Table of Contents
The paper seeks to analyze the impact of information technology on the economics and productivity of an organization. The paper argues the preponderance of productivity and economic relations in any information technology activity in UK organizations by reviewing the literature and recent research questions. The paper ascertains how a neglect of the economic and productivity impact associated with information technology results in a mismatch between the system and the purpose for which it was intended. Throughout the paper, it is clear that a failure to understand the benefits of information technology investment or an over or underestimation of the benefits of a planned investment in IT relative to the costs will likely result in less than optimal investment decision. The paper concludes with a brief overview of the lessons learned from attending to the importance of information technology to the economy and productivity of organizations.
The degree to which investment in information technology is related to organizational productivity and performance remains an open question in the minds of managers responsible for such investment decisions. Relationships between an investment of the organization in information technology and the impact of these investments on the organization productivity and performance have been the subject of research and discussion. Also, the managers who are interested in knowing the payoff of such investments are trying to find answers to this question. Khosrowpour (2003) says that on a macro level, the productivity gains from information technology cited by the United Kingdom corporations based on their increased ability to gather and exchange information rapidly, but it is not shown up in the traditional statistic used by economists for measuring economic progress. It was noted that other performance and production measures showed improvements for those organizations with higher IT investment.
Statement of the Problem
Advanced information technology systems have made the speedy and careful transaction of organizational processes. While a significant amount of information is available regarding IT investment, the literature does not demonstrate an unambiguous relationship between IT investment and organizational performance and productivity. The possible reasons for the mixed findings include the fact that most studies have been cross-sectional rather than longitudinal or multi-year cross-sectional. Whilst information technology has to a greater extent encouraged the growth of productivity in organizations, its rapid growth has posed a challenge on the economic value of these investments. Therefore there is need for invention of advanced information technology systems that will work towards scalable and dependable computing to enhance the productivity of organizations.
Background of the Study
This research unveils thatthe economic and productivity impact associated with the adoption information technology in the United Kingdom is shaped by human actions and choices, while at the same, time having consequences that we cannot fully anticipate or plan. Brynjolfsson (2002) argues that for organizations, it is more appropriate and meaningful to look for returns on the use of information technology rather than only for returns on investments in information technology. It should be noted that information technology per se cannot increase or decrease the productivity of workers performance, only their use of technology can (Brynjolfsson, 2002). Information technology investments in general do not affect the economic value of an organization, but the innovative investments have a positive effect on company value (Remenyi & Brown, 2004).
Information technology can foster a deeper understanding of economic and productivity change within organizations. It is important for this research paper to identify a few key areas where economic and productivity impact of information technology diverges from mainstream conceptualizations of IT in organizations. Brynjolfsson (2002) noted that “further research may amplify our abilities to benefit economically from information technologies” (p. 319). From these key areas, empirically researchable questions emerge which include: What are the organizational and economical processes, the productivity opportunities and constraints, and the dynamics of key combinations that are influenced by the adoption of information technology? How does information technology shape the development of new production techniques and economic viability of the business? What are the benefits of information technology in relation to organizational productivity?
Studies indicate that improvements in efficiency at times are reflected as reduced output and thereby actually force down the out-put per man hour statistic. Khosrowpour (2003) argues that “at organizational level, the research supporting IT investment is based primarily on anecdotal case studies of successful firms in the UK” (p. 219). Overall results of investigations of the economic effect of IT investment on organizational performance and productivity indicate positive impact. According to Khosrowpour (2003), organizations that develop operate and use inter-organizational information systems to support primary business process that can gain competitive edge. This implies that IT has made many new applications of strategic importance feasible by, for example, creating a barrier to entry, switching costs, and changing the basis of competition (Khosrowpour, 2003).
In their studies, Carugati & Rossignol (2011) noted that the relationship between company investment in information technology and productivity is a key topic in studies of economic and business organization. Information technology investment has a positive effect on productive variety which may, in turn, negatively affect productivity. Carugati & Rossignol (2011) indicated that “productivity gains from information technology investment materialize only after time and depend significantly on network externalities and on changes in the complementary infrastructure” (p. 271).
