McKinsey: Stand-alone IT Investments Are a Strategic Mistake

Computerworld - Forget one-year IT project wonders. Boosting productivity, cutting costs and generating positive business payback on IT investments require a comprehensive action plan sustained over several years by multiple business units and departments beyond IT, according to a recent study by New York-based management consulting firm McKinsey & Co.

Indeed, McKinsey found that IT was only one of several factors that contributed to an upward surge in U.S. labor productivity between 1995 and 2000, when productivity grew at an annual rate of 2.5%. Between 1987 and 1995, the rate was 1.4%.

For pointers on how to effectively improve productivity, look to the retail, wholesale, securities, telecommunications, semiconductor and computer manufacturing industries. McKinsey calls these six industries "jumping" industries because they accounted for almost all of the productivity growth in the U.S. economy between 1995 and 2000.

In stark contrast, the industries that make up the other 70% of the economy—and that also happened to be among the biggest buyers of IT during the same period—recorded a mix of small gains and losses that offset each other.

In fact, according to McKinsey, some of these so-called paradox sectors, such as the hotel and retail banking industries, have experienced almost no productivity growth over the past 14 years.

"Two things are surprising to us from this research. The first is how large the benefit is if companies get all of the [business] factors aligned with IT," says Mike Nevens, an analyst at McKinsey. The other big surprise, he says, "is how few companies are actually able to do it."

Among the companies that are succeeding is Wal-Mart Stores Inc., which over the past decade or so has applied the bulk of its IT investments and made big business-process changes to improve basic operations, notably inventory and warehouse management. The result: By 1999, the Bentonville, Ark.-based retail giant had captured 30% of its market, up from just 9% in 1987.

What has differentiated Wal-Mart's IT/business plan is its long-term application of technology to core business activities, such as inventory, rather than support functions, says Nevens.

Moreover, IT was just part of the retailer's overall business strategy. Along with implementing technology, Wal-Mart changed the layout of its stores, shifted merchandising techniques based on what it learned from mining customer data and changed its concept of the distribution chain.

"It was by attacking a piece of their business that's a core activity—picking and packing as opposed to automating the invoicing process—that changed the game competitively," says Nevens.

Catching On

Subsequently, other retailers caught on and adopted many of Wal-Mart's IT/business innovations by the mid-1990s, including electronic data interchange and wireless bar-code scanning in warehouses.