Hu Yoshida

Digital Transformation and Productivity

Blog Post created by Hu Yoshida Employee on Sep 22, 2016

Economists are puzzling over the fact that despite the accelerating pace of technology over the past 10 years, global productivity has declined. The revolutionary changes brought about by smart phones, tablets, globalization, social media, mobile, analytics, and cloud have not translated into productivity gains. In fact, productivity has declined in the developed counties who have the most opportunity to benefit from new technology.

 

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While this chart above stops at 2014. The recent second quarter report on U.S. productivity released by the Bureau of Labor Statistics showed that nonfarm business sector labor productivity decreased at a 0.6-percent annual rate. (Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.) - The decline continues.

 

During technology transformations, productivity is expected to decrease slightly because rapid capital investment disrupts a company’s ability to produce output, because their workers are often diverted from their normal tasks to install new equipment and learn to use it effectively. These "adjustment costs" lower output growth, and thus lower measured productivity growth as well. While I have not been able to find a study on this, I assume that the productivity of IT has gone down for many companies where they are implementing Digital Transformation.

 

Technology alone does not increase productivity and innovation. Technology is an enabler which must be combined with people and process. Digital transformation is disruptive. It breaks traditional development paradigms. New development paradigms built around Agile and DevOps replace traditional “waterfall” paradigms. This leads to new skill sets and IT infrastructure and new architectures that are “cloud” native. Many companies who were not “born in the cloud” have taken a bi-modal approach to IT where they are modernizing their systems of record while implementing new systems of innovation.

 

The measurement of IT productivity is also changing. Where IT has been measured in the past on IT spend as a percent of revenue or full time employees (FTE) per unit of capacity they are now being measured on their contribution to overall company revenue. You can have a very efficient IT operation, where your IT spend is 1% of revenue, but if your company revenue is declining, you may really need to be spending more on IT. Digital Transformation requires investment in people and process as well as technology, and should be viewed as an innovation enabler for increasing business revenue.

 

While there are many variations on the definition of digital transformation, market analyst like Morgan Stanley and Industry analysts like Forrester believe that 27 to 29% of company revenues were influenced by digital transformation in 2015. Forrester projects that this will increase to 47% by 2020 with B2B and retail leading the way and industrial products lagging behind at 37%. My view is that the industrial products segment will catch up as this is an area of IoT focus from vendors like GE and Hitachi.

 

I believe that the current downward trend in overall productivity will continue for the short term, as companies start their digital transformation journey.  However, in the next few years, I believe we will turn the corner and see productivity measurements on an increasing growth curve due to digital transformation.

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