-based value creation and IT-based competitive advantage. IT can create value, but that doesn’t automatically confer a competitive advantage because competitors can adopt similar technologies.
If you’re the first mover to leverage IT in the marketplace, you can get some competitive advantage, but over time, what happens?
Citibank’s ATM Example
Citibank had the first ATM. When they developed it, they got tremendous benefits—people flocked to Citibank because it was so easy to withdraw money. But over time, the ATM, which was a source of competitive advantage, became a competitive necessity. Now, if a bank doesn’t have an ATM, they can’t compete.
A lot of technology is fungible; it’s visible; it can be reverse-engineered. When people see something innovative on a website, they can often replicate it unless there are complementary assets behind it that are not visible—that have causal ambiguity.
Value Appropriation and Strategic Considerations
So, there’s a distinction between value creation and value appropriation. You can create value, but can you appropriate that value so that someone else doesn’t copy your idea and take your value?
You have to be strategic about how you launch your technology because competitors are always looking for opportunities. Don’t ever launch a new IT product in the marketplace if your competitors have more capabilities to take advantage of it—you might just be giving them ideas.
Latent Value and Option Thinking in IT Investments
Another point is that IT value could be latent. That means it may take time to realize. When you’re investing in IT, you could be building options for the future—this is known as option thinking.
Option Thinking Explained
Just like you buy call and put options in finance, where you spend a little money to reserve the option, option thinking is important in IT. You’re investing in options to build on because technology can be built upon over time.
For example, you might invest a little in a new technology standard that hasn’t been established yet. You don’t want to invest heavily until it’s a standard, but by investing a little now, you’re keeping your options open to build on it later.
Advancing the IT Value Stream: Future Focus Areas
So, what’s happening now? If we were to build on this work, we have to recognize that value is co-created. Single companies don’t create value alone anymore. Often, it’s consortiums or groups of companies, and the value is created collaboratively, then equitably distributed among them.
When Citibank offers miles if you buy certain products, they have a collaboration with a retailer. If you use your Citibank MasterCard at that retailer, you get double miles. That’s co-created value. Two companies get together to figure out how to create value together.
So, when we think about value creation now, we have to think about co-created value.
Vision-Driven Capability Development
Traditionally, the relationship was between IT investment and value—invest in technology, get value. But today, it’s about figuring out what business capability we want and what IT we need to invest in to get that capability.
The relationship is now:
- Business Capability Vision
- IT Investment
- Value
Companies are starting with a vision of the desired capability and then determining the IT investments and complementary assets needed to realize that capability.
Example
An insurance company might envision allowing customers to file claims at the site of an accident using their mobile devices. If that’s the vision, they then figure out how to invest in IT to achieve it.
That’s a different mindset from traditional productivity studies.
Value Expansion: Beyond Profitability
The third change is what I would call value expansion. We’re recognizing that value need not be only about profitability or productivity. Value could also be in things like flexibility and agility. If IT helps a company become more agile—able to respond to changes in the marketplace better—that creates economic value too.
Value Expansion Includes:
- Flexibility
- Agility
- Customer Experience
- Speed to Market
Ultimately, these factors lead to economic value, but they also provide competitive differentiation in a rapidly changing market.
Conclusion: Integrating IT, Complementary Assets, and Strategic Vision
In summary, the relationship between IT and value is multifaceted and evolving. While initial studies didn’t see a relationship between IT and productivity—we had the productivity paradox—later research found the value relationship when considering lagged effects and process changes.
We recognized that IT creates value with the right complementary assets to create capabilities. Now, to continue advancing this value stream, we need to focus on:
- How is value co-created?
- How do we have a vision of value and create the right configurations to get that value?
- How can value be expanded to include things like agility and flexibility?
By understanding these dynamics, organizations can better leverage IT investments to achieve sustainable value and competitive advantage in today’s digital landscape.
Event Studies and Stock Reactions
Also, researchers are not just looking at profitability but also at stock reactions. When a company makes an IT investment, we can look at public announcements and see how the stock reacts—positive or negative.
We have software like Eventus that allows us to do event studies on IT investments. For example, you might want to see if AI investments create value for a company. You can search 10-K reports for AI announcements—public companies have to announce major investments. You can do a text analysis of these announcements, identify characteristics of the AI investments, and link those variables to the stock reaction on the day of the announcement. That could be a very powerful and relatively easy study to do.
Final Thoughts
So, as we move forward, it’s crucial to understand that IT value creation is not just about the technology itself but about how it’s integrated with complementary assets, processes, and strategic vision. By expanding our notion of value and focusing on agility and flexibility, we can better capture the true impact of IT investments in today’s digital world.
The key takeaway is that IT magnifies the value of complementary assets. It’s not just about investing in technology; it’s about investing in the right people, processes, and partnerships to leverage that technology effectively. By doing so, organizations can create unique capabilities that lead to sustained competitive advantage.
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