Good management is key to productivity, not IT, says flawed research

Good management, rather than IT, is the way to improve business productivity, according to research by consultancy McKinsey – but beware of its flawed base IT data. The organisation last month released its IT and productivity study, carried out in association with the London School of Economics, initially of 100 manufacturing companies in France, Germany, the UK and US between 1994 and 2002. That appears to show that IT expenditures have only a very modest impact on productivity unless they are accompanied by excellent management. Indeed, it shows that companies can significantly raise their productivity solely by improving management. There is little doubting the latter claim, but closer questioning reveals that McKinsey bought its IT data and that it covers hardware power only expressed as MIPS per employee. It makes no attempt to account for IT management, applications deployed (APS versus MRP, for example), scale and nature of integration – all the important aspects of any manufacturing business’ IT expenditure. So when we read that “a one-point [on a scale of one to five] improvement in management correlates with a 25% increase in a company’s productivity” compared to “the top quartile of companies, as reckoned by the level of their IT deployment, having a total factor productivity just 4% higher than those in the bottom quartile – just one-sixth of the impact” be very circumspect. It’s a pity. The McKinsey study is otherwise thorough and useful – and enlightened business leaders who already understand the importance of management practice, gain measures of what matters and how much. Its chosen three management measures are around lean manufacturing, employee performance management and talent management, which attracts and develops high-calibre people. A one point improvement in any of these, according to the research, is comparable to raising capital investment by 70%, going from 10 manufacturing plants to 17, or increasing the workforce by 25%. “What’s more, companies got the same benefit from improved management regardless of where they ranked on our scale,” says author Stephen Dorgan, associate principal at McKinsey. “In other words, even well-managed companies get a big bang from these efforts.” He also points out that this impact of better management improves financial performance impressively. “The same one-point improvement on our scale was correlated with a 5% increase in a company’s return on capital employed,” he says. Dorgan claims that McKinsey’s approach in terms of its IT data source followed the only statistically rigorous model available and that in any event, “increased compute spending equates to better computer systems”. Sadly, perhaps true 10 years ago, but much less so today, when IT effectiveness can only sensibly be gauged against application types, integration and IT management. He concedes that the approach was “a crude first stab” at assessing the importance of good management practice and IT, and goes on to suggest that, while IT expenditure appears to have zero net value in view of the cost versus limited benefit, in fact, companies do need to continue to invest in their IT – but to do so while investing in good management. Referring to McKinsey’s matrix of IT spending versus management improvement, which unsurprisingly shows best gains by working on both, he alludes, for example, to “the strong enabling effect of IT on management practice.” And he goes on to say: “Companies getting the balance right and improving both their IT and management practice can expect a total productivity increase of 20% [best to worst quartile].”