In addition, Carugati & Rossignol (2011) noted that information technology allows hyper automation of organizational processes and enables labor to be replaced with capital. The use of transaction processing systems and their diffusion have led to the automation of many activities previously performed by a large number of employees, to simplification in execution, and to regulation of performance in keeping with set procedures to pursue objectives with regard to efficiency (cost reduction), quality, speed, and flexibility. With the application of TPS in organizations, structured decisions are made emphasizing the use of procedures and routines such as organizational decision-making tools and institutionalized forms of knowledge. Carugati & Rossignol (2011) argue that the combination of two effects allows hyper automation and an increase in labor productivity at the level of the individual organization. It is fundamental to note that the value of information technology in practice concerns effects derived from smart machines.
Information technology systems allow a reduction in the information complexity of relations between organizational actors increasing the elaboration capacity of parties to a transaction and thereby reducing the corresponding costs of coordinating and controlling their respective behavior. Carugati & Rossignol (2011) say that “in the UK, the Bank of England information technology acts as a production technology that reduces technical specificity and allows the dependence between purchasers and suppliers to be reduced; also concerning relations that affect components designed and built ad hoc” (p. 274). Information technology is a coordination technology that reduces transactions and coordination costs within firms and between firms hence being able to directly affect firm productivity. Also, information technology makes use of market mechanisms to make customer-supplier relations more attractive.
The use of information technology impacts productivity in that it enables electronic communication; in other words, the availability of more information in less time at lower cost. Carugati & Rossignol (2011) says that “information technology enables electronic brokerage because IT performs the role of intermediary between vendors and purchasers facilitating trade” (p. 274). Information technology promotes an increase in information processing capacity. As a result, information complexity is reduced.
With the introduction of information technology in the United Kingdom, there has been development of new market mechanisms. Carugati & Rossignol (2011) say that the average number of suppliers to the same firm is lower, and inter-organizational relations are long-term and stable. This is because information technology requires sunk costs and non-contractible investments arising from the performance of knowledge intensive activities. Carugati & Rossignol (2011) say that in products with a low degree of standardization, suppliers are assessed according to flexibility, reliability, and innovation which emerge from long-term relationships. New market mechanisms are attributed to the reduction in the number of suppliers which increases the number of transactions for the supplier reducing information technology investment cost per transaction.
Carugati & Rossignol (2011) indicated that most of the literature on the organizational impact of information technology specifically concerns skill-biased technical change and skill-based organizational change. Under the hypothesis of skill-biased technical change, the adoption of information technology in the United Kingdom increases the demand in firms for more qualified staff and reduces the demand for workers with operative duties. Carugati & Rossignol (2011) continue to say that the changes brought about are chiefly technological and modify operative procedures and processes within organizations. Information technology is interpreted as a new technological paradigm that leads management and staff over a substantial span of time to try out a new production system and adopt it.
Under the hypothesis of skill-biased organizational change, greater importance is assigned to the relationship between organizational changes and the introduction of more skilled staff (Carugati & Rossignol, 2011). Organizations that after investment in information technology, adopt both new organizational models and more skilled staff manage to obtain greater productivity increases than those that have only made use of one of the two variables. Information technology brings about decentralization of decision-making. The management should compare the costs and benefits of organizational decentralization brought about by information technology observing that the presence of more skilled staff amplifies the benefits and reduce the costs of decentralization (Carugati & Rossignol, 2011).
The greatest productivity increases are obtained in firms that support organizational change by improving the skills of their own staff; they are positioned among the more skill-intensive firms. Carugati & Rossignol (2011) indicated that poorer results in terms of productivity are encountered among firms that are not skill-intensive. Information technology cannot completely replace human labor. This implies that if the effects of hyper automation are encountered with transaction processing systems especially for simple, repetitive operational tasks, knowledge level systems, and management level systems represent tools supporting decision-making processes performed by skilled, knowledge intensive organizational positions, broadening their capacities and potential.
The use of information technology increases the volumes of data and information transmitted within and between companies. Carugati & Rossignol (2011) say that this information flow requires changes not only in coordination mechanisms but also in staff management competence favoring more skilled tasks. Information technology enables decentralization of authority and more flexible forms of division of labor such as teamwork, multi-tasking job rotation, just in time, and quality circles (Carugati & Rossignol, 2011).
