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 / Spring 2010 / Issue 58(originally published by Booz & Company)


The Thought Leader Interview: Erik Brynjolfsson

Many of those gains could be traced to investments made between 2000 and 2009, but the gains weren’t harvested until companies laid people off. For a lot of knowledge work, it may have been hard for managers to perceive whether all the workers they had were necessary. And even if they perceived during the boom years that they didn’t need as many people, political and cultural factors may have made it hard to lay people off. There was thus a potential productivity gain, but it didn’t show up in the statistics or the bottom line.

Then the financial crisis forced the top management to say, “OK, we need to let go X percent of the labor force.” And now that the crisis has peaked, companies may realize that they don’t necessarily need to hire those people back.

We may not get the employment bounce-back that we had in 1982 or after earlier recessions. Many of the laid-off workers will not be hired back into the same jobs when the economy recovers. Those spots on the assembly line or behind the desk are gone forever, made superfluous by technology-enabled restructuring. Instead, people will need to find new jobs, in new companies and even new industries. That takes people a lot longer to sort out than simply going back to business as usual; hence, we can expect longer periods of unemployment.

S+B: And the reason for all this is information technology?
Part of it. But IT in itself isn’t enough. The companies that have made the highest gains in productivity have also improved the quality of their work and management processes. They have what we now call organizational capital.

S+B: What is that?
It’s a kind of intangible asset. In many ways, organizational capital behaves mathematically just like other assets. By convention, an asset is something that creates a stream of value over time. Money spent on value that is realized within a year — for instance, labor and rental costs — is considered an expense. But if it’s spent on something that continues to create value for more than a year — like equipment, machinery, and buildings — it’s considered investment in an asset.

Now we’ve found that the same is true of investments in management processes and practices, including inventory management systems, value chains, accounting methods, and many others. Investing in these kinds of processes and practices can be very costly. You see companies spending a lot of time and effort to optimize the way that they work. But they build up a stream of value that lasts a long time. If you measure those costs and the value that comes from the new practices, you can use those figures as inputs to a productivity equation. Then you see how they are correlated with outputs, including goods, services, and revenues.

You can also enter the value of these organizational practices into market value equations, which define a firm as equal to the sum of the values of all the assets it owns. Statistically, we’ve found that for every dollar of real estate, plant, or ordinary equipment that a company owns, on average, the company realizes one more dollar of market value. Organizational practices add to that amount significantly. In fact, in a typical company, for every dollar of technology assets, we found that there’s about US$10 worth of computer-enabled organizational capital. Another way to put it is: The value of computer-enabled intangible assets in the U.S. economy is about $2 trillion.

S+B: How do you measure the costs and value of management practices?
We’re just beginning to learn how to do it, and we still don’t know completely. One of the ironies of the information age is that information work is less visible than manufacturing or agriculture. We have fewer ways of tracking it than we have ways of tracking the number of tons of steel being produced, or cars coming off the assembly line. Labor in traditional manufacturing is very visible by comparison. So you can be taken by surprise when great waves of change strike the body of information technology work.

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