Professor Erik Brynjolfsson
CAMBRIDGE, Mass., Oct. 14, 2009 — Why is it that some companies are able to get more out of their investment in information technology than others? In their new book, Wired for Innovation: How Information Technology is Reshaping the Economy (MIT Press/16 October 2009/$18.95 cloth), Erik Brynjolfsson and Adam Saunders, two MIT-trained economists, offer a critical examination of how companies with the highest levels of return on their technology investment are putting money into organizational capital, and how other firms can follow suit.
The most successful companies recognize that investing in IT alone is not sufficient, says Brynjolfsson, professor at MIT's Sloan School of Management and director of the MIT Center for Digital Business. “For every $1 that these companies invest in IT, they spend $8 or $9 in complementary changes to their business operations,” he says. “They’re investing in job training and education, and they’re putting more money toward incentive-based pay for their employees, and making changes to the way their business interacts with customers. It’s complicated and costly but these investments in organizational capital help companies become more streamlined digital organizations.”
Drawing on research by the MIT Center for Digital Business and hundreds of interviews with managers, the authors estimate that these investments have created $2 trillion worth of intangible assets not recognized by economic data in the past decade. Similarly, nonmarket transactions of information goods such as Google searches or views of Wikipedia articles are an increasingly large share of the economy yet virtually invisible in the GDP statistics.
In Wired for Innovation, Brynjolfsson and his co-author identify seven characteristics of successful digital organizations. Perhaps the most important attribute is distributive decision-making, whereby companies give employees up and down the org chart more authority to make judgment calls.
“As data gets cheaper, it requires more humans to process it. Having a small group of people at the top of the organization trying to make sense of it all is no longer feasible; there is a bottleneck,” says Brynjolfsson. “One way to address is it to widen the bottleneck and give others leeway to make a broad set of decisions about how the business should run, and how to solve customer needs.”
The authors point to Dell Computer as a prime example of a “digital organization.” In redesigning its factory, Dell purchased new software and made other complementary investments to eliminate inefficiencies in its manufacturing process, and change the way it deals with suppliers and clients. The result was a more efficient factory that roughly doubled its output of computers within a year of the redesign.
“In effect, Dell created an intangible asset — a second ‘digital’ factory — without adding floor space,” he says. “This sort of thing is happening throughout the economy. Industries from finance to real estate to manufacturing to retail are improving their products and the quality of their customer service. And IT is what makes it all possible.”