The impact of information technology upon productivity is related to the demand for labor both directly and indirectly. Carugati & Rossignol (2011) mentioned that the direct effects clearly stem from the fact that if new technologies are adopted, workers endowed with new skills are required. The indirect effects are caused by innovations in procedures, products, and services that are developed at the level of the individual organization. It is important to realize that the relationship between organizational skills and information technology adoption should be considered with the analysis focusing on the effects produced by significant organizational changes (Greenan, L'Horty & Mairesse, 2002).
Information technology produces a 3.6% increase in productivity if the organization is flexible. Carugati & Rossignol (2011) indicated correlated information technology capital stock in individual organizations with their labor productivity and their total factor productivity. Carugati & Rossignol (2011) associated an increase in firm productivity with an increase in investment in software and its use by staff. Research carried out by the London Business School shows that a 20% increase in productivity is achieved in firms if there are suitable managerial and professional skills in using information technology. In smaller organizations, the higher capacity of employees to use information technology systems has proved to be a more important factor of productivity increase.
Organization productivity increases by 1.3% if the number of employees using computers increases by 10%. Carugati & Rossignol (2011) further say that organization productivity increases with the number of staff using the internet. A study carried in organizations based in the United Kingdom shows that UK firms have greater increase in productivity from investment in information technology than other European firms. Carugati & Rossignol (2011) noted that the US firms operating in the UK have greater increases in productivity than other UK multinationals. The UK organizations are more decentralized in organizational terms and have flatter structures allowing greater diffusion of information (Carugati & Rossignol, 2011).
There is a positive effect on a company value if the investment can be characterized as a transformation, if the industry is being transformed by information technology, and if the organization has a leading role in the transformation of the industry. Remenyi & Brown (2004) say that “on average, information technology investment has a positive impact on productivity” (p. 314). There is another hypothesis that with decreasing prices for computers, the demand for routine labor tasks will decrease as a result of substitution and that the demand for non-routine labor tasks which computer capital complements will increase.
Information technology investment has positive contribution to the productivity growth, and whenever the dollar of information technology investment for per person is made, the labor productivity gains (Berghout & Remenyi, 2008). This confirms the assumption that information technology productivity is compounded by the structural change, and it can be ascertained if the structural change comes to equilibrium. Information technology causes migration from production to information sector; and the migration, in turn, causes the reduction of productivity growth.
The adoption of information technology should be seen as a strategic choice presumption when managers rather than users are the key actors in shaping technology to particular organizational or economic ends. Brynjolfsson (2002) says that “once new technology is deployed, developers and managers often have little control over how specific workgroups and teams will use it” (p. 357). It is important to understand that it is through our actions, both individual and collective, and either deliberate or not, that outcomes associated with the impact of information technology change emerge. Greenan, L'Horty & Mairesse (2002) noted that technology in this view is neither an independent, external force completely outside our influence, nor a fully malleable resource that can be thoroughly controlled and bent to our will.
Carugati & Rossignol (2011) say that computers used for the production of documents per se are real work tools, instruments similar to other production technology such as robots, CAD and CAM. In this way, they help to carry out activities previously performed with different technologiesor otherwise and to replace both labor and traditional facilities (Carugati & Rossignol, 2011). The positive impact of information technology in relation to productivity is subject to how new technologies improve efficiency. Information technology enhances automation which are the benefits derived from the substitution or elimination of manual procedures. IT reduces shadow functions in that it cuts errors and potential unsuccessful time consuming phone calls by using emails (Greenan, L'Horty & Mairesse, 2002).
Immediate economics results from the reduction of idle or waiting time and thus the possibility of greater productivity. Carugati & Rossignol (2011) noted that this is significant because it provides leverage by increasing all production factors that depend on economics of speed. Such economics though brings a decrease in unitary costs is fundamentally different from economics of scale. Carugati & Rossignol (2011) argue that the increased total productivity of the factors in the case of the economics of speed is not achieved by adding more production factors but by speeding up the flow of goods through the processes of production and distribution and so permitting a steadier, more intensive use of the factors involved.
When information technology systems are used as work tools to produce and distribute efficient data and documents, the approach used to evaluate economical implications and benefits of ICT is accurate but limited. Carugati & Rossignol (2011) noted that it does not permit us to understand the real reasons why people use information to understand more generally the role of information technology in organizations and relations between them. People should therefore examine the added value and hidden benefits of information and communication in organizations.
