Information technology - should you curtail your investment?

• Author: Vincent, David R.

Information technology--should you curtail your investment?

How much will your ability to compete improve if you continue to throw money at your information system? A researcher sets up a few scenarios--so you can be the judge. Is management's fascination with the promise of information technology (IT) over? Recent studies show dwindling or, in some cases, negative returns on IT investments made in the late 1970s and early 1980s. A recent working paper from MIT's Management in the 1990s Program reports that corporations would have earned a better return by investing the same money in non-IT capital such as production equipment. A Morgan Stanley economist claims that in the service industry many large investments in IT have resulted in decreased productivity.

Many senior executives feel let down by their IT organizations. And well they should. They were often led to believe that throwing technology at problems would guarantee results. It hasn't.

Nevertheless, while some companies disparage their investments in information technology, others foresee that information technology still has enormous potential for financial return. Some corporations are realizing significant performance gains by adroitly balancing the mix of strategy, management skill, and information technology.

During the next decade, business corporations will be the crucible of change in industrialized countries. Global competition requires corporations to replace obsolete, top-heavy management structures with lean, energetic, and flexible organizations, and IT will play a major role in that change. To achieve this, forward-thinking corporations are simplifying their capital structures and decentralizing decision-making. Information technology makes new forms of capital and organizational management possible.

The entrepreneurial organization

During the industrial revolution, centralization and specialization produced economies of scale. Hundreds, and sometimes thousands, of people were gathered into assembly-line or specialized functions. The corporation added layers upon layers of management to oversee mountains of detail.

In the information age, computers are making middle managers obsolete. Look at such megacorporations as AT&T, where during the industrial age middle management served the role of interpreting strategy, building plans of action, and communicating tasks downward in the organization. This required many layers of management. The low productivity of this extensively hierarchical organization became apparent at AT&T after it was ordered to divest itself of its regional operating companies. Some 100,000 AT&T employees--one-third of its workforce--were fired. Most of these people were administrators or middle managers.

Information technology enables executive management to communicate down into the organization, eliminating some of the need for extensive interpretation of policies. IT also enables employees at the bottom of the organization to assume more responsibility. Business analysts refer to this phenomenon as the flattening of the organization.

The industrial age required large numbers of middle managers to interpret and relay information. Today, they are being squeezed out of the organization. Senior management is pushing accountability and authority down the organizational ladder. The result is smaller, highly responsive, and flexible entrepreneurial units.

The corporation that uses information technology to leverage the efforts of these small entrepreneurial units will position itself to survive in today's global economy. Corporations that don't take advantage of this leverage will die.

Ironically, new management models reflect a very old form of organization: that of the hunter-gatherer tribe. The optimal number of members in a hunter-gatherer tribe was about 30 people. More people caused the tribe to split. A tribe was a highly communications-efficient, highly mobile group. More than 30 people produced a serious breakdown in that efficiency and mobility.

The...