Economics of Information Technology Productivity and Profitability Hal

Economics of Information Technology: Productivity and Profitability Hal R. Varian UC Berkeley http: //www. sims. berkeley. edu/~hal 10/7/2020 Intranets 1

Economic Productivity • Productivity means… – Labor productivity: Output produced/labor input – Total factor productivity: Output/index of inputs • Problems in measuring outputs and inputs – Measurement of outputs and inputs • Output of services • Utilization of inputs • Etc. , etc. • Nevertheless, productivity is a critical index for predicting future economic growth 10/7/2020 SIMS 2

Why? • Long run: primary determinant of per capita consumption • Short run: if output per labor hour increases, then Fed doesn’t have to reduce aggregate demand to prevent inflation 10/7/2020 SIMS 3

Post-War Productivity Growth ? 10/7/2020 SIMS 4

Recent experience • Normally productivity is pro-cyclical: grows when GDP grows, shrinks when GDP shrinks • But Q 1 2002, productivity grew at a 8. 6% annual rate! – Q 4 2001: 5. 2% • Why? – Firms laid off workers more quickly than usual… – Output didn’t drop as much as usual… – Because of IT? 10/7/2020 SIMS 5

Productivity and profitability • Growth in productivity does not imply growth in profitability – Example: telecommunications • 8% productivity growth, $2 trillion decline in stock value • Growth in profitability does not imply growth in productivity – Example: marketing • Sell more at expense of other firms in industry • As a general rule… – Increase in revenue doesn’t contribute to productivity, since it cancels out at industry level – Decrease in cost does contribute to productivity 10/7/2020 SIMS 6

Approaches to IT Productivity • Aggregate economy – 3 IT investment booms 1995 -2000: telecom dereg, Y 2 K, dot coms. Drove growth, created stock of IT capability. How much cyclical? • Industry level – Stiroh and Jorgenson (uses govn’t data) – Mc. Kinsey study (industry case studies) – Litan and Rivlin (best practices + diffusion) • Firm level – Erik Brynjolfsson (statistical, data stops in 1995) – Net Impact Study (survey in Fall 2001) 10/7/2020 SIMS 7

Net Impact Study • Survey of 2065 US and 634 UK, French, German organizations – http: //www. netimpactstudy. com • Sponsored by Cisco, conducted by Momentum Research advised by Litan and Varian • Where are payoffs from Internet? – Found widespread adoption of Internet Business Solutions – Biggest impact on revenue side – Some cost savings now, more expected in future 10/7/2020 SIMS 8

Widespread Adoption Figure 1: IBS Adoption 10/7/2020 SIMS 9

Penetration by industry Figure 2: IBS Adoption by Industry 10/7/2020 SIMS 10

Financial impact in US Figure 3: 10/7/2020 SIMS 11

Financial Impact in Europe Figure 4: 10/7/2020 SIMS 12

What Has Been Adopted Figure 15: 10/7/2020 SIMS 13

Impact on customers 10/7/2020 SIMS 14

Revenue Increases 10/7/2020 SIMS 15

Impact on COGS Figure 23: 10/7/2020 SIMS 16

Figure 25: 10/7/2020 Impact on SG&A SIMS 17

Figure 26: 10/7/2020 Use of metrics to track (by industry) SIMS 18

Common metrics Figure 51: Adoption of Internet Business Solution Tracking-Metrics (U. S. , and U. K. , France and Germany) 10/7/2020 SIMS 19

Adoption of applications Figure 40: 10/7/2020 SIMS 20

Figure 44: 10/7/2020 Impact on Costs SIMS 21

Impact on revenue Figure 45: 10/7/2020 SIMS 22

Figure 29: 10/7/2020 Barriers to use SIMS 23

Impact on customers Figure 52: 10/7/2020 SIMS 24

Impact on P&L Figure 53: 10/7/2020 SIMS 25

What correlates with success? • Revenue increase – – Adoption of IBS in several business applications Use of metrics Data standardization Mobile access • Cost savings – Supply chain management – Focus on reducing costs 10/7/2020 SIMS 26

Figure 55: 10/7/2020 SIMS 27

Figure 54: 10/7/2020 SIMS 28

Takeaway points • Widespread deployment of Internet applications – Most impact on revenue side so far – Cost side growing – Europe is behind US • Who is right? • Maybe both… • IT productivity effect appears to be real. • Good news for economy! 10/7/2020 SIMS 29