Any mechanism that improves the efficiency of transaction speeds up the flow through the economic system and allows a more intensive use of production factors. Carugati & Rossignol (2011) explain that the economic activity is carried out inside or outside the firm depending on relative importance of the costs of internal and external transactions. Analysts say that information technology has a strategic role in the evaluation of the limit of economic activity in a market system. Vertical information systems can render more productivity regardibg the functions of allocation, planning, coordination, and monitoring within the firm. The economic benefits, therefore, derive from a reduction of coordination costs.
The use of information technology supporting external economic transactions of firms tends to reduce the information costs of the transaction itself thus reducing the importance of opportunism, small numbers, and information impact (Greenan, L'Horty & Mairesse, 2002). In addition, Carugati & Rossignol (2011) say that information technology within organization improves productivity by enabling the possibility of faster planning cycles, identifying and controlling the critical areas and simulating alternatives, enhancing interactions between firm subsystems, and enabling more accurate forecasting.
Methods and Procedures
Determining the methodology for research is an important step which can never be underestimated. In this research I propose to employ questionnaires. To determine the nature of the impact of various aspects on the economic and productivity analysis associated with information technology, a structured questionnaire should be developed to collect the quantitative data needed. Rugimbana & Nwankwo (2003) say that questionnaires will use as a research instrument in measuring organizational behaviour, attitudes and perceptions towards information technology. The advantages of using a questionnaire is that it help researchers to obtain accurate information, helps in structuring an interview, standardizing the interview format and assists in facilitating the data analysis process.
Through questionnaires, the respondents can provide the researcher with information required at ease and in relatively short time. Rugimbana & Nwankwo (2003) says that the researchers should be attuned to productivity backgrounds of the organization in order to better understand the economic value of IT investment. Data collected from questionnaire is transformed in to statistic related figures computed by mathematical processes and then produce various tables in which numbers have unique meaning to be interpreted.
The questionnaire offers a consistent data gathering procedure and minimizes the effects of potential human errors. Its use also eliminates any bias introduced by the feelings of the respondents towards the interviewer. The researcher should use closed questions and one open question asking organizational member’s suggestion for the impact of information technology.
Data analysis will be based on the answers given in the questionnaires. The basis of the data analysis is to reveal features of the basic composition of the data collected. Parasuraman, Grewal & Krishnan (2006) says that data analysis will provide useful insights pertaining to the research objectives and suggest meaningful approaches for further analysis of the data. Descriptive analysis is the elementary transformation of data in a way that describes the basic characteristics such as central tendency, distribution and variability. The results collected for the data analysis will be discussed according to the answers provide by the respondents for the research objectives.
One of the major limitations of the study is that the findings pertaining a certain set of organizations. Another limitation is that the organizations used in the study where not from one geographical location. The sample size used in the study may be too small. Another limitation of the study is that it may not necessarily be a representative of the population of organizations of interest to the researcher. Lack of formal training of the individuals who profess to be experts in the field may affect the results of the research. This is a major limitation because there is no certification body on organizational productivity research. It is also extremely difficult if not impossible to bluff one’s way through this type of research.
Information technology plays a fundamental role in the productivity of an organization. It positively influences productivity when higher levels of financial investment bring about new products and falling prices. Information technology reorganizes how goods and services are created and distributed. It is important for managers in organizations to look at how these technological advancements affect the entire economy rather than just focus on the benefits of improving technology in one information technology sector. While information technology investment has a positive impact on labor productivity, it gives an organization a competitive edge with a positive returns on average. There is, however, a certain degree of unpredictability and improbability which is inescapable in estimating the returns on information technology investment in a wider but more meaningful acceptation. It might include investment in training and changes in organizational practices to adapt the advances in information technology.
In future research, more precise and diverse topics of interest will be demanding our attention concerning the various directions of the diffusion of information technology and how organizations combine these technologies with other productive factors, assets, and resources. Future research should focus on trying to characterize and measure the organization and on investigating how information technology enables organizational change, and how the combination of both contributes to firm productivity. Managers should therefore analyze the clustering and co-evolutions of the main factors of organizational productivity level and growth to unravel the effects of a given factor such as information technology investment from those of other factors to estimate its absolute or relative significance.